How to split up the farm assets, without dividing the family

Old-fashioned assumptions that the eldest male child will be the natural inheritor of the property, with females relegated to roles as ‘silent partners’. The lack of off-farm or self-contained assets so there is no potential for asset division between multiple siblings, save for selling off the farm completely, potentially losing the hard work and care of generations. Anecdotally, you may too have heard the comment: “Whoever has their name on the chequebook makes the decisions.” Such top-down attitudes can feed into a failure to plan. And without planning, an unexpected life event, such as disability, death, illness or divorce, will force the issue of succession into conversation, at a time when it is the last thing anyone wants to think about.

Succession planning, it must be said, is not something that Australian farming families have traditionally been very good at. Succession involves “the transfer of leadership, managerial control and ownership of family and farming assets from one generation to another”.† Think of it as two separate tasks: a transfer of control and also a transfer of the assets. The former occurs as one generation reduces their engagement and cedes business control so the next generation can take up the reins. Transferring assets, however, can be done at any time, and not just at the time of transferring business control or after death. Done well, multiple generations will work together to grow the business through the transition, with open communication and certainty of direction. Done poorly, family relationships can become so fractured that Christmas celebrations are impossible.

While not traditionally good at planning ahead, Australians are getting better. A Rabobank survey of 1000 Australian farmers in 2019 found that 69 per cent of farmers are actively planning to incorporate the next generation into their business. In 2014, only 61 per cent of farmers reported this intention. This increase reflects changing industry culture and practices and an evolving demographic. With 95 per cent of Australian broadacre and dairy farms being family businesses owned by the operator and their family, positive succession planning must become a key focal point for the agricultural industry at large, says the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES).

Farmers are now an ageing workforce. More than half of Australia’s farm owners are over 55 years of age, with the majority expected to retire in the next 15 years. An in-depth survey of farming families, conducted in 2016 by Adam Steen of Charles Sturt University, found that there was a great divide between the generations in their attitudes to succession and inheritance. The older ‘boomer’ generation of farmers were more likely “to prefer traditional, sole-proprietor models of ownership and control” while under 55s were found to prefer collective structures and flexible ownership models. Younger generations sought open communication and dialogue, and had a desire for “more formalised business reporting, industry benchmarking and comprehensive financial planning”, along with gender neutral treatment.† They were more willing to employ professional consulting services, whereas many older respondents believed succession planning should be done by the farm owners, without external consultation or even discussion with other family members. This generational divide can stifle conversations about what will happen in the future, with the risk that discussions are avoided until a major life event intervenes, such as serious illness or unexpected death. Making informed and calm decisions in a crisis is virtually impossible, causing family rifts that can be difficult to mend.

Such was the experience of Evelyn Saunders* and her husband Tim, who live in South Australia.

Tim is a second-generation farmer whose experience with his parents’ succession plan was so traumatic it has inspired the couple to take a very proactive and early approach to planning for their own family. Tim’s father was a traditionalist who believed “you don’t need anything other than the roof over your head and food on the table”. Tim was the eldest son, and he and his two siblings were expected to work for nothing on the family farm, with their father as patriarch and decision-maker. Enterprising types with a bigger vision for the future of the business, Tim and Evelyn’s growth mindset resulted in ongoing conflict about business strategies for the property. Tim’s other siblings became involved. The conversations became arguments and everyone’s respective positions became more entrenched.

Furniture was thrown. Harsh words were said. In the end, Evelyn and Tim left the farm, with Tim’s father’s words echoing in their ears: “If they go, they go with nothing.”

This experience sent Tim and Evelyn in a completely different direction when considering their three daughters. Aged in their early twenties, the girls have now returned from boarding school and university, and all see their future on the farm. After leaving the family farm, Evelyn and Tim took over another property, taking on significant debt to establish theirown business. Years later, they came back to the family property and purchased the main homestead. Tim’s father then transferred the land, and the debt, to Tim and his siblings while he was still alive (this is called an ‘inter-vivos transfer’). Otherwise, on his death, the assets would have gone to Tim’s mother, as required by his will. Evelyn wryly observes that succession is “just a transferral of debt really; no one wants it”. Tim’s father was very unwell by this point and all the family members, including the grandchildren, were traumatised by the never-ending arguments. “Time did heal things in the end,” Evelyn says. “There were still regrets, but that’s part of life. By the time Dad died, everyone was still talking, thank god.”

Scarred by their experience, Tim and Evelyn began discussing succession early with their children, despite being only aged in their early fifties themselves. “We don’t have all the answers, but we’re open to ideas, plans and suggestions,” says Evelyn. All the girls have expressed a desire to work in the cattle business with them and stay on the land. “Their hearts are in the bush,” says Evelyn, “and this drives our business growth.” As farmers running cattle and cropping businesses valued at more than $30 million, the couple have made significant investments in diversified product ranges and companies as part of their succession strategy. Eggs are spread across many baskets. “All three girls are home now for the next 12 months. They have their own houses on the property and we live in the main homestead. Tim’s mother still lives on the property, too. We often eat together, but everyone has their own space. The best way to start a successful succession strategy is for everyone not to live under the same roof!” says Evelyn with a laugh.

Separate companies have recently been established by the couple, with the two eldest daughters, aged 24 and 22 years, being appointed as directors and shareholders so that they develop experience in decision-making and operational management, thus building their confidence. All the children are shareholders in various entities. Questions as to business structures, trust and company establishments are always under review as new business ideas are developed and the next generation steps into positions of authority. It is ever-evolving, and subject to taxation, legal and accounting advice. Of course, as the children grow older, the question of what will happen given potential marriages, divorces and grandchildren also provide topics for discussion across the dinner table.

“All will evolve over time, but we feel confident we have the business structures in place for now,” Evelyn says. “Next, we are looking at updating our wills and encouraging the girls to also get their wills and powers of attorney in place. These are our key tasks for the year ahead.”

In addition to generational differences in attitudes to succession, other challenges faced by farming families include trying to access or release sufficient funds to support retirement; a general reluctance to retire at all; and challenges in accessing a government pension. Where there is a lack of planning in place for transition, introducing new technologies or investing in the future expansion of the farm business can be challenging. The older decision-maker may be reluctant to let go of control and resistant to change. This can stifle growth of the business while waiting for the older generation to step aside, causing frustration for the younger.

As well, increases in farm debt may stifle succession planning. A farming business which has traditionally supported just one family may not even be capable of funding more than one, or of paying out off-farm children. It may not be economically viable to continue, resulting in the heartbreaking decision to sell the property and divide the asset among multiple children.

So, where to start? Look to the people involved: identify their wants, needs and wishes, both for now and the future. Identify and collate the financials for the property and business.

Ensure all parties understand the big picture and seek specialist advice on legal, taxation and accounting issues. The business structures may need to change. Transfers of title may be needed — remembering that expert advice on taxation consequences should be sought well in advance of any changes. Considering capital gains tax will be an important issue. Family trusts may need to be created, if they don’t exist already.

Consider the timing of transitions to reduce conflict and provide clarity. Identify and explore the differing needs of all generations to understand motivations and anticipate issues. For instance, at a time when the younger generation may seek capital for expansion of the business, the older generation may need funds to purchase a new home and fund their retirement. Document agreements and consider drafting a Deed of Family Arrangement to reflect decisions reached.

Families can also understandably become stuck on what constitutes a ‘fair’ division of the asset pool; indeed, a fair division may not mean an equal one. There is no perfect model and every family will have to figure out what works for them.

The final step in the succession journey is preparing your will to allow for asset transfer after death.

No matter how well planned a will is, though, it can be challenged. Each state has its own legislative framework in this area of law. Hannah Moffatt is a Senior Associate with Flood + Chambers + Meade Lawyers in Victoria and specialises in wills and estate law. She describes this area of law as being like “family law for the dead”: every bit as emotionally driven as divorce and separation law. Sibling rivalry, ancient conflicts and childhood trauma rise to the surface with a speed that can shock. Hannah is sometimes asked, “Why bother to do a will when it can be challenged?” It is better than dying intestate, is her answer. If intestate, then state legislation will decide how your assets are distributed. At least if you have a will, you have made your wishes clear. You may not be able to force your family members to listen, but a will does provide one last opportunity to have your say. Hannah says, “One of the best ways to clarify the intent of the will maker is for them to write a letter to accompany the will, explaining the reasons behind why someone might be left out or receiving less of a share than others”. Written in the deceased’s own handwriting, or even recorded on video, an explanation can address potential hurt or conflict and reduce the chances of legal challenge. Children can sometimes find it easier to accept and understand the outcome of a parent’s will if they are privy to the motivations behind the distribution, although the reverse can also be true.

Timing is important. “People often leave things to the last minute and don’t understand the need to put their intentions in place,” says Hannah. Another key point to consider is that you can only bequeath what you personally own. It is amazingly common to find that many clients do not have a clear understanding of who owns the family home or other properties. It may be owned by a company (as trustee of a trust), of which the owner–farmers are joint directors and shareholders.

A quick title search by your solicitor will yield the answer and potentially save a great deal of heartache and confusion. Also check how titles to property are held, whether as tenants in common or joint proprietors. This is particularly important when there are second marriages. An interest in property held by a joint proprietor will pass to the other joint proprietor immediately upon death, by virtue of the rule of survivorship, bypassing the will completely. This is common for married couples. Where property is held as tenants in common, however (for instance by two siblings in 50 per cent shares), then each person can leave their share of the property in their will to whoever they want, which in turn provides the beneficiary an opportunity to buy out the other interest later.

“Estate planning can be particularly problematic where there is a second relationship and children from an earlier marriage to provide for,” says Hannah. She describes a time when she acted for the deceased husband, who left his second wife a life interest in the property where they lived, and upon her death the estate was to go to all three of his children from the first marriage in equal shares. The second wife challenged the will by making a family provision claim in the Supreme Court of Victoria. She claimed the entire estate, as they had been married 20 years. The matter was sent to mediation. In the end, the parties sold the house, and accepted 50 per cent of the estate each to settle. Challenging a will is a highly emotional and expensive process. The estate will be diminished by the legal costs, which can easily reach $50,000 or more within just a few months. Hannah confirms about 80 per cent of claims thankfully settle at mediation, although such events are rarely without high emotions and drama.

Evelyn and Tim Saunders are doing all they can to avoid this kind of conflict after they pass away by preparing a proactive succession plan for their family early and in conversation with their children. “As parents, with the girls, we can build our business and all work together. We are working with an accountant and advisor to get the succession strategy in place and understand it may need to change over time,” Evelyn says.

This raises a good question: we’ve heard the horror stories, but where are the stories of success? There must be other farming families out there dealing with this issue right now. It is a growing problem for the Australian agricultural industry with its ageing workforce and dependence on family structures to run farming businesses. What strategies are other families employing? What has worked? Why? If you have a succession story, please write in, and share it (anonymously if you prefer). If we pool successful ideas, perhaps it will help other families, in the hope that one day soon succession planning will no longer be the stuff of horror stories and nightmares.

Katherine Beard is a senior lawyer and writer living in Bendigo, Victoria.

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