7 legal considerations for succession planning
“Be afraid of the ‘Tim Hortons lawyer’ – someone down at the coffee shop who wants to give you advice on how to put together your succession plan,” says Robert Fuller, a partner at Simcoe, Ont.-based Brimage Law Group.
“Get a professional, or a team of professionals, and do it properly.”
Glen Lekach, a partner at Regina-based Miller Thomson and a member of the Canadian Association of Farm Advisors, echoes this advice.
Succession plans are made up of many ingredients, both legal and non-legal, Lekach says. While a lot depends on the parties involved in an individual succession plan and how they choose to approach the project, a legal team can offer advice on the transition and make it official.
Fuller and Lekach speak from experience: they’ve seen it all when it comes to succession planning – from farmers who haven’t bothered with the exercise to those who have mapped out every single particular.
Here are the guidelines (vetted by the experts) to keep in mind when crafting a succession plan.
“Don’t delay until you think you have it all figured out. Start succession planning now,” Fuller says. “I see this time and time again: farmers wait too long, and then die before the plan is done. It can be devastating from a will and a power of attorney perspective, and from the perspective of continuation of the farm.”
If you’re waiting on more assets or an improved tax situation, or simply delaying uncomfortable conversations about what happens to the farm when you die, you’re wasting time – and it could cost your successors.
Lekach says it’s crucial to build consensus about the future of the farm at the very beginning of the process, before lawyers and other professionals get involved.
“Start with a family meeting, including farming and non-farming members of the family, to have a discussion about the business. Try to build consensus of what to do, how the farm will be financed and funded and how people will earn a living in the future,” he says. “There have to be full disclosures and frank discussions, and then the legal structures and agreements will fall in line.”
Succession planning isn’t a new concept for most family-owned commercial enterprises, though it is relatively new to many farm families. But as farms become more complex from a business standpoint, there’s a legal imperative to get the family onside with the future of the farm.
Build a team of professionals
Besides hiring a lawyer or team of lawyers who can offer guidance and help paper the transaction, Fuller recommends involving a professional accountant and potentially an insurance agent in the planning process.
Adding to the list, Lekach says a lender or creditor can help figure out how the farm will support additional families should the operation move from a single-family proprietorship to ownership by more than one family.
“The team could also include a financial planner. As one generation is leaving and the next is coming in, the generation leaving wants to know what their spending requirements will be and where that money will come from,” Lekach says.
The most important people at the table, Lekach adds, are those implicated by the succession plan: the farm family or families themselves.
If necessary, a moderator can also be brought in to help with difficult family conversations.
Make a will
Fuller emphasizes that wills should be in place for everyone involved in the succession plan and updated regularly.
“Having a good will is key to succession planning. Succession planning has two pieces – the practical piece and the tax piece,” he says. “The tax tail shouldn’t wag the dog. Get something to work practically and a good accountant will give you a couple of ways to meet your tax goals.”
He cautions that producers should carefully designate power of attorney and ensure that those they leave in charge of the estate are both capable of managing it and have the confidence of the bank.
Make an owner’s agreement
“If you’re involved in business with more than one person, an owners’ agreement deals with how decisions will be made in terms of who has to give approvals, how the business will be operated, what commitment each party has to make to the operation, how people are paid, their entitlement to salaries and dividends and so on. It can also deal with buy/sell commitments,” Lekach says.
Owners’ agreements work almost like prenuptial agreements, he explains, and help resolve disputes before they can cause major problems for an operation. They also lay out each individual’s obligations.
Think about sweat equity
Farmers often don’t want to think too deeply about their successors’ varying contributions to the farm, but Fuller says “sweat equity” is one of the biggest issues lawyers have to deal with when helping farmers create succession plans.
“Acknowledge the strengths and weaknesses of the people involved,” Fuller says. “Just dividing the operation equally is not necessarily the right way to do it – your son may not be the best person to take over. Fair isn’t always equal.”
Fuller offers an example: “Child one worked all the time on the business, child two wandered off to college; then Mom and Dad die and the child who’s probably responsible for 50 per cent of the growth of the farm has to buy out their sibling,” he says. “There’s got to be an acknowledgement of that contribution. But what that contribution is would be something you have to establish.”
Farmers should consider their farm’s debt servicing ability. If one successor wants to buy another’s share, will they be able to carry the cost? One way to resolve this situation from a legal standpoint is to take out life insurance; another way out is to acknowledge the successors’ contributions and, in the will, set up a plan for payment over time.
It’s your money
“At the end of the day you can do what you want with [your money],” Fuller says. “Other than your family and your creditors, who may have claims on your estate, it’s your money. You worked hard for it, you’re a success, and at the end of the day you can do what you want.”
One thing farmers shouldn’t do? Leave their families and operations without a solid plan for the future. Without a succession plan, succession law takes over –and the odds that everything shakes out as you’ve always imagined drop to near zero.