Farm Continuity
It’s a familiar story. The farmer has worked hard all his or her
life. Maybe even inherited the farm from parents or
grandparents. Now with advancing age there is retirement to
consider. One or two of the kids stayed and worked the farm.
One or two left for a different life. How does it all get divided
up? Who has time to even think about all that or pay for the
lawyers and accountants to handle it? There are crops to
plant and livestock to manage. This continuity planning thing
will work itself out, right?
No. It does not. Without actively participating in continuity
planning, all that is left behind is a family and farm in ruin.
Derryn Shrosbree, founder of 33seven, knows this scenario
all too well. He opened his firm to help families with a proven,
tax-advantaged, affordable and best of all – easily obtainable
– solution that keeps the farm, the family and everyone’s
sanity intact.
“The biggest hurdle is psychological,” says Shrosbree of why
so many farmers opt out of sucession planning. “It comes
with a feeling of ‘I am now obsolete on the farm. The farm
that I built, I spent my life’s work on and now that I’m
transitioning out, I feel that I am no longer needed on the
farm,’ which is exactly the opposite of what actually is
happening. You are definitely needed.”
Shrosbree is both a farmer and a family man, with 103 acres
of market garden and three children – one on the farm and
two off. Therefore, he stands by the 33seven tag line with
experience and confidence: ASK A FARMER WHO KNOWS™.
Shrosbree continues, “The second reason [hurdle] is that
farmers look at next year’s canola crop, what has to go in,
getting the soil ready, etc. Farmers prioritize the urgent at
the expense of the important. Continuity is important, but
next year’s crop is urgent. Yes, next year’s crop is important,
but what’s more important is the stewardship of your farm
and the continuity of your farm and your legacy. Farmers kick
the can down the road. I’ll do it tomorrow; and before they
know it, they are 75. Now the important has become critical.
Without continuity planning, the farm will be encumbered
with debt, there will be a loss of acreage and there will be a
family breakdown.”
Continuity planning starts only when the farmer realizes that
doing nothing will result in a disaster.
“You’re not diminishing the farm, you’re growing it,”
Shrosbree says. “Knowledge plus experience equals
wisdom. The farmer is wise. He has knowledge and
experience, and that wisdom needs to be transferred to the
next generation.”
OK … but how? Shrosbree is happy to share the answer.
“You dear farmer, will be doing one transition in your life. I do
one transition per month, for 10 months of the year. For 15
years, I have done 10 per year – that is 150 transitions. I have
done it so many times that there is no scenario that I haven’t
seen and that I cannot handle. We only onboard 10 families
per year to ensure we provide them with the best possible,
most experienced, error-free results. We do not make
mistakes about your future.”
He continues, “The answer is the Farm Liquidity Solution
(FLS). Most farmers are asset rich and cash poor; they keep
investing in more land, equipment, etc.”
What is the FLS? It is solutions that include accounting, legal
and structuring options:
• The Tax-Free Zone
• Business/Farm Evaluations
• Estate Freezes
• Family Trusts
• Offshore Financial Instruments
The following explores one of these options to provide a
quick and easy aspect of continuity planning and estate
equalization.
The Tax-Free Zone:
Step 1: The farm purchases permanent tax-exempt life
insurance on the key person (the farmer). The farm is the
owner and beneficiary of the policy.
Step 2: Premiums are paid using the farm’s cash flow or
retained earnings.
Step 3: The policy is the collateral for the loan.
Step 4: The loan’s proceeds are reinvested into the farm to
generate income. Therefore, farmers have no opportunity
cost of dollars. They do not have to choose between growing
the farm or equalizing the estate, a.k.a. not ruining the family
when they die.
Step 5: Upon the passing of the farmer, the death benefit
pays off the loan. The remainder of the death benefit is paid
out to the family.
Shrosbree discusses how the Tax-Free Zone solution works
by offering a real-time example.
“I go to a farmer and I say, ‘Hey, how are you doing?’ He says,
‘I’ve got an issue. I’ve got a 10,000-acre farm and four children,
two on farm, two off farm. How do I divide this?’ A farm is not
a pie. You cannot cut up a farm in four ways and give each
child two-and-a-half thousand acres. The farm will fail.
“Let’s just say that farm’s worth in easy math is $20 million.
So, there will be $5 million per kid … but the two on-farm
children have worked for eight years on the farm. They drive
the same truck, they share a pair of dungarees and they share
a hat. They have never taken a dime out of the farm. The two
off-farm children live in Toronto and do whatever they want.
“Now it is time to reconcile the farm and the children. ‘I love
my children equally. I want to give them an equal amount of
money when I die.’ This is noble, but it’s not fair. In this day
and age where a farm that was worth $400 an acre is now
$4,000 an acre or more, there is simply no way you can
divide it up dollar-for-dollar equally.
“It will wreck the family, which means the two brothers who
have worked tirelessly for a decade on the farm and have
taken nothing will never have supper again with the two
brothers who left the farm and expect a cash payout for
doing nothing on the farm.”
What options does a farmer have?
Option 1: The farmer can sell acreage, which makes the farm
economically unviable.
Option 2: The farmer can take on additional debt to pay off
the off-farm children’s inheritance.
Option 3: The farmer can choose to do nothing.
Shrosbree notes that at this point, most farmers lose hope
and simply choose to do nothing.
“When you do nothing, be very, very clear in your mind,
you’ve made a decision. The do-nothing option results in
those four children not having Christmas dinner together
ever again. Now that farms are so valuable and are worth so
much money, with big money comes big problems. Whereas
before the children in Toronto couldn’t care less, when the
farm was worth a million bucks. Now the farm is worth $20
million, and attitudes have changed towards farming. All of a
sudden, the non-farm children living in Toronto become very
interested in farming … or more specifically, very interested
in the money from farming.”
He reiterates again that there is a solution; one so easy and
effortless that most doubt its effectiveness. For those who
take the few moments to learn about it, however, the
daunting issue of continuity is solved – no matter how many
children are involved and whether or not they farm.
“With the FLS, the farmer essentially buys a ‘tax-free zone,’”
says Shrosbree. “It’s an equalization tool that gives the
off-farm children money. When the key holder dies, there’s
an insurance proceed that pays off the off-farm children.
They get cash and the on-farm children get the acreage. It’s
not going to be dollar-for-dollar equal, but it will take it to a
level where it is fair and where the farm can afford it.”
Why isn’t everyone doing this?
“Math is easy. Emotions are hard. Humans are not rational,”
he sighs. “I spend 80 per cent of my time listening to people
tell me they don’t have time or don’t want to have this
conversation. The remaining 20 per cent is implementing the
solution for the people who overcome their resistance and
listen. I feel like I’m handing out a gold bar, and most people
simply say no and walk away. Just overcome that fear.
Overcome the notion that ‘meh, the kids will be fine.’ No,
they won’t. They absolutely will not.”
He concludes bluntly, “I think often of my favourite quote
from Yellowstone, ‘Horses and cattle may be how the West
was won, but death and taxes are how we are going to lose
it.’ There is a solution for both. I have the solution for farm
continuity. I have the solution to reduce or eliminate taxes.
So, make a choice. Doing nothing is a choice.”
The reason why Shrosbree cares so much and works so hard
for farmers is intensely personal.
“Why do I care? Because my story is so very similar to many
other farm families. We were a family of five – three brothers
and two sisters – when my father passed away. We were left
with a huge tax bill. One of my brothers and one of my sisters
took the cash inheritance and refused to pay my father’s tax
liability. So, the three of us ended up paying the entire tax bill
whilst the other two took the money and left us hanging.
This action split the family into two parts. The three siblings
who paid our father’s tax bill still have supper together and
the two who did not pay, well I presume they have supper
together, but they certainly don’t have supper with us.
“This entire situation was 100 per cent avoidable if my
father had done continuity planning. By doing nothing, you
make a choice. By procrastinating, you make a choice.
Which of your choices will your family inherit? Will you
leave behind pain and a tax liability? The ball is in your
court. Do something or embrace and accept the
consequences for your family.”
Shrosbree’s father made a choice and that choice was to do
nothing. It had an impact on the farm, the finances and most
devastatingly – the family. It had an impact on Shrosbree in
that he never wanted anyone else to have to go through that
nightmare. He spent countless hours and energy on finding a
legal, viable, workable solution that is scalable and obtainable
for all business owners, and especially for farmers.
If you are interested in this solution, ASK A FARMER WHO
KNOWS™.
To view the full article. Click on this link, Farming for Tomorrow.