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Transitioning ownership of a family farm to the next generation is in many ways similar to succession planning for small businesses. Yet, there are some unique tax and estate planning considerations for family farms that require plenty of advanced planning.
Globe Advisor spoke with Derek Beatty, senior investment counsellor and portfolio manager at BMO Private Wealth in Calgary, recently on the nuances of helping clients transition the ownership of a family farm.
What makes transferring ownership of a family farm different from other businesses?
For anybody who’s grown a small business or a family farm, there’s a concern about how you transition and keep that legacy in the family. But a family farm is different in that it’s a lifestyle.
Farming is rural and it takes a special person to want to take over the farm. Even if you do have a family member who does want to take it over, it may take years for them to make the final decision. In the meantime, the parents are trying to manage the farm and figure out what to do. And when you move the assets, you’re also building an estate plan and a tax planning situation that’s far more complex than a lot of people appreciate.
What are some tax planning considerations for farm owners?
Many farmers and ranchers have an asset that has appreciated significantly over its lifetime, and there’s a capital gain.
The [capital gains deduction for qualified small business corporations, farms or fishing properties] allows the person selling the farm not to pay any taxes on the first $1-million of capital gains. Each person involved with the farm has that $1-million lifetime exemption. So, if someone ended up selling a farm that realized a $5-million capital gain, with proper planning between the parents and some of the kids, it could be structured so that everyone is using the exemption and the transition has no tax.
But there are other issues. If one of the children is running a business of any kind, they’ve used up their lifetime capital gain exemption on this farm transition.
The intergenerational farm property rollover rule, if applied, [allows] children taking over the family farm to receive the land and face no taxes in the transition.
[These mechanisms] can be used concurrently. But the issue with the family farm transfer is most families want to equalize the value of their assets among their children, but what may benefit the child [taking over the farm] may be a detriment to the others.
So, this is where you really need to get into the weeds. If you have one child who wants to farm, you may use some of the intergenerational rollover, you may use the capital gains exemption concurrently, but you may also use insurance. Buying insurance kind of tops [everyone] up so that on a relative basis after taxes you can equalize the distribution of your estate across [your children].
How can advisors help clients prepare for this transition?
As an advisor, as soon as you know they have a farm, you need to start promoting that conversation early and start helping with the process. It’s not something they’re thinking about every day, although in the back of their minds, most clients are probably thinking about it. I also offer to join family conversations because you never know what everybody wants. Family dynamics with a small business require more communication.
This interview has been edited and condensed.
- Kelsey Rolfe, special to the Globe and Mail
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