Estate Planning: A Critical Piece to the Succession Process

Hugh O’Neill, Insurance Advisor

O’Farrell Wealth & Estate Planning | Assante Capital Management Ltd.

An important part of the succession process is the estate plan. Regardless of where you are in life; young, old or middle aged, it is important to have your estate plan in place. You should be at ease with how your estate is set up had you passed yesterday.

Many farm families get tied up in the thoughts about; who is running the farm? How do family members interact on a day to day basis? Who holds the voting, non-voting shares? How will the brothers or sisters get along? The list goes on.

While these are important issues to work through, it is Important to pull yourself away from the day-to-day issues and take a bird’s eye view of the farm and how you want your estate to look. Once you establish what your vision is for the future of your farm, you can begin taking the necessary step that will get you there.

Many people are not comfortable talking or thinking about what the world will look like when they are no longer around. It is a difficult subject to bring up with family. However, there is a great relief to getting things out in the open. After setting up the plan, we often sit with the whole family to reveal the business side of the succession plan, letting all family members understand how they will be treated when their parents are gone.

It is often assumed that the parents will die first. However, you must consider what will happen should the younger generation; new shareholders of the farm, pass away. People do not always die in order. A plan cannot be complete without considering this possibility. The following questions need to be considered; will the spouse want to retain the shares owned by the partners? Will the partners want the shares to be owned by the spouse? How will the estate of a deceased active shareholder be compensated for the equity held in the farm?

Getting back to the parents estate: If there are multiple children on the farm, but not all are farming, what is the appropriate compensation needed for equalization to the non-farming children? Many farmers want to leave pieces of land to non-farming children, however this does not often work well. The farm may need the land to support the operation and the non-farming children may not want to hold the asset and be landlords to the farm. There is also a tax consequence: the land rollover to a non-farming child will likely not qualify for the Section 85 farm rollover provision. You need to work with a good farm succession advisor to get through this part. The final answer lays with the parents to work out what is right for the farm and family situation.

The next part of the equation is taxes. Wealth planning is about setting up a plan that will minimize taxation. Many assets are subject to Probate thus your estate will lose value immediately. Also, unnecessary capital gain taxes and income tax may come into play if your estate is not set up correctly. Sound wealth planning can greatly reduce the erosion of your family wealth due to tax. The old saying of “Shirt sleeves to shirt sleeves in three generations”, meaning your family will go from working class to wealthy to working class in three generations due to the erosion of family wealth due to taxes and dissipation of the wealth among multiple heirs. A comprehensive wealth plan can reduce or eliminate that phenomena.

Lastly, a good wealth planning team will welcome the participation of all of your advisors, including your accountant, lawyer and lenders. An experienced and knowledgeable team will produce a much better solution than one advisor working alone. Ensure the team you select are welcoming to participation of all the professionals involved in your life.