tii estate planning (fresh) - farmers

Farming & Rural Estate Planning

www.freshmanagementsolutions.com.au

A Step by Step guideto ensuring you

and your family’s future

Written by Chris Castles . . . for Results!freshManagement Solutions Pty Ltd

. . . for Results!

freshManagement Solutions Pty Ltd

IntroductionEstate and Succession planning for many people is a confronting process, but it is particularly so for farmers. It is something that many of us ignore, even though we know there can be some very serious consequences.

Most people think estate planning is all about the Will. But in reality, assets that we own may not be dealt with under a Will, or the effectiveness of our estate can be changed through decisions made by our Enduring Power of Attorney. An effective estate and succession plan addresses all of these issues.

An effective estate plan starts with a positive attitude, and in the case of a farming family, the recognition that children can be treated equitably, but not necessarily equally. Coming to grips with this fundamental principle will release you from the pain of estate planning and allow you to move forward.

The plan starts with a small step - determining the principle for the division of your estate, and finishes with communication. Putting a plan in place without communicating it to those that will be affected is a recipe for family disintegration.

Over the years we have helped a number of families with their estate and succession planning. The process we follow is successful and provides good outcomes for our clients. We hope that this publication will provide you with the basic steps to allow you to take action. It provides you with a starting point to the process and will point you in the right direction.

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The Farm Succession Planning ProcessPassing the farm to the next generation is not something that can occur in a few days. The process can be considered divided into seven steps:

Succession Planning Process

1. DetermineyourGoals

2. CollecttheInformation

3. DertermineCriticalIssues

4. ExamineYourOptions

5. Develop thePlan

7. Implement6. Communicate

Each part of the process will be explained in more detail in the pages that follow.

Any plan has a number of competing criteria but in reality your plan can be considered to be a balancing act between three criteria; certainty, flexibility and simplicity. Flexibility and simplicity compete to provide certainty, and there are continual trade-offs required to achieve any sustainable implementation plan.

To put an effective plan in place you will need to consult with your advisers as you move through the process, but it is impossible to start without some underlying principle or goal that you want to apply to your estate. The easiest way to determine this is to look at the big picture and worry about the details later.

Knowing what forms part of your estate is very important as you may be trying to deal with assets that aren’t part of your estate. Other options are available where this is the case, and generally there will be a number of issues that raise their head as you work through the steps. When you encounter these it is rare that there will not be a solution, and when you finish the process you will have a level of satisfaction that you have met your goals and provided a succession strategy that meets your family’s needs.

Many challenges to estates result from inadequate communication – where potential beneficiaries are surprised by the outcome. Good communication between all of the parties involved is essential to ensuring that everyone knows what to expect, how it is to be implemented, and what the implications are for them.

FlexibilitySimplicity

Sustainable Plan

Certainty

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Determine Your GoalsWhen you start out it is easy to get overwhelmed when you go straight to the detail in trying to determine how best to handle your affairs. You should focus on broad goals so that you can make the decisions that matter. You will generally have goals in relation to the transfer of your farming asset in the following areas:

• Equitable versus Equal Treatment • Income • Asset Protection • Security

Equitable versus Equal Treatment

In most farming arrangements it is very difficult to treat all beneficiaries equally when it comes to the division of the estate. The farm is generally the major asset, with the off-farm assets not being sufficient to equalise the estate. Insurance may be used to help offset the difference, but the costs increase significantly with age and it is not always feasible to continue with the policies through to when they are required. There are other options such as periodic payments, lump sum payments, interest free loans and more, but the overriding consideration is that the farm remain viable. Because of this you need to be prepared to treat the beneficiaries equitably, but not necessarily equally.

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Income

In any farm transition arrangement you need to ensure that you have sufficient income to meet your requirements. The income may come from off-farm investments, Government benefits, payments associated with the transfer of the farm, or a combination of all three. Whatever the combination, you should never assume that if you needed a top up that you can collect off the farm. This just doesn’t work and can create friction and family breakdown. Make sure that you have your income sorted before making any transfer arrangements.

Asset Protection

The property has generally been in the family for generations and one major consideration for anyone considering passing the farm down is how to protect the farm. Protection from marital misadventure, creditors, bankruptcy, and claims through the estate are generally the main considerations. As with anything of this nature there are a number of options. You can be very prescriptive, or you can provide a high level of flexibility. Each has its own advantages and disadvantages but normally the greater the protection the less flexibility and vice versa.

Security

In any succession arrangement security is an issue. If you decide to remain in on-farm living it will be how to ensure that you will never be forced to leave the farm. If it is payments for the property transfer that you are relying on it is how to ensure that you receive those payments and ensure the viability of the farm at the same time. If you are funded by off-farm investments it will be that those investments will continue to provide you with the lifestyle that you want to enjoy.

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Collect the InformationGetting the best result depends on the quality of the information that you gather. Transferring the farm is not just about transferring the land. Other factors such as how the farm is operated, what are the family situations of those receiving the farm, what agreements are in place with suppliers and purchasers, what happens if something happens to you or the person you are transferring the farm to.

Financial InformationNaturally, as part of the succession process ensuring the financial well-being of those transferring the farm is paramount. Further consideration is the equitable treatment of beneficiaries and the tax and stamp duty implications of any potential transaction. Detailed financial information is required to be able to provide the specific advice required to implement any plan successfully. The following data should be collected as a minimum:

• The title details of your farms, the purchase costs of the land and the estimated value of the properties.

• Details of your operating entities such as partnership, company, trust etc...

• Latest financial statements for the last three years for the operating entities.

• Detailed eq uipment asset listing with the depreciated value as well as the current market value of the equipment.

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• Details of all of your farm related liabilities including the facility amounts, interest rates, required repayments and property secured for the facilities.

• Details of your off farm assets and their ownership.

• Details of all superannuation policies.

• Details of your insurance policies, their ownership and beneficiaries.

Relevant DocumentsThe financial information is only part of the story. The agreements and other legal documents that frame your business operations and personal affairs are also important to gather together. The following documentation must also be gathered:

• Constitutions for any companies that you operate.

• Trust deeds for any trusts you may have including discretionary trusts, unit trusts, Self-Managed Superannuation Funds (SMSFs).

• Any partnership or shareholders agreements that you may have in place.

• Copies of any lease or rental agreements.

• Copies of any cultivation, agistment or other similar agreements.

• Any supplier or purchaser agreements that you have in place.

• Documentation relevant to your finance facilities.

• Copies of your Wills and Enduring Powers of Attorney.

Family InformationFamily information allows full consideration of the circumstances of the various family members. Such information is generally used to determine the best structures, cater for any special needs, and ensure that appropriate flexibility is built in to facilitate further generational transfer.

Details about the following are required:

• Details about the farming children including their ages, domestic situation and stability, their children, and their likely role in the farm.

• For non-farming children, their occupations, their likelihood to require support from the farm in future years, their attitude to passing on the farm (this will be discussed later).

• Any special circumstances which may be happening, are about to happen, or are likely to happen in the future. For example if there are any rocky relationships, if there are businesses not trading well and likely to be put into administration, if there are any children requiring special needs.

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Determine Critical IssuesThis step is the most important one. In the past you may have got to this point in your planning and it became all too hard. Each critical issue needs to be determined and a strategy put in place to address it.

You will already be aware that the critical issues will need expert advice to plan for and minimise their impact. Success does not happen by accident, and the more planning undertaken at this stage, the better your result will be and the more satisfying the outcome.

A few potential critical issues are listed below and expanded upon later:

• Asset Protection • Security in Retirement

• Taxation and Stamp Duty • Control

• Equality • Family Harmony

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Asset Protection

Generally the value of the family farm is significant in relation to the other assets held. As a result, protection of the asset is important and needs to be considered in the context of the environment in which the family operates. Any strategy should consider the risk from:• Claims from other beneficiaries.• Claims from creditors and trustees in bankruptcy.• Breakup of a family relationship.• Unintended transfer of control.

As I mentioned earlier, flexibility and simplicity often have to be traded to achieve the certainty of outcome that you want. Risks need to be kept in perspective and, while sometimes it is best to plan for the worst and hope for the best, the cost benefit associated with doing so may not be worth it.

Security in Retirement

Your financial security in retirement is paramount when considering the transfer of the farm.

Where your income is assured through off farm assets you have more flexibility in the transition of the farm than otherwise. However, if the off farm assets are to be used are part of your equalisation strategy for the other potential beneficiaries of your estate then additional challenges may present themselves. How do you ensure that there is some inheritance left for the remaining beneficiaries of your estate. Do you transfer some of your off-farm assets now? If so, how do you secure your retirement? These questions all need to be addressed in an effective succession plan.

If you require income off the farm to secure your retirement, how do you ensure that you will receive the income. What will be the situation if you need a lump sum to buy a car, or for medical treatment, or for entry into an aged care facility at some later stage? How will your position be secured to protect you? Advice is required to address these very sensitive and complex issues.

Taxation and Stamp Duty

Poor planning will, not may, lead to additional tax, and potentially stamp duty, being payable on any transition of assets.

The ability to take advantage of the many concessions available for the reduction or delay in crystallisation of Capital Gains Tax need to be carefully explored and understood. These strategies need to be incorporated in the overall plan so that the best result is achieved.

The transfer of farm and partnership equipment can also be subject to additional taxation if not planned correctly. There may be a trade off between immediate implementation and implementation over a period of time to achieve such results, but without having the options

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presented for consideration you may embark on a course which costs you dearly in the long run.

Control

Giving up control is perhaps the hardest aspect to deal with. Seeing the farm pass down to the next generation, new practices being adopted, or things being done differently to the way that you used to do them, can be particularly confronting.

To alleviate any concerns in this area the transfer can occur over a period of time with perhaps the farm enterprise being transferred initially, and the farm property to be transferred at a later stage.

Also, what about the potential for unexpected changes of control. This can occur where a beneficiary passes away or becomes unable to act for themselves. It could also manifest as a result of inadequate planning in relation to the control of the entities that are used to run the farming enterprise. Unfortunately these aspects are rarely addressed until it is too late unless expert advice is obtained.

Equality

Being asset rich and cash poor generally means that the largest asset is the family farm. So to treat beneficiaries equally becomes a major challenge. Because of this the overriding principle of equitable treatment of beneficiaries needs to be adopted in most cases.

Equality may be able to be achieved if there are insurance policies in place and they are maintained. However, the reality is that as one ages, the cost of the policies increases and inevitably the policies are ceased prior to passing away. This can create a significant gap in the value for each beneficiary.

Other ways can be used to try to treat beneficiaries equitably. There can be payments from the farm to the other siblings. Where this arrangement is adopted consideration needs to be given to the ongoing viability of the farming enterprise.

Family Harmony

Family harmony is something that can be disrupted when any succession plan is put into place. Different members of the family may feel that they have been treated unequally or unfairly when the plan is revealed to them.

There is no easy solution to this challenge except to say that nothing can beat communication and allowing people to be heard. Many family disputes occur because potential beneficiaries

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have expectations that are not met, and they don’t know why. When you feel like you have communicated enough, talk again and again as you can never over communicate.

Examine Your OptionsOnce you have a clear picture of what you want to achieve and you have identified your critical issues, you will want to consider your options. What path you can take to achieve the objectives of your succession plan.

By now you will realise that the achievement of certainty in your succession plan will require some trade off between simplicity and flexibility. When you are considering your options it is easy to be overwhelmed with the decisions that you have to make. This is a disempowering state and to work your way through your options, considering all of the issues, you should seek the advice of an expert.

Using an expert in succession planning is similar to using a coach in tennis. They can have a look at what you are doing, identify any gaps that you may not be able to see because of the focus you have, and make suggestions and give guidance as to what the best possible solution is for you.

Develop the PlanYou are now at the stage where you can put together a written plan which outlines what you want to do.

So why should you have a written plan? Why can’t you just get on with the job and start implementing the results of the previous steps? The answer is simple really. A written plan means that you have something for everyone involved in the process to consider. Words mean different things to different people and by having a cohesive document that addresses your major concerns and the strategies for implementation, everyone involved can consider your intentions in the same context.

A written plan will help you to:

• assess family members to see if they are ready for the transition,

• ensure that steps are in place to minimise tax,

• provide appropriate structures to provide protection from creditors and relationship breakdown’

• minimise the disharmony in the family if there are differing views on what should be

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happening, and

• provide you with comfort about your retirement plans and how they are funded.

CommunicateHumans are complex beasts. Communication takes place in many forms. A simple nod of the head, a particular tone, a word used in the wrong context. Where there is fear and uncertainty these can be recipes for disaster.

When you embark on the succession planning process you will experience a range of feelings, as will the other family members involved. Good feelings can give direction and confidence, while bad feelings can overwhelm and paralyse. Bad feelings generally occur as a result of mistaken beliefs, unfulfilled expectations and undelivered communication. It is the latter two that are particularly important in the succession planning process.

Generally family disharmony will occur because the expectations of a family member are not being met, and then this festers because there is no communication about the reasons why, how they are feeling, or the concerns of the parents. In the tough world of farming there is normally little room for the ‘touchy feely’ things of life, and unfortunately that leads to the disharmony that we see in many family succession arrangements.

The meaning of your communication is the response you get. The response you get is a direct result of the way the message is delivered, and the way it is received. Communication can

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never be delivered until the receiver understands and acknowledges the message.

You Encode You Speak They Hear They DecodeYou ThinkThey think

they know whatyou mean

In the succession process effective communication is essential. Family meetings explaining the process, your reasons for your decisions, and asking for feedback and concerns are essential to maintain family harmony and ensure that the process remains on track. Having an objective professional facilitate the discussions can greatly improve the lines of communication and the overall outcome.

Implementation

Gathering your information together puts you in a good position to make decisions about your financial affairs and succession planning. However, Just as thinking about physical exercise won’t get you fit, it is implementing the plan that will get you the results.

Implementation may take several years if the process needs to be staged so it is important that expectations are managed during this time. This may lead to frustration amongst the parties involved so communication needs to be maintained.

A journey will never begin unless you take the first step, and will never end unless you get to the destination. Persistence is the key.

Information

Action

Results Decision

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Choose Advisors CarefullyAlready you have probably experienced the frustration of going to your accountant, lawyer or other related professional to achieve your succession and estate planning objectives only to discover that there is no co-ordinated approach or commitment to seeing the process through.

Fresh Management Solutions approach is to adopt a project management role facilitating communication between family members and managing the input required from the various professionals that will be involved. Naturally, the introduction of a ‘project facilitator’ brings some objectivity and accountability to the process and enables your objectives to be achieved.

ADVISOR

CLIENT

Tax

MoneyManagement

FinancialPlanning Legal

Insurance

This role is a challenge and one that has great responsibility associated with it. Some traits that you should look for in your choice of advisor are:

• understanding • consistency • perspective

• respect • challenging • focussed

• good communicator • attentive

When these traits are balanced with your commitment you will achieve the results that you need.

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Personal Balance SheetFARM ASSETS

Your Assets $

Land

Farm Buildings

Farm residences

Machinery and Equipment

Livestock

Quotas

Inventories

Total Farm Assets

Your Assets $

Mortgages

Bank Loans

Bank Overdraft

Finance Contracts

Tax Liabilities

Total Farm Debts

Net Farm Value

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LAND DETAILSLegal Title and

AcreageRegistered Owner Original Cost Current Value

Investment AssetsDescription Notes Owner Date

AcquiredPurchase Price ($)

Current Value ($)

Investment Property

/ /

Investment Property

/ /

Managed Fund

/ /

Cash (Bank Accounts)

/ /

Direct Shares / /

Term Deposit / /

Other: / /

/ /

/ /

/ /

/ /

Total

Off Farm Assets

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Lifestyle AssetsDescription Notes Owner Date

AcquiredPurchase Price ($)

Current Value ($)

Home / /

Holiday Home / /

Home Contents

/ /

Motor Vehicle / /

Motor Vehicle / /

Boat/Caravan / /

Other: / /

/ /

/ /

Total

Superannuation AssetsFund Name Notes/Description Owner Current

Value ($)Is insurance Included?

YES NO

YES NO

YES NO

YES NO

YES NO

YES NO

YES NO

YES NO

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Income StreamsDescription Notes/Description Owner Current

Value ($)

Liabilities Description Owner Lender Amount

Owing ($)Term Type

(P & I or IO)Interest Rate (%)

Repayments ($)

Frequency

Home Mortgage

Investment Loan

Investment Loan

Credit Card

Credit Card

Credit Card

Personal Loan

Other Loans

Total

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Insurance Details (Including Life, Total & Permanent Disability, Trauma & Income Protection)

Description Policy 1 Policy 2 Policy 3 Policy 4 Policy 5

Insurance Type

Investment Company Name

Product Name

Policy Owner

Life Insured Name

Sum Insured

Waiting Period

Benefit Period

Date of Commencement

Premium & Frequency

Loadings/Exclusions

Nominated Beneficiaries

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Personal Budget ExpensesCategory Description Weekly

($)Fortnightly

($)Monthly

($)Annual

($)

Personal Debt Commitments

Home Mortgage Repayments

Credit Card Repayments

Car Loan / Lease Repayments

Personal Loan Repayments

Other

Investment Costs

Investment Property Repayments

Other Debt Repayments

Other

Housing

Rent

Council / Shire Rates

Water / Electricity / Gas

Internet / Telephone

House & Contents Insurance

Household Repairs/Maintenance

Furnishings/Appliabces

Other

Transport

Running Costs / petrol / Fuel

Registration & Compulsory Third Party (CTP)

Comprehensive Insurance

Maintenance /Service / Repairs

Other

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Consumable

Groceries

Alcohol / Cigarettes

Other

Health

Private Health Insurance

Medical/Dental/Optical/Chemist

Other

Children

School Fees

Child Care

Child Support / Maintenance

Other

Personal

Clothing/Footwear

Entertainment/Dining Out

Sport/Recreation/Hobbies

Gifts/Presents/Christmas

Vacations/Holidays

Subscriptions/Books/Newspapers

Life/TDP/Trauma/Income Protections Insurance

Other

Other

Pets / Vet Fees

Charities / Donations

Miscellaneous

Grand Total (Transfer this amount to page 11)

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About The AuthorChristopher J Castles • Professional Financial Advisor & Business Consultant

• Wealth creation

• Business structuring and restructuring

• Estate planning, asset protection and superannuation

• Succession planning

Chris Castles is a Certified Practising Accountant and a Certified Financial Planner. He holds a Bachelor or Engineering (Electronic), a Post Graduate Diploma of Management (Marketing), a Post Graduate Diploma of Business (Accounting) and a Diploma of Financial Planning. He also holds a commercial fixed & rotary wing pilots licence.

He is a partner in FRESH Management Solutions, a firm that specialises in comprehensive Management and Succession Planning Services. He has participated in roles as shareholder and Director of major listed investment companies.

His knowledge and experience spans more

than a decade in providing financial planning services to wealthy individuals and small to medium size businesses. Before working in finance, Chris was an officer in the Royal Australian Air Force.

As Director of FRESH Management Solutions, Chris has produced this workbook with a mission to assist experienced and aspiring farmers in the effective transition of farm business. Working with farm advisors including lawyers and other business planning professionals, Chris has designed effective strategies to help farmers and their families keep farms and land in production for the next generation.

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Fresh Management Solutions is a Management consulting advisory service with proven capacity and capability to manage complex issues facing businesses today.

With a complement of expert consultants fresh management solutions is a firm driven by a central aim to be leaders in Management solutions with significant technical skills and business experience.

The firm takes a team approach with clients, developing strategies founded in understanding of industry dynamics, to deliver valuable, commercially sound and result-driven outcomes.

Our roll in providing information and education services to accountants, financial advisors and other professionals is integral to the development and maintenance of this relationship.

Fresh Management Solutions relationships with accountants and other advisors has focused on delivering exceptional service to their clients and support in areas such as:

• Education & Training programs

• Assisting in the education of clients through seminars, technical summaries and providing content for newsletters and other client publications.

• Giving regular presentations at conferences and industry forums.

• Developing comprehensive tools to assist the advisers in giving advice to their clients.

Our range of presentations generally run for 45 minutes to an hour but can be tailored to meet specific requirements. For example presentations can be combined to provide a more in-depth workshop or shortened as part of another presentation.

About Fresh Management Solutions