Your Reading List

Is your farm transition on-track?

As farms grow in value, it gets tempting to think succession planning is too risky to consider. It’s why only eight per cent of Canadian farms have written plans. But maybe there’s a way after all

Whether you call it a succession plan or a transition plan, if the very idea makes you wince, you’re not alone. Canada’s farmers are older than ever — according to Statistics Canada, more farmers are over 70 than under 35 — yet only about eight per cent of all farmers have a written succession plan. But whether you plan for it or not, your last day of farming will eventually come. Whether you choose to help your farm and your family with a clear path forward or burden them with a financial, legal and emotional mess is entirely up to you.

Related Articles

Bob Tosh, farm business advisor with MNP in Saskatoon, knows the easy farm comeback. “I often hear the classic expression,” he reports. “I won’t care because I’ll be dead.”

Tosh always responds the same way. “I say the only thing you leave is a legacy,” he says. “What legacy do you want to leave?”

In farmers’ defense, there are some very big reasons why more don’t tackle transition planning. Farm businesses tend to be financially complex. Their inconsistent income and expenses, high deferred taxes, significant asset holdings and low liquidity make the finances around retirement and estates very daunting.

At least as difficult (actually, for many farm families, much more difficult) is the emotional side of succession. For farmers, the line between work and the rest of life tends to be so blurry that many can’t picture life after farming.

Often, they like the idea of passing operational and decision-making responsibility to the next generation, but they can’t quite bring themselves to actually do it. And on top of that, there’s the seemingly impossible task of deciding how to divide assets between kids in an estate plan, especially in families where some but not all of the next generation plan to continue the family farm.

When Alex Smith was a kid, he dreamed of being a prairie grain and oilseed farmer, just like his parents. Like piles of farm kids, his earliest memories are steering the tractor from his dad’s knee, riding shotgun to the grain elevator, and standing — usually impatiently — while his dad talked weather with the mechanic or feed rep.

“Alex Smith” is a real farmer, but it isn’t his real name. Country Guide rarely publishes information this way, but made an exception in this case, believing the only way we could hear the straight goods from him was to let him speak without revealing his identity. You’ll understand why in the next few paragraphs, but readers should know we’re bending the rules in this case, and they should make their own decisions about the Smiths’ credibility.

Succession planning — especially estate planning — is an awkward conversation around the Smith farm. In fact, his parents and siblings don’t even know that he’s talking with Country Guide. He says they’d be embarrassed that he’s airing the family’s dirty laundry so publicly.

“Sex, religion, politics: those topics aren’t nearly as taboo as talking about who’s getting what from your parents’ will,” he says. “Especially since, in our case, there’s definitely been some unhappiness between the siblings about the whole topic.”

He’s not alone in feeling that way. In fact, the fear of just that kind of discomfort is a big part of the reason so few farm families talk succession even within the confines of their own families.

“Even though there is a lot of information out there and a lot of awareness on the importance of succession planning, many people are very fearful,” says Tosh. “It’s the Pandora’s Box concept: they don’t know what they’ll find when they open that box. They’d rather stick their heads in the sand.”

Alex has spent virtually all his life on the farm. Even when he went away to agriculture school, he came back on weekends and holidays to help with seeding, harvest and more. There’s never been a question in his mind that he’d ultimately become a farmer.

His parents, let’s call them Arthur and Janet, have told him they feel relief and pride that he has both the knowledge and desire to continue the family farm into the future. They’ve watched neighbours sell their farms to outsiders, and they feel giving up the land they love to strangers would be heartbreaking.

But, like most families considering generational transition, it’s not all smooth sailing in the Smith house.

Smith’s brother Alan has never shared that passion for the land. He’s helped on the farm over the years, but more due to family commitment than real enthusiasm. After high school, Alan went west to the University of Calgary where he completed a business degree. Now, he lives in Edmonton and works for a bank. He’s comfortable, but of course, he’d be a whole lot more comfortable if he received an equal financial share of his parents’ multi-million-dollar farm estate.

Their sister Claire, on the other hand, is keen on farming. She loved 4-H and has always had natural skill with the family’s cattle. That said, as executive director of a non-profit, she’s tied to city-living, at least for now.

Alex, incidentally, isn’t a huge fan of cattle. Over the past five years as he’s been transitioning into greater management of the farm, he’s been focusing his efforts on building up other elements of the farm. The family still has a small herd of cattle, but they’ll likely sell those in the next few years. If Claire does, at some point, want to come back to the family farm, will there be room for her and her love for cattle?

“The right answer — the only answer — is yes, obviously. But to be honest, it’s an awkward question,” says Alex. “How would that look? I don’t know.”

Their parents, like many farm families, are asset-rich but cash-poor. Virtually all the farm’s wealth is tied up in land, which they’d like to keep as a single parcel into the future. They’ve struggled with the idea that, if they pass the land (and necessary equipment, etc.) on to Alex, they’ll have little to pass on to their other two children.

The subject is made more complicated by Claire’s uncertainty about her own on-farm or off-farm future.

“That’s not what you’d do with business partners,” says Tosh.
photo: David Stobbe

When the children were younger, their parents took out life insurance as an estate equalization tool. They (not so secretly) hoped one of the kids — everyone knew it was likely to be Alex — would take over the farm, but they wanted life insurance to balance any non-farming children’s inheritance. Back then, their farm was worth about $900,000. Today, skyrocketing land prices mean it’s worth more than $6 million, and the life insurance doesn’t come anywhere close to equalization.

Succession planning is hard work. That said, it doesn’t have to be horrible. Tosh meets with families like the Smiths all the time. He says the keys to successful planning are open communication, a formal planning structure, a commitment to process over outcomes and an understanding that the plan is a living document.

If that advice sounds bureaucratic rather than practical, keep reading. It may just be the best family-saving advice you can hear.

First: communicate, communicate (It doesn’t have to be so bad)

Succession planning is an emotional activity. It forces people to be open about their hopes, plans and priorities. It often lays bare past hurts and sometimes opens the door to accusations of jealousy or selfishness. Almost always, it demands difficult, sometimes uncomfortable conversations about roles, expectations and more.

Talking openly is the only way to resolution, says Tosh.

“People usually get into conflict because of assumptions. The key to clearing that off the table is to open the conversation. At some point something will blow. What you’re trying to do is create collaboration. You want to create a safe place for communication where a difference of opinion does not become personal.”

Second: commit to formality

While it might seem like conversation should be easier within the safety of a family unit, in fact family dynamics often make communication more difficult. Ingrained patterns of behaviour based on birth order, gender bias or family history will all influence the way conversation flows.

Often, too, families can have too much comfort of the wrong sort when it comes to communication. It’s the wrong sort because it gets in the way of building an environment for making succession decisions.

It may always have been all right for your family to use a kind of shorthand when you’re talking, or maybe you’ve used non-verbal gestures like rolling your eyes, or you’ve raised your voice and shouted to let off some steam, or walked away.

“That’s not what you’d do with business partners,” says Tosh.

It’s possible to build a new level of trust and respect, he says, but the family has to be willing to tackle it, and it may well need an outside facilitator to find the best, tried-and-proven ways of doing it.

“Formality is your friend,” Tosh says. “The only way it’s going to work is if there is formality in the system.”

This also means official sit-down meetings rather than casual chats over coffee, plus the formalizing of who speaks when and how others must listen, as well as clearly defined expectations for how each person will participate.

It means adhering to a set process too. Tosh knows formality is at odds with many farmers’ personalities.

“A lot of people who want to farm want to do it because they don’t want formality, they don’t want to clock on and off, they want independence. Think about those guys who want to go out and ride fences at five a.m. or drive tractor at midnight. They’re not wired for rigidity. They’re used to dealing with fluidity all the time. And, they’re pragmatists: they’re used to dealing with unknowns all the time.”

However, farmers are also “get it done” people: if they understand that succession success demands a level of formality, most will step up to the challenge.

Third: focus on process over outcomes

Given the complexity of farm succession planning, Tosh says estate planning experts often counsel that “fair and equal aren’t the same thing.” He thinks that attitude amounts to an abdication of responsibility on the professional’s part: a hands-in-the-air, “there is no solution” cop-out rather than a commitment to exploring how succession planning should work.

“What they’re saying is that, because fair and equal aren’t the same thing, Mom and Dad can go ahead and do whatever they like,” says Tosh. “But the world has changed; we don’t have the same reality as previous generations… It’s a much, much more complex issue than before, and saying fair and equal aren’t the same thing just isn’t good enough.”

Tosh points to all kinds of factors that make today’s succession planning different than for past generations:

  • Women aren’t willing to be passed over for a fair inheritance.
  • Defaulting to primogeniture — the oldest son getting everything — isn’t acceptable any longer.
  • Life insurance isn’t an effective balancing tool now that land prices are so high.

How should succession planning work? Tosh says it comes down to analyzing the definitions of fair and equal.

Equal, he points out, is a mathematical calculation where portions are identical. For many (likely most) farm businesses, there is no way to divide assets along purely equal lines.

“Good luck coming up with a mathematical calculation. There have been plenty of people who try but you can’t get a mathematical solution to a paradoxical question,” he says.

Fair, on the other hand, is based on perception. Fair requires all parties to come to agreement and consensus. Though challenging, fair is possible, says Tosh, if you “stop worrying about outcomes and instead work on fair process.”

In practical terms, fair process means all family members — on-farm and non-farm, those actively involved and those entirely uninvolved — need to sit down together to work through the planning process.

“A lot of people don’t like that. They’ll ask: ‘Why should my non-farm kids have anything to do with this?’ If the outcome that you’re seeking is the ability for your family to get together and have Christmas dinner, then inclusivity matters,” says Tosh.

Once every member is part of the conversation, the calculation about how to split assets can involve incalculables, including things like each participant’s wishes, priorities, etc.

“Farming is a capital-rich, cash-poor enterprise that is very difficult to divide up. Each person will have a much better understanding of any decisions that are made if they’ve been part of the conversation,” says Tosh. “You’re not going to get to equal. But you might get to a solution everyone understands and finds acceptable.”

That said, simply making sure everyone understands why certain decisions are being made may not be enough.

“When I started in this job 11 years ago, good farms were worth maybe $1 million. Now we’re talking $20, $30 million for some. That’s a game changer. That changes the whole conversation around wealth and the transition of wealth,” says Tosh.

Arguably, the on-paper value of the land may not be important to you if your hope is that the farm will stay in the family rather than being sold. Still, says Tosh, farmers need to understand that an increased responsibility comes alongside increasing land value.

“I think we’re just catching up to the realization that you can’t get away with what we did before. If you set up your estate so Child 1 inherits $300,000 and Child 2 inherits $10 million and you haven’t really looked hard at that, you’re setting up your family for major struggle.”

Fourth: when you think you’re done, remember you’re not

Succession planning is not a checklist that, when complete, can be popped in a binder and left on a shelf. Instead, it’s an ongoing process and a commitment to work towards specific goals, all the while recognizing those goals could change based on unknowns at any time.

“The agriculture industry has done a really bad job of describing a succession plan as a thing in a box. Too many people have the attitude that ‘when it’s done, I can rest easy.’ The reality is a plan is a moving object. It’s just an understanding of how you’ll address key elements, and permission to move in a certain direction,” says Tosh.

Many things could come along and hijack the plan. While death, divorce and debt are the “big three” that are usually referenced, changing goals, changing priorities and changing relationships can also redirect a succession plan.

The Smiths are just one of many Canadian farm families grappling with the challenges of succession planning. Smith says the topic of succession comes up regularly when he’s chatting with farming friends or attending events through the Canadian Young Farmers Forum, a networking and resource association.

“I don’t know if I feel better or worse that so many of us are in the same boat trying to figure this thing out,” he says. “There aren’t easy answers. The money end of estate planning — trying to come up with something fair — is hard. Transitioning management has been hard, especially on my dad, since he’s been the main decision-maker for the farm for 30 years. And if I’m being honest, being patient has been hard too. If you’d asked me five years ago where we’d be at today, I’d have said that I’d be in the driver’s seat with my parents providing guidance. We’re getting closer to that but we’re not there yet; I’m hoping we’ll maybe be there in another five years.”

That said, the Smiths are making progress towards transition. Despite some disagreement on how the specifics should look, the whole family agrees that keeping the family farm in the family rather than selling is the best option. They’ve implemented certain tools to deal with the financial end of transition, including recently incorporating to allow the kids to become shareholders. (Arthur and Janet took preferred shares, which allows the business to be frozen and growth to automatically direct towards the younger generation.)

Most importantly, the family is finally starting to have more open discussions about everyone’s priorities.

Smith has discovered that taking over the family farm is different than just wanting to own an asset. “At the risk of sounding cliched, I feel like I’m a steward of something that’s bigger than money. I’m the fourth generation working this land. I hope one day my kids will be the fifth. I hope 100 years from now it’ll be my great, great, great grandchildren on this land. Figuring our way through transition hasn’t been easy but it’ll be worth the effort.”

About the author

Madeleine Baerg's recent articles

Comments

explore

Stories from our other publications