It is not uncommon for a son or daughter to have been involved in the family farming business for many years, working alongside their parents.
It is not uncommon for a son or daughter to have been involved in the family farming business for many years, working alongside their parents. Unfortunately, it is all too common that succession planning or the exit strategy of the parents from the farming business has not been discussed.
Section 274 of the Duties Act 1997 (NSW) provides that there is no transfer duty (stamp duty) for the transfer of land used for primary production if it is between family members.
There are a number of things to consider to ensure that farming businesses are successfully transitioned from one generation to the next. The first considerations should always be;
- Can the parents transitioning off the farm retire comfortably without being reliant upon income from the farm. This assessment should include provision for parents to access aged care facilities in the future if and when required; and
- Are the son or daughter taking over a viable business?
Once the above questions have been satisfied, it is necessary to ensure that parents have adequately provided under their Will or through some other means for their other children who are not associated with the farming enterprise. There are a number of solutions to this and a joint conference with your Solicitor, Accountant and/or Financial Planner should unearth solutions to ensure that children have been provided for equally.
For a number of reasons Succession Planning and transitioning out of the farming enterprise should be discussed well before it becomes a necessity. It is not uncommon to encounter situations where parents have spent profit on the farm without reducing existing debt. If off farm assets are developed over time to support parents in retirement or debt is reduced, then the amount of finance required by the next generation may be less making it a more viable business and easier transition.
In a more practical sense, communication between the generations is crucial. Younger generations should be encouraged to express their intention in one day taking over the family farming enterprise. Too often the situation arises where the son or daughter that has returned to the farm spends much of their working life assisting their parents, often at reduced pay, with the running of the family farm only to later realise that it is not viable for them to take it over. These circumstances can leave that child at a significant disadvantage to their siblings who have earnt money and advanced their career off the farm.
Succession Planning is not a plan to set out solely in a Last Will and Testament. As soon as younger generations express an interest in taking over the family farm, then providing it is suitable to the older generation, steps should be taken to document the arrangement in conjunction with the revisiting of the Last Will and Testament of the older generation.
Take the following example:
Frank is in his early 70’s, owns a significant livestock and cropping enterprise and wishes to soon retire. He has been working on a part-time basis for the last decade.
His daughter Betty is in her late 40’s and has been working on the farm for the last 15 years. Betty has been fully conducting and jointly financing the livestock and enterprise for the last 15 years, during which time the turnover and value of the enterprise has increased dramatically. Betty does not own her own home and has put most of her money into the farm.
Betty’s three siblings work off the farm in well established careers, they each own their own home and are financially secure. Betty has little to do with her siblings and they do not visit the farm often.
Frank and Betty have often discussed Betty one day taking over the farm and business but have never documented anything.
Frank is tragically killed in an off farm accident and has not updated his Will for 20 years. His last Will left all of his assets to his now deceased wife in the first instance and following, his four children.
Betty is upset to learn that she will only stand to inherit one quarter of the farm and associated farming business given she has worked on the farm for 15 years and invested significant amounts of her own money into the farm and business. She decides to make a Family Provision Claim upon the Estate.
The above situation could have been avoided had Frank and Betty taken steps to document their succession planning arrangement, which in the normal course would also have involved Frank revisiting his Will.
Early communication and planning is crucial when parents look to transition off the farm into retirement and the next generation takes over. Please contact Leyden Legal should you be involved in a farming business looking to transition to the next generation.