There is a certain reluctance in all of us to deal with the subject of estate planning because it requires us to consider what is going to happen after we die. Death is not a particularly pleasant subject and we prefer not to think about it. Some of this reluctance may disappear if estate planning is thought of in a broader context as having to do with the accumulation and use of property during one's lifetime, as well as its distribution after death. In fact, this is what it is.
Estate planning is particularly important to you, as a farmer, because you are engaged in a capital-intensive industry. The size of your estate, and the fact that substantially all of your net worth is probably tied up in your farm, create special problems which can be dealt with only through a well-constructed estate plan.
What is Estate Planning?
Estate planning deals with all aspects of the accumulation, use and
distribution of a person's assets. It therefore entails all of the following:
- accumulating and controlling assets;
- providing for an orderly and equitable distribution of assets during lifetime
or on death;
- providing adequate retirement income;
- minimizing tax; and
- maintaining sufficient liquidity to pay taxes and other costs at death.
You
have a number of " tools" at your disposal which you can use to
achieve all of the above. For instance, you can:
- prepare a will describing how property is to be distributed after your death
(see Chapter 2);
- choose a form of business arrangement that minimizes your tax liability and
makes it easier to transfer your property to your beneficiaries (see Chapters 3
and 11);
- transfer property during your lifetime or on death and use trusts to hold
property for your spouse or child (see Chapters 5, 6 and 7);
- plan your retirement income (see Chapter 10); and
- provide liquidity in your estate with the use of life insurance (see Chapter
12).
What are the Benefits?
The time and effort spent on your estate plan is usually well rewarded in terms
of the savings in taxes, estate management costs and property transfer
procedures. Equally important, however, is the peace of mind enjoyed by you and
your family in the knowledge that the plan has been well thought out and is fair
to all.
When Should You Begin to Plan?
You should give some thought to estate planning as soon as you begin to
accumulate assets. While you are single and relatively young, your planning is
likely to consist of safeguarding your valuable assets (such as storing
important documents in a safety deposit box) and preparing a will setting out
what should happen to your property in the event of your death.
After you marry and start a family the scope of your planning will broaden. You will change the beneficiaries in your will and, perhaps, name a person who would act as guardian to your children if you and your spouse should die suddenly. Your business affairs will probably become more complex and you will want to assess whether a different form of business organization would be beneficial. Perhaps you will want to consider forming a partnership with your spouse, or carrying on business through a company. Your debts may increase significantly and you may want to reassess the extent of your insurance coverage.
Later on in life, your estate plan will broaden even further because you will then have to decide whether to bring your child or children into the business. Ultimately, you will have to consider your retirement plans and the sale of your farm. Plans may have to be changed periodically in response to external factors such as new government legislation.
It can be seen, therefore, that an estate plan is not something that is made and then forgotten. It's an ongoing dynamic process that evolves throughout the middle years of a person's life and requires a periodic check-up in response to changing circumstances.
How Do You Pass on Your Farm?
Your planning in the early years will probably centre around managing your
farm and earning sufficient income to support your family. In later years,
however, you will have different concerns such as whether any of your children
want to take over the farm or whether there will have to be a sale to a person
outside the family.
If there is to be a sale to a person outside of the family, you will want to receive the best possible price and reduce your tax liability to the maximum extent possible. The best way of doing this is to ensure that you receive advice from your accountant well before the transaction occurs. In some situations that advice should be obtained one or two years before the proposed sale. This is discussed in Chapter 4.
If the farm is to be transferred to
one or more of your children, the issues will be somewhat different. You will
still be interested in receiving a fair price and minimizing your tax liability,
but there will be a number of other issues as well, including the following:
- do you want to transfer all or only some of your farm property?
- are you looking for an arrangement under which your child is gradually
phased-in to the business?
- how can you give your child the opportunity to take over the farm and still
treat your non-farming children fairly?
Planning the transfer of the farm to the next generation can be difficult and time consuming. Because you will have spent considerable time, money and energy in acquiring your farm, you will not want to transfer it to your children without being fairly certain that your needs will be looked after, and the transfer will be a success.
Don't be surprised if the transfer process takes several months, or even a year or more, before you complete it. This is a big step for parents, and it quite often takes a while for everybody to become comfortable with the process as well as the outcome.
Some farm families have difficulty coming to grips with this phase of their estate plan because they are overwhelmed by the many issues that need to be taken into account. Sometimes they put off the discussions that should be taking place; hoping, perhaps, that the decisions will be easier if they are deferred to another day. Usually this doesn't happen.
You
will more likely avoid becoming overwhelmed if you don't become too involved in
the details early in the process. The Estate Planning Checklist, published by
the Ministry in 1993, will help you do this. It sets out eight basic steps in
the family farm transfer process and then discusses the first four of the steps
in some detail. These eight steps are shown in the form of a diagram on the next
page.
The Family Farm Transfer Process
The data you collect in step 1 will include the approximate value of your
farm assets and liabilities, the manner in which these assets are owned,
particulars concerning your family, details of non-farm assets, insurance
policies, etc. You should try to gather this information together in a manner
that will facilitate a discussion by the family as well as a review by your
professional advisers.
Step 2 of the
process is perhaps the most important. Here you look at a number of broad
financial and personal issues that ultimately will shape the way in which the
farm is transferred to the children. There won't be a final decision on these
issues at this stage, but there should be a discussion of the options and an
assessment of the importance of each issue in the overall transfer process. The
issues that will be considered will include the following:
- The importance of an "interim" arrangement with the child (such as
bringing the child into the farm as a shareholder or partner) rather than a
complete sale
- The importance of you continuing to control the farm for a period of time
- The necessity for you to move off the farm
- Your financial needs, both now and in the future
- The ability of the farm to support the family members who are interested in it
- The approach you might take in dealing with your non-farming children
In
step 3 of the process you will establish some broad goals and objectives. Your
plan will not have been "fleshed out" in detail at this point but
hopefully you will have arrived at some tentative conclusions in the following
areas:
- whether there will be a full or partial sale or, perhaps, some sort of interim
arrangement such as a partnership
- whether you want to retain control over the farm
- your income and capital needs in the short and medium term
In
step 4 you should attempt to increase your knowledge of the estate planning
"tools" which are at your disposal. These include:
- the "tax tools" (such as the capital gains deduction and farm
"rollovers") - see Chapters 5, 6, 7 and 9
- the "security tools" (mortgages, agreements for sale, etc.) - see
Chapter 3
- the different forms of business arrangements (proprietorships, partnerships,
joint ventures, companies) - see Chapters 3 and 11
- methods of holding property (joint tenancy, tenancy in common and life
interests) - see Chapter 3
Your intention here is not to become an expert but to be better able to review the options with your advisers. You might begin by reviewing the brief commentary in the Estate Planning Checklist referred to earlier and then supplement your knowledge by reading portions of this publication.
Steps 5 to 8 in the process represent the "analysis" and "completion" phases of your plan. Here your advisers will become more involved. The options will be "fleshed out" for your review, and the final plan will be selected and put into effect. Hopefully, you and/or your advisers will be able to use this publication in this phase as well.
After a plan is developed in draft form by your professional adviser, you will want to discuss it with the remainder of your family. It is important that all members of your family believe they have been fairly treated. Time spent at this stage can save much anguish during your lifetime and after your death.
If the plan you are developing is to be included in your will rather than being put into effect immediately, a discussion with your family may avoid the possibility of your will being contested under the Wills Variation Act (see Chapter 2).
Your accountant will naturally be concerned about minimizing your tax liability, but it must be recognized that tax is not the most important consideration. You and your spouse must feel comfortable with the plan recommended to you and it must conform to your ideas on how you should deal with your children.
Your estate plan should be flexible. It should, for instance, take into account that your children may change their personal goals and career paths. You should not take irrevocable steps until you are certain that your children have decided what they want to do with their lives.
Provide for an Incapacity
As you become older, you will want to discuss with your lawyer the merits of
empowering another person to act on your behalf if you were to become
incapacitated. The law in B.C. in this area changed considerably on February 28,
2000 as a result of the introduction of the Representation Act. Essentially,
this new Act enables you to sign a standard agreement covering matters such as
your personal care, the routine management of your financial affairs and certain
health care decisions. There is also an enhanced agreement which authorizes more
significant decisions such as the sale of assets and the refusal of
life-supporting medical treatment.
If you have previously made arrangements through a lawyer to give an enduring power of attorney to one or more members of your family, the new legislation in B.C. may not be of great interest to you unless, perhaps, you want to take advantage of the provisions dealing with health care. If, however, you have not done this, and you are reaching the age where somebody should be authorized to act for you if you were to become incapacitated, you should arrange a meeting with your lawyer to discuss this matter.
Gift Tax and Succession Duties
Farmers in British Columbia have to consider the effect of income taxes on
their estate plans but, fortunately, they do not also have to wrestle with gift
taxes and succession duties. These taxes were abolished in British Columbia in
January 1977. Nowadays, therefore, you need not be concerned about the
possibility of a gift tax if you should transfer property or cash to a member of
your family.
Using Advisers
You are going to need the advice of professionals in developing and
implementing your estate plan. The questions that come to mind in this regard
are "which professionals can help you?", "when do you consult
them?" and "how do you choose the right one?"
The following is a list of some of the advisers and the areas in which they will be able to help you.
Accountants: If your accountant is very knowledgeable in the areas of taxation and estate planning as they affect farmers, he or she can act as the "quarterback" for your overall plan.
Lawyers: They can advise you on the legalities of the estate planning and business succession arrangements. Agricultural experience is advisable. Ultimately a lawyer will be required to put your estate plan into effect.
Bankers: They can offer advice on how to finance farm succession arrangements as well as retirement planning and the investment of your capital.
Financial planners and consultants: These individuals can also advise on retirement planning and overall financial planning. Some will have a specialized knowledge of insurance products and the manner in which they can be used in your overall estate plan.
Insurance agents: These individuals can advise you on insurance matters. Some have financial planning qualifications that enable them to advise you on a broader range of issues.
There are two schools of thought as to when the outside consultants should be involved. The first is that you should not bring in an outside adviser until you have done your own research and have had some preliminary discussions within the family. For some people, this will be the right approach, particularly if they are able to locate publications such as this one, and the Estate Planning Checklist published by the Ministry of Agriculture and Lands in B.C. Others, however, find it useful to have an initial discussion with an advisor to help them focus the discussions within the family. This is particularly true where the parents are approaching retirement and it's time to develop the arrangements for the transfer of the farm to the next generation, or plan for the sale to an arm's length person.
Your advisers should have an understanding of the issues and problems affecting farmers and, most importantly, you need to feel comfortable talking with them. For some phases of your estate planning, your adviser will usually be your lawyer or accountant. At other times, however, you may need to involve several people, including your accountant, lawyer, banker and insurance agent.
How
do you know if you are dealing with the right people- Well, here are some
suggestions:
- Ask around. Talk to other farmers who have used advisers and get their
suggestions.
- Enquire at seminars and workshops.
- Contact professional associations.
- Ask the Ministry of Agriculture and Lands.
- Set up an interview with possible advisers and find out what training they
have and their length of experience in dealing with estate planning for
agricultural businesses.
Keeping
Track of Your Estate Planning Information
As your estate planning changes over time, it is important to keep track of
the information that is essential to your arrangements. To some extent, this
information will be contained in your will but it may also be contained in other
documents such as the following:
- a shareholders' agreement, if your business is carried on through a company
- a partnership agreement if your business is carried on through a partnership
- lease agreements
- financial records
- insurance policies
To assist you in
doing this, we have included an insert in this publication entitled "Estate
Planning Information" (there is also an extra copy in the Appendices). We
suggest you complete it and file it with your will and other valuable papers.
Some Questions and Answers
1. My wife and I want to bring our son into the business or perhaps sell a
portion of the farm to him. How do we begin the process?
Well, as mentioned in this chapter, a good starting point is the Estate
Planning Checklist, published by the Ministry of Agriculture and Lands
in B.C. This is a fairly small publication that will give you an understanding
of what the family farm transfer process entails as well as provide you with the
information you will need to gather together. After you have reviewed this
Checklist you may wish to talk with a professional adviser (accountant or
lawyer), a farm management specialist at the Ministry or, perhaps, attend an
estate planning seminar. These seminars are often provided on a periodic basis
by accountants, lawyers, insurance agents and by the Ministry itself.
2. Which professionals are likely
to be able to help us develop an estate plan?
This depends on your advisers' experience and qualifications. There are some
accountants and lawyers, who have considerable estate planning and taxation
experience with agricultural businesses and can guide you through the entire
process. If your accountant or lawyer does not have these skills, he or she
should be prepared to recommend you to somebody who does.
Depending on your circumstances, it may be appropriate to involve your bank and
insurance agent.
If you are not sure who to approach, contact your local Ministry office. They
will be able to provide you with recommendations as well as some preliminary
advice.
3. Should we have our farming child
attend the first meeting with our family's professional adviser?
There are no hard and fast rules but generally it's preferable for the
parents to have the first meeting with the adviser on their own. This will
usually facilitate a more complete discussion of the options available.
