A Farm That Lasts
Wednesday, February 8, 2023

Section: Wills, Estates, Wealth Transfer

Getting Creative

"People are getting creative,” says MNP’s Trevor MacLean. Goals that used to seem impossible are routinely getting achieved.
By Jennine Moyer, Country Guide, January 2023

Maybe nothing has ever been certain on the farm, but today it feels more true than ever before. There’s so much more to worry about than just weather and weeds. Who could ever imagine the global supply chain would be turned upside down by a virus? Or that you wouldn’t be able to source parts for your combine, or that fertilizer would cost you a small mortgage?

And then there’s inflation and rising interest rates, and having to adopt the latest technology to keep the farm competitive.

On top of which, many farm businesses are also struggling with looming questions of succession and transition and how to be fair to everyone in the family. And then, of course, there is still the weather, which in today’s high investment climate can really knock a farm sideways.

Uncertainty and complexity

The pressure is taking its toll. “A question we ask our clients is ‘what keeps you up at night’,” says Trevor MacLean, agricultural business advisor with MNP in Alberta. “Lately, the most common (answer) has been the complexity of today’s farming businesses and how to keep up with constantly changing factors.”

Then, ongoing global uncertainty is causing additional stress on farm managers who are pressured to make operating decisions without all the necessary information, and often on unrealistic deadlines.

Whether it’s because of major environmental factors like floods and heat waves or geopolitical black swans that have an impact on world trade, farming can be turned upside down overnight. A day that starts with the farmer feeling in control can end with wondering how to handle the next new mess.

Brendon Fornwald, farm management consultant with Backswath Management in Saskatchewan says, serious pressure also comes from equipment shortages and input supply issues, not to mention labour shortages.

“The volatility is likely here to stay, making farm management essential for success,” says Fornwald. “Thanks to new software developments most farms have a good handle on their cost of production, and now it’s time to shift the focus from production to management, starting with enlisting a team of advisors and making plans that will help the farm navigate uncertainty.”

Creative planning

MacLean advises clients to think critically about the events and pressures that affect their farms on a daily basis. Many of these are outside a farmer’s control, but putting assumptions in place and making a plan for those that can be controlled, like farm transition, is a step in the right direction.

When it comes to farm transition, MacLean says he’s seeing a big trend towards family inclusivity and involving all family members in discussions earlier than ever. “I think we’ve all heard farm succession horror stories, and people are learning from that,” says MacLean. “Everyone is being engaged in planning, including non-farming children, and people are getting creative.”

The ever-challenging issue of fairness between farming and non-farming children continues, but more farming parents are getting comfortable with the idea of leveraging non-farm assets, like investments and insurance in an effort to balance the allocation and value of assets.

“It often looks like the child taking over the farm is getting the stronger side of the balance sheet, but remember they are assuming significant risk, especially in today’s environment. There is no risk for non-farming kids receiving cash assets,” says Fornwald. “The risk versus return factor is huge and can’t be balanced within families no matter how hard you try.”

In an effort to keep things fair, Fornwald has seen some creative approaches to enable the farming child to continue farming land that has been divided amongst family. Lease agreements between children are a popular approach, allowing the farming sibling to build capital to eventually buy out their non-farming brothers or sisters. In these situations, Fornwald recommends lease agreements ranging from five to 10 years with a first-right-of-refusal clause for the farming sibling.

Some families have taken such lease agreements a step further by amortizing parts of a farm estate that have been divided between farming and non-farming kids. If the non-farming kids who received an asset like farmland sell the land within an allotted amortized time frame (for example, 10 years) in an arm’s length sale for fair market value, a deductible approach would apply. This means, Fornwald says, that a specified percentage of that fair market value would be “returned” to the estate or farm as part of the original agreement.

This discourages the non-farming child(ren) from selling an asset that the farming child(ren) must have access to as they work to put together a sustainably sized farm operation. If the non-farming children have a really strong reason for selling, they still can, but not without recognizing that the sale would have a serious impact on the farming children that they must be cushioned against.

At the same time, it’s fair to the non-farming child. Not only is the 10-year time frame realistic, the non-farming children also receive lease payments along the way.

“Adding a 10-year protection clause to lease agreements like these is highly recommended,” says Fornwald.

Founders’ fees are another unique succession strategy that Fornwald has seen lately. This concept is designed to support the older generation as they transition away from farm management by capitalizing on their wealth of knowledge as a farm advisor. It assigns a founders’ fee, or a farm pension, per acre and per year to Mom and/or Dad, so the farm continues to cash flow and support them while transitioning management responsibilities.

Fornwald says this strategy is especially helpful in situations where the older generation still wants to be a part of the farm.

MacLean says he’s noticed more emphasis being placed on keeping generational farms in the family lately, even if no one wants to actively take over the farm. “Honouring a family’s farming legacy and keeping it available in case future generations want to farm is a new trend being adopted on some operations,” says MacLean, who notes that as people shift from rural to urban living and lifestyles, they are conscious that their children may want to move back to the farm and want to keep the option to farm open for them.

The trick is to keep the farm active and establish strong family governance so the farm can be managed from a distance. “You need a system that encompasses family, business operation and ownership that will maintain and preserve the farm,” says MacLean. This unique approach to farm management can include passive shareholders, leaseholder agreements and unanimous agreement clauses (in case of disputes).

There are countless upsides to such an approach to maintain a family farm legacy, and MacLean advises families to establish a contingency plan and a thorough governance structure to preserve family dynamics and ensure success.

Another trending topic is the reluctance to “pay for the land twice.” In this situation, families that are seeking to find fairness may be pushing the farming child to purchase the farm outright to help compensate Mom and Dad in their retirement and source cash to divide amongst non-farming siblings.

“This is a touchy topic with the younger generation who may be struggling to find a way to afford the farm,” explains Fornwald. “Sometimes we forget that, in many cases, non-farming kids want the family farm to continue and be successful, and are willing to find solutions to make things work.”

Forward thinking

The most promising trend both advisors report is the uptake in transition and farm management planning — both essential tools for the success of today’s farm businesses. While the issue of fairness will always be a concern for families, open communication and an increasing willingness to maintain farming legacies also appear to be leading the evolution of farm succession.

“A farm transition will never be equal amongst the next generation,” MacLean says. “Adopting a philosophy about what fairness looks like to your family is the closest you will ever get to equal, and there are plenty of ways to get there.”

In many cases, it’s taken generations for farms to reach the success they enjoy today. “Don’t discount those years of hard work and the legacy you’ve built,” MacLean says. “Work together, communicate, and bring in an advisor to help you find the best approach.”
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