Incorporation and succession planning
Janet Kanters
So you’ve taken the big step of incorporating your farm business, giving
you peace of mind and an operation that’s running like a well-oiled
machine.
You’re beginning to think it might be time to slow down, take an overdue
— and well-earned — vacation, and allow your children to be more
responsible in running the farm.
So just how easy is it to turn your farm corporation over to your children?
Well, according to Rick Haines, FCA, with KPMG in Regina, it’s best to start
planning for succession sooner rather than later.
“What we have to keep in mind here is that succession planning is a
process, and not an event,” he says. “It’s about family, people
and relationships, as well as ownership and management. It’s about
what’s fair, and it’s driven by family values, wants and
concerns.”
In a nutshell, what you’re looking for is a successful transition for the
next generation, while ensuring the viability of the business and preserving
family harmony. This latter point makes farm succession planning a little different
than your ‘typical’ corporation turnover.
Indeed, a farm business succession plan, says Haines, should perpetuate shared
values, and treat family members fairly and equitably.
“And that doesn’t necessarily mean equally, which is where you run
into a lot of issues,” he notes. “Succession planning really requires
family participation, and involves such things as estate planning, wealth
planning, retirement planning and business planning.”
The first question that must be answered is whether or not mom and dad are
ready to pass things on to other family members.
“This is usually the first hurdle you have to overcome when you’re
trying to do succession planning,” says Haines. “Even though mom and
dad think they’re ready to give up the business, when it comes down to it and
you’re getting into it, maybe they’re not so ready to give it
up.”
Some key factors to consider when thinking of succession include:
- Are other family members capable of taking over the business?
- How are mom and dad going to fund their retirement?
- Will mom and dad still need income from the farm?
- Will everyone be treated equally?
- Who’s going to do the physical work on the farm?
- Who’s going to make the decisions?
- Who’s going to have ownership of the assets?
The answers to these questions are not simple, and they need some serious
thought before they can be answered. That’s why in most cases, people
considering succession of their farm business consult with trained
professionals.
“Early in the process, you should seek assistance from competent
professional advisors, which include lawyers, accountants and investment
advisors,” says Haines. “And because you’re dealing with family
succession, you also might want to consider using a trained facilitator to deal
with any family issues that arise.”
This facilitator, adds Haines, acts as a mediator. He or she listens to the
wants, needs and concerns of individual family members, allowing everyone to have
his or her say in the succession process.The facilitator is then able to create
some rational scenarios that are fair and equitable to all family members,
allowing the succession to proceed relatively smoothly.
Turning over the farm to the children doesn’t have to be as
cut-and-dried as it sounds. Indeed, many parents decide to transfer the farm
business ownership over time. By using the corporate structure, this can be
achieved fairly simply, by implementing an estate freeze.
“Implementing an estate freeze simply ensures mom and dad retain
ownership in the corporation as preferred shareholders, ‘freezing’ the
value of their interest in the corporation at a fixed amount. The children would
then come in as new common shareholders, entitling them to any future increase
in the value of the corporation’s assets,” says Haines.
“One benefit of implementing an estate freeze is that it fixes mom and
dad’s income tax liability associated with the value they hold. As well,
it allows mom and dad to retain some degree of control of the corporation by
holding shares with voting rights.”
Succession planning need not be confusing or difficult for farm families.
Indeed, an incorporated farm business is often easier to turn over to children
than a non-incorporated farm. It just takes some pre-planning and good
communication amongst family members.
“You need to develop a shared family vision, because you may find out
that certain family members don’t see the farm business going in the same
direction as other family members,” notes Haines. “Hand-in-hand with
that, you have to develop shared goals. To do this, you really have to focus on
communicating with one another, listening to one another and, obviously, showing
respect for one another.”
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