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Retirement planning

You are operating a successful farm, yet you deserve to enjoy retirement.


November 22, 2013
By Paul R. Vaillancourt CFP CLU CHS CPCA

Perhaps you’re uncertain how to remove yourself from the operation and ensure that it remains viable. What are your options if another family member takes over or if you sell to someone else?

It is never too early to plan for your retirement and make decisions about the future of your farm. Good retirement planning requires lead time to allow for plenty of discussions with your spouse and family, to seek the advice of professionals and to evaluate all of your options.  

The first step in your retirement planning is to think about your goals. This might sound easy, but it is quite challenging and it can take some time to get it right. Your farm is most likely the greatest asset that you own. Ensure you make the right decisions for you and your family and that you’ll be comfortable in retirement.

Transferring ownership to the next generation
If you’re thinking about keeping the farm as a family farm, you need to decide how to transfer the ownership to your child or children. In many cases, not all of the children have an interest in the farming operations and you will want to determine how to be fair to everyone concerned.

As a certified financial planner, I often sound out strategies with clients to help them realize that what is considered fair and equitable may not necessarily be equal. There is a significant difference, but it does come down to your goals and retirement needs.

•    How important is it that the farm remains intact and transferred to the farming child or children?  
•    What is the standard of living and potential of the non-farming children?
•    What is the fair market value of the farm assets, the farm debts and the non-farm assets taking into account the effects of taxation?
•    What contribution has the farming child (or children) made
relative to the actual remuneration and other benefits he/she has received?
•    What cash flow is available from the farm that can help to equalize the distribution?
•    What are the financial resources of the farming children to assist in funding the fair and equitable distribution to the non-farming children?
•    How will you finance the transition, ensuring that you have
sufficient funds in your retirement and that the farming child is not overburdened with excessive debt?
•    If there is more than one child interested in farming, how do you ensure that all parties continue to collaborate by using a buy-sell agreement?

Once these questions are answered, a farm transfer plan can be put in place with the right purchase option that will give you financial security during retirement, provide the farming children with the assurances that they will acquire the farm and maintain harmony with the non-farming children by providing for them in a fair manner. Your plan should consider tax implications, fair financial compensation to farming/non-farming children and the funding of a portion of that compensation, if possible, through life insurance.

Selling to a third party
If none of the children has shown an interest in acquiring the family farm, the only option available is to sell the farm to a third party and use the after-tax proceeds to fund your retirement. At first glance, this succession plan may seem easy, but it has its own set of issues.

Before you consider this option, you will want to do your homework and make sure that you have the right business structure in place to maximize your capital gains exemptions and pay the least amount of tax possible.
 
As you are nearing your retirement, you need to find the right buyer. Your candidate may be an employee within your operations who has expressed their intentions, or a contact through your network. Depending on your farm structure, you will either be selling the inventory or selling the shares and quota. As a sole proprietor, the sale of your farm is included as personal income. If you’re incorporated, selling the shares or qualified farm property might be preferable for tax reasons. Taking advantage of the $750,000 capital gains exemption is possible but requires forethought to ensure that you comply with the tax rules. Furthermore, if there are exemptions available to parents and children, then the tax liability can be reduced further.

Your ideal retirement plan is a process that will take time and it is certainly not a one-time event. Careful consideration is necessary, as you will want to balance the family’s wishes while choosing the option that gives you financial stability and security in your retirement. Review your plan annually to ensure that you’re on track and make any adjustments as situations arise. As your full retirement plan will include estate and tax planning, you should obtain professional advice from your financial planner, tax specialist/accountant and lawyer.

Insurance products and services distributed through I.G. Insurance Services Inc.  Insurance license sponsored by The Great-West Life Assurance Company. This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Paul Vaillancourt is solely responsible for its content. For more information on this topic or any other financial matter, please contact an Investors Group Consultant.


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