Settling a son or daughter on family farm

Press, 24 October 1980, Page 14

Settling a son or daughter on family farm

In most cases where a son or daughter is settled on a family farm they have to be given favoured treatment in comparison with other members of the family.

This was the message that Christchurch farm accountant, Mr P. S.- (Pita) Alexander, gave to a seminar on estate planning and retirement at Waipara last week.

He said that a major problem that very often developed fairly early on in any discussion with a farmer and his wife was that while they very much wanted a son, who, say, had been working at home with them on the family farm for some years, to have a chance tc purchase the farm on such terms and arrangements that he was in viable position in a so-called normal year, they also wished to treat all of their cni'd-en equally.

“I cannot fault the moral or social intentions here, but the objectives in the great majority of New Zealand family farm situations very much conflict," he said. “Except where there Is a very low mortgage and the farm is very profitable, and/or a situation where there is a significant . amount of offfarm assets, I have not been able to satisfy these two objectives, and'l cannot basically see the situation changing,” said Mr Alexander. •

“In ri leral terms, a farmer and his wife who wish to settle a son, or for that matter a daughter, on the family farm in a. financial situation which is viable in a so-called normal year must give that child favoured nation treatment over the amount of debt (that he or she has to shoulder) and bis or her share of the ultimate estate.

“I know very well, as a large number of my own clients have told me from time to time, that' this situation they feel is most inequitable and unfair • to other members of the family, and I certainly would not want to get involved in an argument about this ... however, the fact remains that if there are four children and one son is going to take over the farm, then unless that son has started at a very early age and purchased a share bf the land, stock and plant, he is going to need more than a quarter share of the ultimate estate. He’ will not be able to pay out a three-quarter inter-*

est to his brother and sisters. He would not be able to raise that ..amount of mortgage monies and he could not service it even if he could.

“The alternative, of course, is an outright sale of the farm so that the children can be treated equally. However, in practice, I usually find we draw back from this alternative and proceed more or less along the lines I have suggested, with the son who ends up on the farm receiving effectively a greater share in the long run of his father’s estate, and perhaps also of his mother’s estate, depending upon the original ownership.”

Later in his talk Mr Alexander posed the question as to what debt structure a son or daughter taking over the family farm could service and still be left in a reasonable position, “There isn’t a golden figure here as it depends upon the ability of the family member concerned, the type of property and quality of livestock etc.

“However, we invariably do need to structure a situation where we have a figure in mind, and in a sheep and beef cattle situation a reasonable benchmark I find is a debt servicing of the order of $5 to $6 per ewe equivalent. You will all know individuals servicing a higher debt loading than this and surviving quite well. However, these individuals are usually very experienced and very good operators and I do not think a sound estate planning and retirement situation generally should involve a higher debt loading than this for the family member remaining on the farm. . .”

Although it was a controversial issue on its own, Mr Alexander said that he found that additional land purchased by clients, perhaps some years previously, could make a big difference between being able to settle only one son or being able to settle two sons at the appropriate time; Very often at the time the action appeared to be a bold step, but history of course often made these moves Hook almost, self evident, with the pain and sleepless nights that were ex-

perienced at the time being quickly forgotten. Mr Alexander said that estate planning and retirement was not an exact science. What appeared to be .the correct moves for farmer A and his family were not necessarily the correct moves for farmer B. and even if they were the timing of the moves would almost certainly be different. There were a few golden rules and there were one or two exact figures, but what each farmer and his family did and when they should do it would invariably be the result of quite a number of discussions amongst themselves and their advisers to work out the best plan for their circumstances.

Over the years both political parties had demonstrated a desire to assist farmers in being able to continue the family farm concept, in that there was a very considerable amount of legislation at present in existence in this field.

A key provision, for example, was the right for a father to sell to his son or his daughter a part, or all, of his livestock at the father’s standard values or close to them, providing his son or daughter were continuing farming in their own names. This was an extremely useful provision that would be used in a large number of family farm estate planning exercises. There were also a number ; of other provisions, such as income tax

relief on the sale of a farm and capital livestock, which could be very useful and was often used, particularly when the farm was not being sold to a member of the family.

“I would suspect that there is much more legislation in this area for farming than for any other sector of the community,” said Mr Alexander.

Although there were quite a .number of permutations as to how a son or daughter could be involved in the farming exercise, a well proven one was for the father to sell an undivided, say, one quarter interest ’ his livestock and plant to his son at standard values for the livestock and at market values for the plant, and to perhaps sell the son an undivided one quarter interest, say in his land and buildings.

The father and son then entered into partnership with the father owning an undivided three-quarter interest in the land, stock and plant and the son an undivided quarter interest, and the two then each introduced their interest' in the land, stock and plant with all income being generated in the name of the partnership and all expenses incurred by the partnership. The initial split could be less than a quarter or it

could be as much as a half, although it was seldom more than a half in his experience at the initial stage. Quite often in five years time or even less thtf father would sell a further proportion of his land, stock and plant to bring his son’s interest to a half and they would continue to farm on. this basis perhaps for some years. Sometimes the initial stage simply involved the father selling his son an undivided, say. one quarter interest in his stock and plant and the father renting the land to the new partnership. The important point was that this involved the son in the ownership of the assets and the trading side of the enterprise at a not particularly significant cost, which was important at present. If the father was elderly and he had a big estate, the first step might have to be the sale of an undivided one half share of the land, stock and plant right from the start. Although it was not always easy to do, Mr Alexander said It could not be over-emphasised that any estate planning and retirement moves should be kept as simple as possible.

No discussion on estate planning and retirement in a farming situation was complete without reference to inflation. Any es-

tate plan must' allow for this as its impact had been very severe, but just how to allow for it was not an easy question to answer. Once both the husband and wife received national superannuation it tended to consolidate the income side, but it did not answer the net estate situation. particularly if the husband or tire wife were to live for, say. a period of 30 years beyond their retirement. Any sound estate plan would try to avoid a situation where a fanner or his wife, or both, were dependent on receiving allowances of some kind from their family on which to live. “As compared with other sectors of the economy one of the problems with estate planning and retirement in farming is the relationship of the very high gross assets and net assets in most farming situations and the relatively low profitability associated with those assets. Combining these two situations and wanting to carry' on the family farm tradition is difficult and I think will probably remain so. However, if is an exercise which must be faced, and given the right’ circumstances and the will and the right advice at' the right time it will be resolved— and you can be assured it will be a character building exercise,’’ said Mr Alexander.