The most common business structures that farming families run their farms in are:

• partnerships, and
• family trust

What to look out for with succession planning for farming partnerships

Farming partnerships are often husband and wife, or brothers, or sometimes father and son. But usually by the time the next generation is involved, the structure is a bit more complex. 

The partnership is usually formed primarily for tax purposes. There is usually no partnership agreement, no buy-sell agreement, and no documentation to deal with retirement, incapacity or death. Quite often the farming equipment used by the partners are owned by one or other of the partners, and not specifically owned by the partnership.

The ownership of the farming land is often in the names of the partners as joint proprietors, or sometimes as tenants in common. But often, the farming land is owned in various lots by one or other of the partners. There is usually no rental agreement between the farming business and the land owners. There is often no guarantee of continued use of the land should something happen to either of the partners. 

All these factors cause multiple problems if the partners want to go their separate ways. For example, if they are brothers, when they are trying to work out the succession of their part of the farm for their children, there can be disputes about who contributed what and whether it was in fact 50/50.

It can be worse still if nothing is done, and one of the partners dies suddenly. The partnership dies with the death of the first partner, and without a buy-sell agreement there is no obligation on the surviving partner to recognise that any of the farm should be paid to the deceased’s estate. 

Finally, a major problem with most farming structures, not just partnerships, is that farmers are often asset rich and cash poor. Liquidation of the farm assets is often required to meet all the claims of the various beneficiaries, and this can leave any future of the farm business continuing in jeopardy. For example, if one of the children want to continue farming, but there are two off-farm children, if the deceased parent hasn’t provided enough off-farm cash or assets to leave the off-farm children a sufficient legacy, it can leave the on-farm child having to go deep into debt to pay out the others. 

The earlier a farmer can focus on succession, the better.

Issues to focus on when succession planning for a farm in a family discretionary trust

A family farm run in a family discretionary trust may or may not have a corporate trustee. The trust deeds are typically older and don’t contain some of the developments in succession in the last 10 years. Sometimes the assets of older family farm trusts vested on death, so check if this is the case with your trust.

The first step is to determine the roles under the trust deed, who fills what role, and the succession of those roles; for example, trustee, primary and secondary beneficiaries, appointor, and potentially a guardian. 

Often the trust was set up by the family accountant for tax purposes, and no other factor was considered. Take the opportunity to give some detailed advice about what a trust is and how it works, and the various roles. Also, similar with the partnership situation, the landowners are often individuals, and land is often not in the trust. Alternatively, land may be in different trust, potentially with different succession mechanisms and even beneficiaries. 

If you need to make changes to the trust deed, check the powers of the trustee to do so. If you want to change beneficiaries, similarly, check the powers in the trust deed.

If there is a corporate trustee, check how directors are chosen for the trustee - do shareholders have the power to appoint a director each, or is there some other mechanism for succession of directors?

Does the trust deed give the appointor the power to pass on their role under their Will, or is there an automatic succession process built into the trust deed? If there is a guardian in the trust, then these same factors need to be investigated.

All of these questions need to be considered in light of to whom the trust is to pass, and whether the farmer intends all the assets in the trust to remain in the trust or whether some need to be moved out to apportion inheritance between children. The powers and roles that children will inherit through the trust also need some deep consideration , and things like whether a decision is to be made unanimously or by majority vote.

If you would like to know more, please do not hesitate to contact me.