Success with consensus

Good communication and consensus among all involved in a family dairy farm succession plan is vital to its success.

“Consensus is best as if everyone is not aware of what is happening things can go badly wrong,” said Jude Wilson who with Brian Carter, both of Hamertons Lawyers Ltd Whakatane, conducted an online seminar called “Handing over the reins” for the Dairy Women’s Network in November.

“After parents have died grievances can come out of the woodwork. Lawyers profit but everyone else gets stressed which is not ideal. The most successful succession plans are those made with everyone, including the children, accountant, lawyer, bank manager and farm adviser, around the table to understand what it is parents want,” Jude said.

It was vital to avoid unforeseen consequences of a succession plan, Brian said.

“There is a very enabling piece of legislation, The Family Protection Act, which allows children and grandchildren to challenge a will. It can be easy for someone to air grievances after parents die, so it is good to have everything sorted out while they are alive to cut off those legal claims.

There can also be litigation against trusts under which children raise claims that they have not been treated properly and want financial recompense.

“You don’t want that and don’t want a family blown apart. Communication involving everyone, including the spouses of your children is essential.”

No one-size fits all when it comes to succession planning, but the first step is to decide exactly what the retiring farmers want for their future.

“Get your goals on paper. There should be two lists – the must-have bottom-line retirement list and a good-to-have list. Once that’s sorted the first call should be to the accountant to talk about financial planning to be sure the plan will work. Secondly, talk to your lawyer and if the farm still has debt, talk to the bank manager as some plans won’t work if you owe the bank a lot of money,” Jude said.

Things to consider include where to live? Will it be in the family home or a new or different house on the farm? Perhaps there is a wish to move into town or the beach or buy a yacht to travel the world or to take cruise ship trips every year.

“Figuring out what you want, and how much it will cost are key parts of your retirement and succession plan,” Jude said.

An accountant can advise on any tax implications of the succession plan, including potential depreciation recovery impacts, Brian said.

“If land and buildings are to be transferred, that could trigger depreciation recovery which can be a significant cost to a farming business. Talk to your accountant about ways to minimise that.”

No one size fits all with a succession plan which may include involving a share milker rather than a child, if offspring have no interest in taking over the farm. Selling the property on the open market and distributing the proceeds between children is also an option.

However, where one or more children do wish to continue farming on family land, Brian and Jude said providing for other offspring is also important.

The plan need not be completely equal to be ‘fair’ in regards to asset distribution as in many cases siblings who do not wish to farm are happy to receive a proportionally smaller financial benefit as opposed to ‘working for their inheritance’.

A succession plan may take at least two to three years to put in place and Brian warned against rushing the process.

“It can take a long time to get right. If you rush, you will make mistakes and leave things out. A succession plan is important, it’s a big deal and you need to get it right.

“The latest you want to start looking at forming a plan is in the farming year prior to the year you wish to retire so that everything is in place, including for children to borrow money, well before handover.”

An option is to work through the plan in stages, taking up to 10 years to complete. “There is no right or wrong way to do it provided consensus has been gained.”

If offspring have yet to decide if they wish to farm or not, the options, Jude said, include for the parents to continue to farm for a specified period to give their children time to decide, or to put the farm up for sale on the open market.

“Ultimately it is your asset and life’s work. It is your decision if you want to keep farming until your kids put up their hand to take over. If you decide you don’t want to wait, or for health or lifestyle reasons, you have had enough then selling on the open market is a backstop option.”

Another option is to lease the farm on the open market to a third party, Brian said.

“This retains the family farm. It is easy to see why some would not wish to sell on the open market. Once the farm has gone it’s very hard for the next generation to achieve farm ownership. Leasing provides security of the land and some income and the future possibility for children to return to the land is still there.”

• Hamertons Lawyers Ltd has a blog about succession planning on the Dairy Women’s Network website – go to: www.dwn.co.nz/news/starting-to-think-about-succession-or-retirement

Options for succession planning include:

Selling the farming assets to family first, with the sale of the land later once the business is established

• Selling or transferring shares in your farming company to one or more children
• A sale of the farm to one or more children (or an entity under their control) with a loan back for all or part of the purchase price
• Leasing to one or more children with a right of first refusal to purchase
• Distribution from a trust if the farm is held in a trust
• Disposition by will
• Subdividing to provide a part of the farm for each child (if that’s possible)
• Selling the farm on the open market.