Succession planning deals with passing a business on to the next generation. Estate planning addresses the issues that relate to the deaths of family members.
I emphasize the following general comments:
- Succession and estate planning deal with emotive topics: the ultimate death of family members; the capacity for relationships to fail; the potential for disagreement to arise when relatively large sums of money are at stake
- There is no ‘one size fits all’ process for every family. Succession and estate planning must address the individual aspects of each family, and nothing should be taken for granted by undertaking a formulaic approach without room for flexibility
- If more than one child will succeed to business ownership there will be an even greater need for effective planning
- Good communication is the simplest and most effective tool for a family to make succession and estate planning a positive process.
This article discusses some of the economic and legal issues that are relevant to succession and estate planning.
For simplicity I use the term ‘son’ to describe the inheriting child. There is no reason why a daughter should not come back to the farm.
Start early on financial planning
Financial planning is the process whereby a family member puts money aside now in order to amass a pool of assets to provide an income in the future—superannuation is the best-known financial planning strategy.
The concept is becoming better known within agriculture where traditionally, families have depended on the business to deal with the financial needs of each generation.
However, a good financial plan offers a farming business:
- The opportunity for each generation to retire with dignity
- An alternative income stream that is separate from the farm
- A potential pool of assets that could be distributed to non-farming family members.
To be successful it is important that family members seek timely financial planning advice from a certified practitioner.
The effect of compound interest means that the earlier parents and their inheriting son can put effective financial plans into place, the earlier the business can focus on meeting the costs of succession in later years.
As one element of this, a financial planner can advise on the most tax-effective ways of accumulating and receiving income.
Which financial planner?
Growers can find a problem with this issue because they are unsure of which financial planner to use.
Some research is required.
Perhaps you could talk to family or friends who already use a planner and discuss the experiences they have had. Another initial option is to consider using the financial planning arm of your bank.
I’m afraid there isn’t any sure way of finding the perfect adviser, but it’s your money so take the time to find the most suitable planner you can.
Take time to collect information
From an economic standpoint, succession and estate planning must be founded on good information; particularly—but not exclusively—economic data. Each family needs to understand:
- The value of net worth now—is there a sufficient asset base upon which to plan the long-term needs of two or more families?
- Average annual profitability—can it support personal and business needs?
- The expectations for the non-farming siblings. These need to be described and quantified. Can the business afford to pay these?
Determining responses to these questions does not take long, but if a process is put in place without any regard for the economic data there is increased potential for an unsatisfactory outcome.
Leaving a viable orchard
One option for parents is to sell the orchard when they are ready to retire. However, many families usually wish for the business to be continued by the next generation; hence the need to plan succession.
(continued next issue)
For more information, see Tree Fruit November 2013
