Succession Planning
ENSURING THE FUTURE OF YOUR FAMILY AND YOUR FARM
in 1893, two brothers settled across the road from each other on farms near Listowel, Ontario. It was the beginning of a family farming tradition that is now carried on by Dave and Doug Johnston; and it’s one the brothers hope will continue to be carried on by their children.
PHOTO: The Johnston family. From left to right Doug and?Laura and children Devin, Alexis and Brooklyn. On Right, Dave and Christine with children Sam, Seth, Kaleb and Hannah.
The Johnstons operate Maplevue Farms; Dave looks after the dairy herd and Doug spends his time in the fields. They have 1,300 acres of corn, soybeans and wheat as well as hay. As the fifth generation, it’s a farm business they’re proud of. “We continue to buy farmland when it’s the right time and price, it’s kind of a family history, we started out with a hundred acres,” says Dave, while Doug adds, “Dad had 600 acres when he passed on, and Dave and I kept growing it from there.”
the next generation
The Johnstons already know that not all of their children will want to stay on the farm – there’s seven of them between their two families, aged seven to 13 – but they can tell some interest is there. “I would be surprised if there weren’t two or three of them that wanted to farm,” says Doug. “Our goal is make sure the farm is viable enough for the kids to have an opportunity. There will be no forcing them on, the last thing we want to do is give them the farm and six months later they sell it on us.”
That’s where farm succession planning comes in. The Johnstons haven’t created any official documents yet because according to Doug, “it’s not essential yet.” They want to give their children time to decide what they want to do after college or university. However, experts agree it’s a process that should be started sooner rather than later.
“It could be a several year project to get it all done,” advises John Aitken, a chartered accountant and partner with Collins Barrow in Chatham, Ontario. “To go through the thought process and figure out all of the estate details properly, it’s not something that should be left to the last minute. But a lot of farmers aren’t thinking about it soon enough.”
“I think we learned our lesson,” says Dave. “We were prepared with our parents, but you always think you’re not going to need it. Then when you walk into the barn and Dad’s laying there dead, it’s quite a shock.”
the legalities
Without the proper legal documents in place, it’s the kind of shock that can be difficult for a family to recover from. Robin-Lee Norris, a partner with law firm Miller Thomson LLP in Guelph, says she has seen plenty of worse case scenarios. “Families can end up without a choice, with no other option but for the farm to be sold. Early discussions with your lawyer and the rest of your team of advisors can help you set things up the correct way to ensure you don’t put the farm at risk.”
The unexpected death of the Johnstons’ father, Sam, due to a heart attack happened in 1998; it was followed by the death of their mother, Marcie, due to cancer in 2000. They had just settled the estate documents a couple of years before. It was a long process that began in the late ‘80s with the farm becoming a four-way partnership.
“When we came home from university, Dad said either you boys are running it or it’s for sale,” remembers Doug. Their two older brothers and older sister had already established careers off-farm after their university graduations. “Dad was almost 60 by the time Dave and I graduated and he was ready to give up the day to day management of the farm.”
In order for the brothers to buy into the farm, their parents’ original dairy herd was sold. They then slowly took over responsibility for the business; buying new stock, acquiring signing authority at the bank and transferring over the milk quota. The farm was later transitioned into a corporation in 1996 which provided their parents with income as shareholders.
“The day Dad died, we did not go backwards on the farm. We didn’t look at each other and say ‘now what?’,” says Doug. “We knew exactly that we could run it. The banks weren’t frozen because we were already involved with running the operation. Not that you’re ever prepared for a death, but we were prepared.”
the finances
Talking about the eventual loss of a family member, and planning for a future without them, is a difficult subject, “especially for people in the agricultural industry,” says Barry Smith, VP Operations, Ontario for Farm Credit Canada. “Traditionally it’s very close relatives that are taking over farms and there’s a lot of heritage there and there’s a lot of family emotion involved.”
Smith says they offer a number of services, including information seminars, transition loans and young farmer loans, that could help with the process. “Farmers should phone their local relationship manager and begin a dialogue with them. We’re concerned about a smooth transition to the next generation because it’s important we see them succeed and see the industry do well.”
the family discussion
The Johnstons have already started to discuss some aspects of their own succession plans. Their mother used to make them have weekly or bi-weekly kitchen meetings to discuss farm issues. The brothers haven’t continued that type of family meeting, preferring to discuss matters while milking cows or going for a drive in the truck. However, one tricky subject they’ve already decided on is what will happen when their children get married.
“Our Dad recommended we keep the farm business separate from our personal family lives. We both had prenuptial agreements that were required as part of the partnership and corporation agreements,” explains Doug, saying this separation of business and family has worked well for them because both of their spouses have successful careers off-farm. His wife, Laura, is a partner in a Home Hardware family business in Lucknow and Dave’s wife Christine is head of the x-ray and ultrasound department at Palmerston Hospital.
“We will require the same thing [a prenuptial agreement], so if there is a marriage break-up the farm doesn’t leave the family. We’ve seen it happen way too often with other families, in fact we bought a farm because of a break-up,” says Doug.
Dave is in full agreement, “We’ve worked too hard to build this place up to let somebody else tear it down.”
Norris has seen first hand the increase in farm families now dealing with divorce and separation. She’s also seen how changes in family law have impacted their operations. “With the family law act changes in the mid-’80s, came the recognition of certain rights, whether your name is on the farm or not. I’ve actually seen people go into huge debt to buy out a family law claim so the family farm can stay intact.”
the plan
The Johnston brothers have also discussed how the business will be passed on, saying it will likely remain a corporation with just some adjustments to account for who is running it and what the assets are. “I think you have to be open communicators so everybody knows what’s what,” says Doug.
The family will also have to figure out a fair inheritance for the children who don’t want to be farmers. When Dave and Doug went through the process with their parents and siblings, “Having a plan meant everyone knew what to expect,” says Dave. “The off-farm siblings each got a farm and we now rent acres from them.”
However, a similar division of land might not be such an easy option for their children. “Older farm corporations tend to make the process more difficult because they have more property in it,” advises Aitken. “So if they want to leave this parcel to one child, and this parcel to another child, it makes it more difficult if it’s in a corporation. That’s why I advise my clients to keep as much land outside the corporation as possible.”
Norris points out another issue, “Some of the old planning tools we used to use, such as severing a lot, aren’t available anymore due to changes in land use legislation.”
Putting together a trusted team of advisors, including a lawyer, accountant, and bank manager, is the best way to ensure your succession planning goes smoothly.
“The best lawyer isn’t always the cheapest,” cautions Dave. “But we found out you get what you pay for with lawyers and accountants.” A bad experience with the lawyer dealing with their father’s estate prompted them to find a new one, but they kept the same accountant their dad used. “He’s actually retiring now and turning us over to his daughter. But he knows as much about the book side of the farm as anybody.”
“You’ve got to have somebody you can trust,” adds Doug. “Dad always joked the accountant probably knows what’s happening on the farm better than we do. We tell everything to the accountant, the lawyer, the banker. You have to be upfront with them. They’re going to find out anyway.”
For other farmers beginning to think about their own succession plans, the Johnstons also offer this advice based on their own family history: “It’s not a nice thing to plan for, but you have to talk about it. And you have to think worst case scenarios, not best case scenarios.” says Doug. Dave echoes that while adding, “I would tell people not to delay because you never know when that day comes that the plan is needed.”
Courageous conversations
ADVICE FROM A FARM FAMILY COACH
“Succession planning starts with communication and conversations with yourself, your spouse, and with your successor,” says Elaine Froese, a farm family coach with a certificate in conflict resolution and mediation. “It’s a process, not a quick fix.”
The problem Froese has observed is that many farmers don’t want to begin the conversation because they want to avoid conflict. “But they have to understand conflict isn’t bad, conflict needs to be resolved.”
Froese says many farmers have an ‘all or nothing’ thinking that prevents them from transferring some of the farm management because they feel they’ll no longer have a role. At the same time, the next generation is looking for a timeline that will decrease their own anxiety over the future. “They want clarity as to who is doing what when, they want certainty as to when they will have some equity, and they want a commitment to action.”
Starting the succession planning process can be overwhelming admits Froese. “The best advice I can give to farm families is to start talking and sharing with each other; and then make it a top priority to put your plans into action.”
www.elainefroese.com
Here’s some more advice from the experts:
Barry Smith, VP Operations, Ontario, Farm Credit Canada
“Typically, it’s difficult for a young, next generation farmer to get established on a farm if they don’t have equity for that down payment. We have several financial planning options that can help ensure the success of our customers. Ag is all we do. It’s about continuing to serve our customer base. And it’s important to us that we continue to add value to our customers. And we’re very concerned about a smooth transition to the next generation. It’s good for the industry and it’s good for FCC. It’s really important to the industry because at the end of the day, the people taking over the farms now, it’s important they have the business savvy. So it’s very important to us that we be involved in the process and be able to add value and help out.”
For information on the loan products provided by Farm Credit Canada, got to: http://www.fcc-fac.ca/en/Products/Lending/loanselector_e.asp
Farm Credit Canada also provides an education program. They are hosting three succession planning seminars in the new year.
January 30: Jordan Station (at the Beacon)
January 31: Alma (at the new Community Centre)
February 13: London
You can register directly at http://www.fcc-fac.ca/en/LearningCentre/events
Michael Henley, Miller Thomson LLP
“Every family, every structure is different. Some are willing to share everything and some really have difficulty communicating. This is not something that happens in a few weeks, sometimes it takes several months to complete a succession plan. With my clients, they come in and we go through everything. And as we start going through things, they realize, wow, this isn’t going to be as easy as we thought. They have to go off and think about it and really make some tough decision.”
John Aitken, Collins Barrow
“I consider myself a coordinator on behalf of the client because the process takes legal and specialized tax advice to implement. I’ve known a lot of my clients for many years, and I guess they feel comfortable talking about some of these things with me first.
A common error that farms make if they’re already incorporated, they feel they can leave specific assets to their children whether the corporation owns it or not. But a lot of times I’ve had to say well wait, if you want to leave that asset to the child, you have to leave the company to them because the company owns the property, not you. It is also a common mistake that people make in their wills.
As part of the succession planning process, my advice is to have family meetings, and people are very reluctant to do that. In my experience, I find if one child is going to get the bulk of the farming assets and continue farming, I want to make sure that child is in the loop so they know how to plan for their future. People are reluctant to let everybody know what they’re plans are for fear the vocal children will try to make them change their mind.”
Elaine Froese
“Once everybody starts attacking the issues rather than the person, than they can lay out action steps to getting the information they need. Business continuance is about the transfer of land and labour which happens quite often on farms with young backs showing up on the farm. Then it’s the transfer of management and that’s the hard piece; farmers have all or nothing thinking. They think that if they transfer management than they have no role left. And that’s not true because the younger generation needs the wisdom and labour and expertise of the founders. But the founders have a real identity crisis in letting go.
However, if you’re a 40 year old grain farmer in Ontario and you don’t own anything, you’re just a glorified employee. And you’re angry because by the time you’re 40 you want to have ownership and control and that’s why planning is a big deal.
You need to speak to each other, you need to communicate, and for some people that’s best done with an outside facilitator. In Ontario you have the Canadian Association of Farm Advisors (www.cafanet.com), and you have some really excellent people in Ontario who can be good facilitators.
My book ‘Do the Tough Things Right’ is specifically geared to help farmers get started through courageous conversations. It talks about fairness and family fights and family dynamics and all the communication things you need to figure out so that when you go to talk to your lawyer and accountant you actually know what everyone’s wishes and expectations are and you have more clarity.
The complexity and the sense of being overwhelmed is stopping many people in their tracks. Just make the call, build your team of advisors and get it done. And then celebrate the different accomplishments and tasks that you complete because your stress is going to come way down once you have people who are happier.”
Resources from the Ontario Ministry of Agriculture, Food and Rural Affairs:
Farm Succession Planning Steps and Checklist
http://www.omafra.gov.on.ca/english/busdev/facts/10-025.htm
Farm Succession Do’s and Don’ts
http://www.omafra.gov.on.ca/english/busdev/facts/08-043.htm
Components of a Farm Succession Plan
http://www.omafra.gov.on.ca/english/busdev/facts/10-023.htm •
