Passing the farm to the next generation when Dad’s will doesn’t mention the kids.

This article was originally published in Grainews. Grainews is an agricultural based publication written for farmers, and often by farmers, in a style they understand. Don and Erik work closely with author Andrew Allentuck, providing the background financial plans and theoretical analysis for Andrew’s Farm Financial Planner column.

Introduction

A woman named Ruth, 65, and her late husband Max, who recently passed away at 66, farmed 1,600 acres in Manitoba’s Interlake region for the last four decades. Ruth continues their mixed farming operation with 800 acres of grain and the remainder in pasture and hay for what was, before they sold them, a small herd of beef cows. The farm did not thrive but neither did it suffer. With Max’s declining health in his last years, he and Ruth kept the property together and the family intact. But he did not update his Will. His passing has opened old wounds.

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The Problem

One son we’ll call Blake, 44, works in Alberta but wants to take over the farm. Two daughters ages 46 and 42 are married to local farmers.

Max used to assure Blake that one day, the farm would be his. But Max and Ruth did nothing to prepare for the transition of ownership. Max’s Will was three decades old and made no mention of children. The farmland was still registered in Max’s name. Max never made any off-farm investments or even bought RRSPs. He devoted the farm income to maintaining the farm, rather than off-farm investments. You could say that he had financial tunnel vision.

At his dad’s funeral, Blake announced that he would be taking over the farm. Ruth, he said, could move into government-subsidized housing in town. The daughters would get nothing. These provisions caused anxiety and much family disharmony.

Ruth approached Don and Erik to help make the transition of the farm work. At present, Ruth owns farmland worth $1.2 million. Blake owns none of the farm. Ruth needs retirement income either from land rental or investments if the farm is sold and the cash invested.

At present, Ruth has Old Age Security which currently pays $7,360 per year and a small Canada Pension Plan Benefit of $350 per month. She needs more money. The intentions Max expressed in his Will have to be respected, but as a practical matter, Ruth needs innovation.

Making a Plan

The accounting valuation for the farm will produce a seven-figure capital gain. It can be offset by the $1 million Personal Owned Farmland Capital Gains Exemption and the allowable exemption of the farm-house and an acre around it. Allow $100,000 for the farm home and land and the total tax exemption should be $1.1 million.

Ruth wants to stay on the farm for another 10-15 years and then move to town. She could tell Blake to wait, but as a mom and a practical person, she would like to help blake take over the farm.

There are several ways out of this. First, Ruth could gift 160 acres of farmland to each of her three children this year. She would use part of her $1 million tax exemption to shield the transfer, which would be close to market value. That way, the children would be starting with a relatively high adjusted cost base if they sell the land or when they, themselves, pass away.

With this plan, Blake would get a quarter section of better quality land with a notional value of $250,000. His two sisters would each get a quarter section with a value of $150,000. Blake could rent another quarter section from his mother. Blake can also purchase farm equipment for $50,000 paying ruth $5,000 per year for the next 10 years. He would also have the use of farm buildings as part of that payment.

Ruth’s remaining 960 acres (500 cultivated) would be rented for cash to a neighbor for $18,000 per year. That would be Ruth’s retirement income. Blake would get an option to purchase this land at a favorable price when Ruth retires fully in 10 – 15 years.

The Outcome

Blake may not like this arrangement, but it is good from Ruth’s point of view. Assuming she can make the deal acceptable to her children, she would have the market value of her 480-acre parcel valued at $550,000 against an original purchase price of $60,000. The $490,000 capital gain would be shielded by the $1.1 million deduction. However, there would be some tax payable due to the Alternative Minimum Tax. In addition, Ruth’s Old Age Security benefits would be fully clawed back in the year of transfer.

Any surplus cash should go to Ruth’s Tax-Free Savings Account. She has $69,500 of room in 2020 and will have $6,000 more per year under present rules.

Retirement Income For Ruth

In this scenario, Ruth will have $614 from Old Age Security, $350 from the Canada Pension Plan, and farm rent of $1,500 per month. That’s a total of $2,464 per month. She can add $416/month from Blake’s machinery payment of $5,000 per year. Ruth will pay an estimated $260 monthly income tax and have $2,620 for living expenses in a paid-up house with an acre of land. Her estimated cost of living is $2,400 per month, so the plan would work on paper.

Assuming Ruth makes a one-time TFSA contribution of $69,500, and that sum grows at a rate of three percent per year after inflation, Ruth would have $3,442 per year for the following 30 years. She could lengthen the life of the TFSA by contributing to it or cutting annual withdrawals. She could use the balance to finance a new car in a few years or make gifts to her children.

Conclusion

This plan, for the disposition of the farm, conforms to Max’s Will, creates retirement income for Ruth, allows Blake to take over the farm and provides for the interest of his two sisters. One might say that it is making the best of a situation that might have been better, had Max updated his Will. However, it is the sort of disposition Max probably would have made had he done so in the years preceding his death.

Everyone is taken care of. The farm continues. Ruth has income and a place to live. Blake and sisters can continue as a family unit with a common interest in the farm. No one gets everything, but everyone gets something.

For more information on estate planning read:

The Estate Planning Beginners Guide, Farm Financial Planner: Estate Planning