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Handing over the reins - the farm succession challenge

28 April 2017

Despite the rise in corporate owned farms in New Zealand, the family farm remains the back bone of our farming industry and has undoubtedly been a major contributor towards its success. With skin in the game there is strong motivation for family members to put in the hard graft required and find ways to increase innovation and efficiency. These are good reasons to continue the tradition despite the challenges faced today - the substantial amounts of capital involved, the opportunities available to children from farming backgrounds to travel and pursue higher education and careers off the farm and the effects of relationship break down.

The balancing act

You’ve worked hard, you have a family member keen to take over the reins and have decided it’s time to start the succession planning process. Every farm and every family is different, so there is no magic formula for a successful farm succession plan. The process will be much easier for you if your farm is profitable, if you start as early as possible, if you consult a team of advisors (such as lawyer, accountant, banker, farm advisor and facilitator) and if you commit to open and honest communication with all family members. Your plan will need to balance your financial needs, the continuation of the family farm as a viable economic unit and fairness to other members of your family.

The benefits of a Family Trust

In many cases it is not possible to achieve fairness by treating all children equally – the success of your plan may depend on giving more financial assistance to your child who wishes to take over the farm than to your other children. If your family trust owns your farm you can distribute some of the trust assets to your succeeding child and you can benefit your children unequally with less risk of a challenge to your plan than if the farm is owned by you personally. That is because a claim under the Family Protection Act 1955 cannot be brought by your children against the Family Trust assets when you die. However, your children can make such a claim against your own assets when you die. To be successful in bringing a claim under that Act your children would have to show that you have not discharged your moral obligation to provide for them. A Family Protection Act claim can be extremely expensive and can destroy family relationships well into the future.
Your child may also wish to form a family trust to own his or her interest in the farm. This will give some protection to your child’s interest in the farm from a claim by his or her spouse or partner under the Property (Relationships) Act 1976 if the relationship ends. Your child can also protect his or her interest by signing an agreement contracting out of the Act. The contracting out agreement must meet the legal formalities of the Act or it will be unenforceable. There may also be good succession planning reasons for your child to form a family trust with his or her spouse or partner to own their interest in the family farm.

Companies and other legal structures

Most farming businesses today operate with more than one legal structure in place. A favoured business structure is for all the assets owned by the farming business to be held by a company which carries on the farming business. Shares in the company can then be transferred progressively to your child or his or her family trust. The company also provides a framework for governance of the business. Whatever legal structure you choose, you and your advisors will need to consider the tax implications arising from the chosen structure and the costs involved in its implementation and administration.

Your legacy

If you put time, effort and money into planning the hand over your legacy will be a secure future for your farming child, harmonious family relationships and the continuation of your farm under the guardianship of your family.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott