Farm estate planning has become increasingly important due to the complexity of the tax laws. Farmers need to be aware of these laws and structure their affairs to take advantage of the tax exemptions and deferrals available. Planning is not restricted to tax areas. Proper Wills need to be drafted with a view to the impact of the tax laws. More importantly, the farmers emotional ties to the family farm must be considered.
Farm families have varying objectives, needs and concerns, but for many, the major concern is the continuation of the farm, by the farming child, in a way which is equitable to all the children. Is it fair to transfer the family farm equally to all the children when only one child wants to farm for his/her livelihood and who has worked for less returns, compared to a child who is not interested in the farm?
Typically, the Will is structured to distribute all the estate assets equally among the children in the event of both parents death. Farmers tend to have all their equity tied up in farm assets. For example, let’s say the parents estate value amounts to $1,000,000. The value mainly consists of land, machinery, equipment and inventory. Let’s assume, the parents Will divides the estate equally among four children. Upon the parents’ death each child would receive $250,000 (less any taxes and charges triggered). Due to the rollovers and exemption available when a parent transfers the farm to a child, the tax should be minimal.
Let’s assume only one child wants to farm. Would the farm child be able to borrow $750,000 to buy out his/her siblings. At a 5% interest rate amortized over 20 years, the annual cost would be $59,140. Is this affordable? Not likely. Even if the farm child could finance the sale, there are no tax deferred rollovers between siblings.
If the parents structure their Wills to transfer the $1,000,000 farm to the farming child, there will likely be minimal tax triggered due to the exemptions and deferrals available. However, is this fair to the siblings of the farming child? How do the parents provide an equitable inheritance to the non-farming children?
Life insurance on the parents payable to the non-farming children may be the solution. Life insurance death proceeds would be tax free. The cost of the insurance would likely be substantially less than the cost of borrowing money to pay out the non-farming children. Insurance costs will vary depending on the amount purchased, and on the age and health of the insured.
Every farmer’s situation will differ and the tax and estate rules are complex. The farmer’s accountant, lawyer and financial advisor will all play an important advisory role in any well executed farm plan.
Submission from:
Geoff Keleher
Financial Centre Manager
Sun Life Financial
1000 1st Ave West, Owen Sound, ON
www.sunlife.ca
geoff.keleher@sunlife.com
