The Succession Advantage: Planning to the Finish Line
We are wrapping up our latest series, The Succession Advantage, with our final article about “The Finish Line.” If you have been following along with us, you will be with us at this Finish Line with a succession plan fairly well built. We established this plan using our previous phases to outline The Succession Advantages achieved during each stage: creating family communication by aligning individual goals and visions; diving deep into farm financials and affordability; road mapping the farms future through strategic business planning; and in last month’s article, looking closely at transition and what that looks like for farming and non-farming family members. When we approach The Finish Line, we focus on a few key items; co creating agreements, estate planning and maintaining on-going family governance.
“This is the phase families get the most excited about,” says Matt Holmes, Founder of Holmes CPAs and Tax Advisors. “Anytime there is significant tax savings, the motivation seems to change and things move quicker,” he shares. Holmes works with numerous farm clients across Ontario, who are ready to complete their succession journey by formalizing their farm clients Shareholders Agreements and Asset Transfer Agreements. “We have identified the tax savings for them and now it is time to begin the legal process of implementation.”
When families understand their values around time and money this part becomes rewarding for all generations. It creates family harmony for those who haven’t participated in the business while providing a roadmap for the incoming generation and an exit plan for the outgoing generation. One tool commonly used during this phase is permanent life insurance and the role it plays in a family farm succession plan.
“We usually run into two things when we talk insurance during a succession plan; one is the assumption that insurance is the succession plan and we can avoid those tough conversations; and two is the lack of understanding about how insurance works and the role it plays in generating cash flow for the farm,” says Mike D’Alessandro, co-founder of Park Place Financial. “Many view it as an expense versus an investment,” he says.Generally, when insurance is utilized in continuity planning, it is identified as an efficient vehicle for families to transition capital to the next generation. Insurance has unique attributes in that it can grow after-tax corporate capital on a tax deferred basis and payout to the corporation tax-free. It also creates a capital dividend in the corporation which can be a powerful tool in creating liquidity and cash which could be used in creating fairness when it comes to estate planning, particularly with non-farming children. “When there is a clear vision and unified family, insurance can be a useful tool in the farm continuity process,” D’Alessandro says. “It’s about exploring all options and implementing the most tax-efficient ones.”
Families are strongly encouraged to update their wills and ensure they have their plans aligned and changes documented to fit accordingly. Often a dual will for the farm corporation will help to minimize any surprises or probate costs. Along with savings on probate and tax efficient financial planning tools, family governance is usually outlined to ensure family harmony remains. “If the succession planning team does a good job, all we are doing is building consensus on the agreement,” says Joe Hentz a lawyer in southwestern Ontario who works with farm families during this phase of the process. “Once the complex family issues are resolved with the succession advisor and consensus is built, we work alongside the advisor and the family’s accountant to develop a comprehensive plan that takes into account relevant tax considerations, estate planning and family law matters to ensure the family’s goals can be achieved,” he says. These agreements collectively provide a framework for families on how to govern themselves, their children or future children and how to understand the value of both farm and family.
Perhaps the biggest advantage, hopefully evident in each article of this series, is plan early. Plan now, when we know the tax laws and have the ability to work within those laws. “Most of the families we have worked with are very motivated to do a transfer during lifetime when the uncertainties relating to tax implications have been resolved and we’ve been able to find paths forward where tax can be saved,” says Matt Holmes. “Nobody knows what form of tax might exist 10 or 20 years from now, particularly when dealing with a transfer from an estate. I find this motivates many families to implement succession plans when there is more certainty over the current tax treatment.”
These pieces outline the final Succession Advantages when planning early and engaging with a professional team. The opportunities to dig into family farm continuity, finances, vision for the business and what transition means for each family member – all tough but crucial conversations and needed for your family farm to continue for future generations.