Advance Planning is Key to Successful Retirement

This article contains a cautionary tale about the Kash family, a fictional farming family that didn’t want to put any effort in planning for their retirement. Instead,they were aware of favourable tax rules which allow for transferring farm property to kids on a tax-deferred rollover basis, and therefore their “plan”was to just give everything related to the farm to their kids, Johnny and June,once they had enough other assets to retire with.  Johnny wasn’t involved in farming, and June was active on the farm.  They didn’t see any reason to walk the line around complex estate planning and thought simple and straightforward was best.

When Mr. and Mrs. Kash (the Parents) were ready to retire, they transferred some of their farmland as an early inheritance to Johnny. They then transferred all farming corporation shares and their home quarter to June and the Parents relocated to a condo in the city.  What June received had far greater value than what Johnny received, but this fit with the “fair is not always equal” mantra which the Parents had heard of.

A few years go by and Johnny has a break down in his marriage. Johnny’s spouse is now claiming ownership over half of the land he received,which the Parents thought would remain “family land”.  The Parents could have taken various steps to avoid this outcome:

-         Johnny could have entered into an inter spousal agreement preventing claims against the land from the Parents.

-         Johnny could have given the parents a promissory note, which the Parents would plan to forgive in their will.  By creating a debt, the Parents could choose to enforce this debt against Johnny’s ex-spouse,or better yet, convince her that she doesn’t want that land and debt associated with it

To make matters even worse, Johnny had to sell the rest of the farmland to fund his separation battle. Johnny sold the land to the highest cash bidder without June even being aware.  June was farming the land but had not written agreement with Johnny to secure these rights.  The Parents could have done the following:

-         A long term lease giving June rights to farm could have been created before the transfer.

-         Aright of first refusal could have been given to June so she would have had the right to buy.  

Now that June has lost access to her key parcels of farmland, the farming operation is no longer viable so she has no choice but to stop farming and instead decides to pursue a career in country music.  Recalling that June received much more value than Johnny because she was going to be the farm successor, she thinks that if she sells the farm she will be able to fund her music career, so she sells to the highest bidder before the Parents can do anything about it.  Once the Parents hear this, they are devastated, as they thought they might move back to the home quarter because they miss the hustle and bustle of never ending projects.  How could have the parents avoided this?

Instead of transferring the farming operation to June outright, a succession plan could have been put in place to transfer management and future growth of the farming operation to June, but allow the parents to maintain the accrued value of the farm (often known as an estate freeze). If this had happened, then the Parents would still have equity in their farming corporation and could choose to transfer some of that to Johnny to come up with a more equal division of their property among their children.

With respect to the home quarter, the Parents could have leased it to June for a period of time until they know she is settled, or could have transferred it but registered security such as a mortgage against it to protect their interest and make sure June didn’t sell it without their knowledge or input.

The result of the “simple and straightforward” plan is that the Parents are left living in a condo, their ex-daughter in-law has taken some of their land, Johnny received much less inheritance than June even though neither are farming, and June has sold off what was supposed to be the family farm to pursue her country music aspirations.    

While the story of the Kash’s is an extreme example of a transition of the farm gone bad,it is a reminder of the importance of coming up with a detailed succession plan for your farm and transition of wealth and building in contingencies where appropriate.  Consulting regularly with your advisors about your succession plans is the best way to make sure that once it is time to implement, there are detailed thoughtful plans in place to achieve your objectives.

Greg Kirzinger is a tax lawyer and a partner with Stevenson Hood Thornton Beaubier LLP in Saskatoon and practices in the areas of tax, succession planning, farm and business planning and real estate.

Contact: gkirzinger@shtb-law.com

This article is provided for general informational purposes only and does not constitute legal or other professional advice and does not replace independent legal or tax advice.

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