How to create a succession plan: 10 elements you need to include

Julienne Issacs
June 12, 2017
By Julienne Issacs
Succession planning can seem like an overwhelming task. All succession plans encompass legal, financial and operational elements, but there are as many variables as there are differences in farms and farm families.

There are common denominators to all good succession plans, says Heather Watson, executive director of Farm Management Canada.

SPW1.3 Heather WatsonHeather Watson

Plans should ultimately include guidelines for the transfer of ownership and capital, management and labour. “The plan should therefore take into account stakeholder and business structure options, financial performance and targets, estate planning and retirement planning,” she says.

These are the broad strokes. Here’s how you build a good succession plan from the ground up.

Good communication
According to Tracy Hanson, a partner at Calgary-based Walsh LLP, the first ingredient in every good succession plan is good communication between the generations.

“That’s key because succession planning is as much or more about the soft issues as it is the legal questions like what business structure to use and tax considerations,” Hanson says. “To get people to the table and talking about expectations and goals and timelines is needed so that everybody can make sure they’re walking down the same path.”

Hanson suggests the group appoints a “quarterback” to keep the group’s momentum up, keep everyone in the loop and stay on top of plan requirements.

Peter Hobb, a partner at Collins Barrow Durham, LLP, recommends the succession planning process start with meetings to establish the goals and objectives of everyone involved.

Once the succession plan is underway, he suggests business meetings between stakeholders be held at least quarterly, in order for those directly involved in farm operations to discuss the business, analyze finances, and review strategies for driving the business forward.

Collecting documentation
After the first meeting to discuss goals, the group can start gathering information and laying the groundwork for a good succession plan.

This includes collecting documentation related to farm finances, in particular its ability to support more than one family during the transition if necessary, as well as information related to the history of farm management and farming practices, the value of farm assets and the retirement plans of current farm owners.

“The more detail about the picture of the operation, the better,” Hanson says.

Preparation can also include doing some homework and learning about possible farm structures for the future.

The specifics of transition
Succession plans should indicate how the transition will play out, starting with transition of labour.

“In any business succession we’re talking about transition of labour, as when students come back from college to work on the farm,” Hanson explains. “Then, as experience and ability allows, there’s typically transition of management and ultimately transition of ownership of the assets.”

SPW1.3 Tracy HansonTracy Hanson

Succession plans can stipulate that some of these assets be transferred during the farm founder’s lifetime, and some after death. Farm founders can hold on to some assets as a retirement plan.

Any documentation related to gifts or sales of land should be brought to succession planning discussions.

Wills
Hanson identifies wills as crucial elements of larger succession plans.

“Certainly part of the business succession planning is also estate planning, so if we’re talking from the perspective of parents, having wills and having the wills reviewed is helpful,” she says.

Ideally, succession plans lay out a complete transition framework and are slowly enacted and ultimately completed during the farm founder’s lifetime. But because succession can take time, Hanson says wills can provide a “fallback position” if farm founders should die before the transition is completed.

“Sometimes farm families will do their entire succession plan in their will and others will start it during their lifetime and finish in their will,” she explains. “That’s why having a current will as opposed to a 20-year-old will is important.”

Other key documents
Another document farm owners should keep up-to-date is one identifying enduring power of attorney; this appoints someone to look after business decisions should they become ill or incapacitated.

“From a management and business perspective the enduring power of attorney is really important. Somebody needs to pay the bills and run the business,” Hanson says.

A personal directive document identifies an individual who can make healthcare decisions on behalf of the farm owner in such a case.

Often, Hanson says, husbands and wives will name each other for both roles. These documents are easily created and can mean the difference between a relatively smooth transition and an unhappy one.

Family decisions
Hanson says one element that’s often overlooked, but should be included in good succession planning, is a plan for the well-being of dependents after the farm owner’s death.

Dependent or handicapped children must be provided for in the will or succession plan, she says, or the estate can be challenged by a court because the farm owner’s responsibility is not primarily to the farming children but to dependents.

Blended families also present unique considerations, as, in some provinces, including Alberta, spouses are also considered dependents and must be adequately provided for lest they also contest the estate.

“Another factor or element to think about is non-farming children: how do we leave a viable operation for the farming child but be fair to the non-farming child?” Hanson asks. “The sooner you look at that and think about that, the sooner you might start making decisions to create assets that are not integral to the farming operation so they can be left to the non-farming kids.”

Plan for retirement
Hobb says succession planning can be highly emotional work, especially when farm founders realize it’s time to start transitioning power over farm operations to the next generation.
SPW1.3 Peter HobbPeter Hobb

“A lot of farmers don’t want to retire,” he says. “But I think it’s important for the existing ownership to think about what they’re going to do in retirement.

“If you don’t have goals for after you step away from the farm or business, retirement can be disastrous,” he says. “You have to start planning your exit from the farm well in advance of it happening. If you’re working 24/7, you can’t step away, it’s impossible. You want to wean yourself off.”

Farm founders should also consider how they will fund their retirement plans.

Focus on goals
Hobb believes many farmers become overly fixated on minimizing tax, and because of this, he’s seen structures put in place that are inconsistent with the real goals of the key stakeholders.

“One of the issues is that, by having more family involved, you can split the capital gains exemption between family members, but if their goals and objectives are not aligned, it can cause real problems,” he says. “It’s important that you consider who really wants to be an owner and has the passion to carry on the farming operation.”

In reality, there are many strategies for minimizing tax that the experts can identify when push comes to shove. But the most crucial element in any succession plan is the identification of shared goals.

It’s up to owners and successors to make sure these are reached.

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