Succession and estate planning in a family farming business is a complex juggling of the needs and wants of the “retiring” generation, the new farmer(s) and their partners and often siblings of the new farmers who will not be farming in the future. 

Issues include:

• Separate the succession and estate plans.
• People matter most; set the ground rules and guiding principles for decision making, starting with a conversation is the most important part.
• Timeframe is important.  The earlier the better.
• Allow for a balance of flexibility and certainty.
• Ensure education on the future implications of the plans.
• Go through and understand the “What ifs”; all the D words : death, divorce, disagreement, disability.
• Formal agreements are vital; deed of family arrangements.
• Succession is a process or a journey not a destination.

Succession for Farmers

Succession and estate planning in any business is a complex process that requires good communication, planning and ideally a long lead in time to maximise the chance of a successful transition.  A family farming business adds to this complexity due to the following reasons:

• The emotional nature of family connections and the associated difficulty in having conversations about these difficult subjects;
• often only some of the next generation will be involved in the future running of the business and others children are not. These individual family members are generally at different ages and life stages;
• the older generation will often still be involved in the operations of the business.  There are varying needs and wants of the “retiring” generation as compared to the new farmer(s) and their partners;
• there is often long multi-generational family history of the land and business in question.  Maintaining a viable farm in the family is often a key objective and can conflict with other objectives; and
• the farm is a large tangible asset with a value that is independent of the operational return of the business.  The business return on the asset value is generally low and variable (relative to other investments).  A large asset is therefore required to have a viable farming unit.  The farm usually makes up the majority of the family wealth.  The combination of all of these factors makes it very difficult to “pass on” a viable farming business and have an equal or even fair distribution of the family assets. The farm generally has insufficient capital return in order to achieve parity between on farm and off farm participants it is intended that debt will be used.

Communication On Succession And Estate Planning

Research indicates that the level of communication on succession and estate planning within small businesses is pretty poor.  While the research statistics on succession in farming business is now pretty old and therefore its relevance could be questioned, it does, however, give some historical perspective and some guidance to what professionals, active in providing successional advice, see.

Succession becomes and issue when

• Someone is frustrated and “had enough” – disagreement; and/or
• there has been an “event” such as – death, disability or divorce.

The lack of early, constructive communication and planning on succession results not only in disagreement between family members and personal stress, it also leads to business underperformance and potential erosion of family wealth. 

Increasing The Likelihood Of A Successful Succession Process

There are a number of factors that are important to improve the likelihood of a successful succession process. These are:

• Separate the succession and estate plans.
• People matter most.  Set the ground rules and guiding principles for decision making. Start with needs and objectives.
• Time frame is important (i.e. do it early, take your time – don’t barge through).
• Allow for a balance of flexibility and certainty.
• Ensure education about future implications.
• Go through and understand the “What ifs” – All the D words – death, divorce, disagreement and disability.
• Formal agreements are vital – deed of family arrangements.
• Succession is a process and a journey not a destination.

Succession Versus Estate Transfer

• Succession is the transfer of control and ownership of the business (not the land assets).  It needs to occur as one generation reduces their input into the business and the second generation seeks to move in their own direction.
• Estate transfer is the transfer of the major fixed assets.  This can occur at any time and not necessarily at the same time as the transfer of the business.

Both are connected but are mutually exclusive and can happen at different times.  Even where they are dealt with at the same time they should be considered separately.

Formal Agreements

The main advantage of formal agreements is the process rather than the result.  Formal agreements mean agreements are recorded in a clear and concise manner.  It also means that the process gets concluded to a point in time.  It gives the opportunity for individuals to have a “cooling off period” from any agreement reached in a discussion or meeting format and allows stakeholders to obtain individual advice.

Consultants are asked to help in too many succession disputes where a succession process has taken place previously and past agreements have either not been documented or documented in minutes that become ambiguous through the passage of time.