Determining how to divide up the family farm between your heirs is not always an easy task. This is particularly true when there are multiple children, but perhaps only one or two stayed behind to farm, and the others left and got careers elsewhere. How does the farmer ensure that the value of the estate is fairly distributed between their children, while still allowing the faming children to continue the family business and keep their livelihood?
One of the biggest hurdles our clients face when answering this question involves the fair division of land. Particularly close to a major centre like Calgary, the value of the property does not necessarily reflect its use as a farm or ranch land. Rather, much of the value can be speculative, and based on future development potential.
Let’s use Farmer Al as an example – Al had three children, Betty, Clara and Dave, but only Dave stayed behind to help on the farm take over. Al has retired from farming, and wants to ensure Dave can continue on the business after Al’s death.
Al’s assets include equipment, grain in bins, cattle, some cash and investments, and two sections or 1280 acres of land. His land is just outside of Calgary, and therefore is highly valuable at $20,000.00 per acre. The value of Al’s overall assets look like this:
a) Cash and investments: $1,000,000.00
b) Equipment, Cattle and Grain: $3,000,000.00
c) Land: $25,600,000.00
Clearly Al’s most significant asset is his land. While Betty and Clara did not farm, Al wants to make sure he is fair to his children. However, if he leaves all the equipment, cattle, grain and land to Dave so he can keep farming, Dave suddenly receives $28,600,000.00 worth of assets, with only $500,000.00 each for Betty and Clara. There is also nothing to stop Dave from turning around and immediately sell the land upon Al’s death, making him a multimillionaire, and leaving Betty and Clara with much less for themselves. This does not seem at all fair.
Often, a client like Al will consider leaving one ¼ section to each of Betty and Clara, so that they at least receive some land as well as the cash. So on Al’s death, the division of value of assets would look like this:
a) Betty – $3,700,000.00
b) Claire – $3,700,000.00
c) Dave – $22,200,000.00
This, however, is an imperfect solution: Betty and Claire still are not treated very equally, and meanwhile there is no guarantee that Betty and Claire will sell the land back to Dave or otherwise deal with him. The size of the farm is reduced by two quarters, which would negatively impact Dave’s ability to keep operating.
In order to ensure that Betty and Claire still receive a balance share of the estate, and Dave can still farm, we have recommended a unique solution to clients like Al which achieves both goals. This scenario works as follows:
1) Al would form two separate companies: a farm operating company, and a land holding company.
2) All of Al’s farm assets are placed in the operating company, including equipment, cattle, and grain. All of the shares in the operating company are then left to Dave in Al’s will, so he has all the assets of the farm business provided to him so he can keep going.
3) All of Al’s land is transferred to the land holding company. In Al’s will, he leaves the shares equally to Betty, Claire, and Dave, so they all have an equal ownership interest in the land.
4) An agreement is then entered into between Betty, Claire and Dave, whereby Dave is allowed to continue to farm the land rent-free for as long as he wants. Once Dave is ready to retire and ceases farming, the land is sold, and the proceeds divided equally between Betty, Claire and Dave.
5) Al still divides all his cash and investments equally between Betty and Claire, so on his death they still receive a portion of their inheritance immediately.
This proposal has the benefit of allowing Dave to continue farming and keep the business going as long as he wants. However, once Dave is done, he doesn’t get to receive the value of all the land to himself, and instead, it is shared between him and his siblings equally. So Betty, Claire and Dave would receive a total inheritance value as follows:
1) Betty – $9,033,333.00
2) Claire – $9,033,333.00
3) Dave – $11,533,333.00
While this is not exactly an equal division, it is certainly a lot closer to what was considered previously. It provides for a more even inheritance for the children, while still giving Dave access to the land to farm and more value overall in recognition of his efforts in staying on the farm and continuing with the business.
This scenario may not work for everyone, but it is certainly one we recommend our clients with significantly valuable farmland to consider. When conducting family farm estate planning, conversations with your accountant, your children, and a lawyer with estate planning experience are vitally important to ensuring your wishes are properly documented and discharged following your passing.
It is always recommended to speak with your lawyer to discuss the terms of the agreement and understanding the risks and consequences of the agreement. If you are looking to speak with an industry professional about this topic further, please contact Rees or Kari with the Smith & Griffith Real Estate Team with CIR Realty to advise you through the process!
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A Partner at Beaumont Church LLP in Calgary, Dan Hawkwood comes from a long line of farmers and ranchers in the Calgary area and brings the experience of his rural upbringing to his practice.
Beaumont Church LLP
#300, 2912 Memorial Dr. SE, Calgary, AB, T2A 6R1
d. 403.261.8360 p. 403.264.0000 f. 403.264.0478
dan.hawkwood@beaumontchurch.com
BeaumontChurch.com