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Legal insights into transition planning

Today it’s getting even more critical to keep up with your legal documents all through your business planning and succession discussions

At 45,000 sq. feet the new dairy pack barn is impressive, especially the way it captures the spirit of hope that fills the McCorquodale family at Embro, Ont. With the next generation waiting in the wings, their barn represents their shared belief in their future, complete with robotic milking system and the latest in cow-comfort and financial know-how.

In multiple ways, it’s a giant leap from the tie-stall barn where, since the 1930s, the family has milked registered Holsteins.

This part of the story began last year when Murray McCorquodale took over full ownership of the farm from his 80-year-old uncle, Fred Innes, after they’d had a successful partnership for decades. As they were going through that process, the family jumped right into talking about transferring to the following generation.

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Murray and his wife Cassie are sandwiched between the generations, with their children James, Sarah and Cate now each interested in farming. James has been home working full time for a year and half, while both Cate and Sarah have careers off the farm. Sarah is a teacher in northern Quebec but hopes to be closer to home soon, and Cate is a lawyer in Stratford and works at home on the weekends.

As of mid-January they were still milking in the tie-stall barn, the labour-intensive job of “swinging” cows, milking one group and then switching in the next batch because now they have too many cows for the stalls. In the spring, they started building the new pack barn and it’s big enough to double the milking herd (currently 55-61 cows) so they can eventually fully utilize two robotic milking units.

Building the barn has given them a collective goal and been a catalyst for learning how to make decisions together. Murray has been acting as general contractor, and all the family’s voices are being heard about the project. The “children” (all in their 20s and 30s) are adult peers now, and all their skills and education are contributing to the continued success of the farm.

“It’s taught us that not everyone thinks the same way or communicates the same way, and we all deal with stress differently,” says Cate McCorquodale.

Until the barn is completed, it’s difficult for them to discuss the future, as they’ll have an entirely new routine on the farm with new skills, labour and management required. They want to wait and see what the farm looks like logistically to see where everyone can fit in.

In the meantime, lawyer McCorq­uodale created simple but smart legal documents to transfer the assets from uncle to nephew and is starting to get her family to think about how they might organize the next transition of the farm business in the future.

“It takes time to get all the pieces in place,” she says. “It’s not just about transferring ownership, it’s about the process.”

McCorquodale says it doesn’t have to be complicated to be a good business structure. When they transferred her great uncle’s ownership she wrote simple, one or two page agreements — one to transfer the land, one for the quota, one for the cows, and one for the house, while he updated his will.

Even with the value and complexity of farming rising so rapidly, it’s possible to protect the farm during transition with a series of quite straightforward agreements, Cate McCorquodale says. photo: David Charlesworth

Innes knows he can stay living on the farm and maintain ownership of a few of his favourite cows. The cow agreement simply states that if the cows or their offspring sell, he gets the money from the sale and the farm pays to take care of them and gets the milk. These straightforward contracts with his nephew allows Innes to keep engaged in the business he has loved all his life while transfering the full responsibility and almost all of the ownership and management.

Discussions on how to transition to the younger generation naturally sprang out of the transfer of ownership between uncle and nephew. It brought their family together to discuss their future and the farm’s future, leading in turn to discussions about expansion, new technology and new facilities.

Looking to the future has become integrated into how the business operates. Importantly, it’s also integrated into how they think. For example, when each member of the younger generation said they didn’t want to be tied to the cows seven days a week with no vacation, but they all wanted to farm, a robotic milking system and working together became a good option. With some research, they decided to build a pack barn similar to the heifer barn they had built 15 years ago.

The family also considered setting up a corporation right away, but held off to see how the tax rules were going to change. Plus with McCorquodale and her sister’s sub­stantial off-farm income, they wanted to see how it might affect them income tax-wise. Eventually, with three potential farmers in the next generation, they will likely create a corporation, says McCorquodale, but for now, they are focused on finishing the barn.

Besides, there are a lot of things they need to discuss before they get tied into a legal ownership structure. For example, now they are all considered straight hourly-paid employees, but with the new barn, who will do what and how will they split ownership? How much each of them is going to need financially means sharing earnings information, not something that is usually done in families. How will they deal with future spouses? When will the older generation want to retire?

These can be difficult discussions but McCorquodale says they are starting to talk about them so they can think on it and proceed later after the dust settles from the construction pro­ject. They’re all optimistic about the future and about preserving the legacy of the farm.

John Mill, a tax lawyer based in Windsor, Ont., says the core issue that sometimes gets missed in succession planning is that a generational family farm is not a financial asset that is part of an investment portfolio. Instead, the generational family farm is personal, and it is a legacy in the same way as other personal mementoes with special family significance that are passed down through generations.

He calls succession-planning documents a family farm legacy agreement. “The first step is to develop a consensus that the generational family farm is worth preserving. This consensus must be the foundation of any planning. If there is dissent or lack of consensus about the family farm legacy, then careful consideration must be given to the planning,” says Mill.

An increasing problem with succession planning, he says, is defining fair market value (FMV) and trying to equalize estates. It’s how the family approaches the problem that will provide a good solution, and it’s not about maximizing inheritance. “The answer will never be found in legal documents or financial instruments alone,” says Mill.

Instead, he says, the answer lies in an alignment of two significant concepts: the generational family farm is a unique legacy deserving of protection, and the lifestyles of the members of the family farm and their families are deserving of protection. The legal documents then can be drawn to match those goals.

Legal documents

One of the things farm business transition planning does is to formalize processes, which also brings up the importance of having other legal documents in place.

Lawyer Laura McDougald-Williams says there are many important documents that are created along the journey of farm succession, depending on the stage of the succession process. McDougald-Williams and her husband, Dustin Williams, are former Outstanding Young Farmers and operate a grain farm near Souris, Man.

She says important documents can include marriage contracts, and employment contracts for family members/spouses as well as non-family hired help, partnership or operating agreements, corporations with unanimous shareholder agreements, land rental agreements, purchase/sale agreements, vendor take back mortgages and/or gift declarations, and up-to-date wills and powers of attorney.

For the young McCorquodales, the transition process has brought up the need for prenuptial and co-habitation agreements, as none of them are married yet. Through her legal network McCorquodale sees more divorces destroying more farms, and many more young people living together with no legal agreement between them in case they split up.

She prefers to call prenuptial agreements “marriage contracts” and says a co-habitation agreement can be written to automatically turn into a marriage contract agreement later. “It’s really not a black-and-white, win-or-lose situation; it’s about defining the grey areas,” she explains. “For a few hundred or a thousand dollars you can deal with it when everyone likes each other. Or you can deal with it at the end when everyone is angry and it’ll probably cost you much more.”

The other area of farm litigation McCorquodale is seeing more of has to do with estates. More litigation is happening with farms because the estates have become more valuable, she says. “It used to be the only person who wanted the family farm was the one left there. Now it’s a multi-million-dollar asset and the public has become more aware of the values lately. Also labour-wise, it has become easier to have a full professional career and farm too, so more people like me are interested.”

McCorquodale has been practising law for two and a half years and before that completed her master’s in cattle genetics and her undergraduate degree in animal science, both at the University of Guelph. It was when she was in law school that she realized how much she missed the farm work, particularly working with the animals. So she started working on the weekends and helping out when she could while going through law school in London, Ont. “I like the cows and have invested in my own cattle, my own genetics,” she says.

The first step

Creating strong, forward-thinking documents and structures can be a risk management tool for a farm but it is also involves thinking about estate planning. McCorquodale points out that 95 per cent of the farm agreements she drafts deal with estate planning. “You have to have it all (agreements) on paper now,” she says.

Families need to develop farm transition agreements reflecting their principles and values. “In the absence of courageous conversations, families will often revert to boiler-plate agreements that fulfil legal obligations but may not necessarily reflect the families’ values, nor their intentions,” agrees Jim Snyder, national director of agriculture practice development at BDO Canada. BDO offers a one-day workshop on “The Principles Behind Effective Agreements.”

Snyder wishes charter for corporations would not be issued unless accompanied by signed shareholders’ agreement and partnership and co-habitation agreements. The time to deal with an issue is before it becomes an issue, he says.

“When relationships have broken down, it becomes difficult, if not impossible, to negotiate agreements acceptable to all parties. Worse than that, we cannot construct an agreement with someone who is no longer here and/or no longer able to represent themselves.”

It’s important for farmers to have wills and powers of attorney completed, and ensure that their children, once they turn 18, should have them done as well, even if they don’t own much of anything yet. “Lots of young people think they don’t need a will, but they will buy something one day soon and if they have a will in place, they are prepared ahead for that day,” McCorquodale says. “There’s no lag or forgetting when things get busy.”

Also, many people forget to keep their wills updated, says McCorquodale. She has had situations where people think their wills are fine but then they get marry and don’t realize that the old will then becomes invalid.

Having a power of attorney allows someone to step in to keep a farm going in case of an operator or bill payer becoming incapacitated. This is becoming critical as banks become less local and less flexible in their management.

Another thing that McCorquodale sees being done incorrectly and causing problems is putting joint names on bank accountants or assets. Although it can be a very good idea, it has to match with the plans for the farm overall and everyone’s income tax situation, and it must be communicated to the whole family.

Joint tenancy considerations

With joint tenancy, there is a need to balance competing interests and risks, and to ensure that any joint ownership is consistent with cohabitation agreements, business ownership structures and estate plans, says McDougald-Williams.

“There are especially serious issues with the parent generation adding adult children onto title jointly to bank accounts or land,” she says. “Adding adult children on as a joint owner is generally discouraged, unless the intention is for them to inherit this asset, and this intention is clearly documented, preferably in the donor’s will.”

Williams adds that people need to be aware there’s no longer a presumption under the law that joint tenancy includes the right of survivorship to the surviving owner, unless they can clearly demonstrate an intention that the person creating the joint tenancy intends for it to include the right of survivorship. Otherwise, the surviving owner is deemed to be holding the asset in trust for the estate beneficiaries.

Another more common litigation situation McCorquodale has seen lately is when a family is in the middle of or hasn’t started succession planning and something happens to make it unravel: maybe someone gets angry or sick or even dies. And if at that point they don’t have a signed or funded unanimous shareholders’ agreement or other legal agreement on paper, there are no guidelines on how to proceed.

Or they made a succession plan many years ago and didn’t update it to adjust for changes in the farm or in the family. Farms are moving, rolling things, so the agreement has to continue to work, McCorquodale says.

A lack of communication causes problems for farm families such as documents being created and signed without the family telling their lawyers and accountants everything. Or the family doesn’t know. It’s not always easy to talk about these things, but you need to include the immediate farmers and their spouses and partners in the discussion, says McCorquodale.

On a farm you have the confounding problems of working all day together and then sitting down to dinner together and historical family dynamics. It’s easy to put off talking but understanding that succession planning is the transitional part of a business plan and knowing that it’s a collaborative continuum will help.

“You have to keep going and everyone needs to understand that it’s not always going to be easy or perfect and it’s okay,” McCorquodale says. ”But that can’t stop you from moving ahead.”

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Senior Business Editor

Maggie Van Camp

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