Land transfer can be a challenging topic to discuss. An ag transition specialist offers tips to parents and children to satisfy all parties and maintain relationships during this process
By Kate Ayers
The farm transition journey is long, and families must consider many factors along the way. Fortunately, family members do not need to make the trip alone and many options are available to best suit each operation’s needs.
One step that families can take is to proactively transfer land while parents are alive. This process considers and can benefit a farm’s business structure, tax implications and family relations.
Families can harness “a lot of power and impact by pulling wills back to relish in them today and not wait the 30 years,” Annessa Good, Farm Credit Canada’s ag transition specialist, said to Farms.com.
“In agriculture culture, historically families address transition when they read the parents’ wills. So, we are trying to promote being proactive, not reactive.”
While these conversations can be difficult to initiate, communication is key throughout the transition process.
“Proactive land transfer can help us address timelines and expectations,” Good said. Other benefits of this process include providing retirement income for parents by securing equity, celebrating milestones as the next generation gradually takes over the farm, and providing security for the next generation’s families by ensuring that children are not simply working on a promise, Good added.
For land transfer agreements, parents and the next generation should seek independent legal advice, Good said. “While it may seem over the top, anytime you have a family agreement, it is beneficial for both generations to have legal perspectives.”
When parents transfer land to their children, they should consider the five Ds:
- Divorce – when gifting equity, parents may have concerns of child’s potential divorce
- Disposition – parents gift land and then the child turns around and sells it at fair market value
- Debt – that a child may take on
- Death – families don’t talk about this enough. Child dies first; now what?
- Dementia, disease, disability – junior generation needs clarity on future
These points “go back to fiscal needs and expectations. Transition planning is 50 per cent financials and 50 per cent family communication dynamics. When we begin these conversations, we need to address these potential hurdles,” Good said.
Another hurdle that families may face during proactive land transfer is determining fair land values, which may be the elephant in the room.
“Fair is a subjective word, so determine what fair means in your family,” Good said.
To determine this value, family members must take a “holistic view of communication, expectations, and how many hands are in the pot.”
For example, “parents’ retirement incomes need to come out of the operation, their estate planning needs to cover inheritance for off-farm children when applicable, and the family needs to maintain a sustainable and viable business for the next generation,” she said.
However, the fair market value number only comes into play if the farming child sells the land.
Families must also compare “appraisal values versus productive values. Parents need to dig into the numbers to justify discounted land values for the next generation. Are we tracking sweat equity as a family to determine discounts on land from work in the past?” Good asked.
Typically, “anything that is 2.5 times over cash rent value is the tipping point and the purchase would not be viable. Productive values will depend on land market values in a specific region. This number helps parents and the junior generation understand how much debt they are taking on and parents can have conversations with off-farm children so they can understand the economics,” she said.
Overall, families have four proactive options for transferring land, Good said. These include:
- Life estate and remainderman interest – More control mechanisms for parents to be guaranteed specification of their needs while also transferring acreage to a child. Commonly done as a full gift, no money transferred. Expectations are clear. Should result in little to no adverse tax consequences nor probate fees. But the catch is that children have a harder time using equity to grow their business.
- Repurchase option – If land is ever sold or legal action is taken against the property, parents have the option to repurchase the property at the value for the price transferred, plus the value of any improvements made. Child has more flexibility for borrowing power. There could be some adverse tax consequences.
- Shareholders loan – Selling a personally owned acreage to your farm company and then using that shareholder loan as a potential source of tax-free retirement income and an off-farm asset for estate planning. This option involves transferring some of the company ownership over to children.
- Gifting the equity through joint tenancy – Work with technical advisers as many factors need to be considered. Exercise caution with this option.
Throughout the land transfer process, farmers should consult their accountants, lawyers, financial and retirement planners, and life insurance agents, Good said. “Lean into your technical advisers when writing up these agreements. Be transparent and upfront.”