Succession planning for farmers far more than just life insurance

2016-06-28 00:00:00.0

Farmers whose estate planning is centred on ensuring that their agricultural legacy is continued by their children should be critically examining the way they are preparing for the future – relying on a single financial solution to provide financial means for family to inherit a farm that is a going concern may not meet the mark, says Errol Meyer, Senior Manager, Advisory Propositions at Standard Bank.

 

“Succession planning is not just about having life insurance policies in place.  It is about understanding the benefits of various financial solutions, their correct structuring and having a holistic financial plan”.

Above all, he says, successful planning and avoiding pitfalls is about pulling advice from several sources and combining inputs to arrive at a workable estate plan.

“The problem, traditionally, is that various professionals give their input to farmers. Unfortunately, when the financial advice from these various sources is combined, the outcome is often not satisfactory. The reason for this is that each has a limited perspective regarding succession planning and applies only the products they have against the farmers’ request for assistance.”

 

“The emphasis now is to get these people working together.  In the case of Standard Bank this means that the banker who grants a farmer credit, the estates expert who executes a will and the financial planner.

“The objective of the team is to ensure that on a farmer’s death, the farm’s business is structured correctly so that the estate – and therefore the family – are in the best possible position to have credit granted. This means that the farm can continue to trade and that it has the liquidity to continue doing so. The outcome should be that succession plans can be implemented and that all family members benefit.”

Relying on life insurance being paid into the estate may pay off farm debt, but the question of estate duty and capital gains tax could rear their heads with the result that up to 25% of the estate’s value could be compromised.

Farmers should be questioning:

  • The role of life insurance and the beneficiaries of policies.

The cheapest way of creating liquidity is through life policies that, if correctly structured, can assist with paying inheritances, SARS and bank debt. The real question that has to be asked is where the payment should be vested.  Often the obvious answer that the beneficiary should be the spouse is not the best solution. Often the beneficiary should be a company.

 

“The farmer has one chance to have funds ‘mushroom’ somewhere.  It can mushroom in an estate, in a trust or to a company. Having it available through a business means that creditors can be paid, loan accounts settled or used for the benefit of shareholders. Cash can also be paid into the estate to account for estate duties. Liquidity housed in the correct entity can therefore go a long way to solving many problems at the same time,” says Mr Meyer.

  • The role of a trust – still one of the most popular forms of estate planning.

“Although a trust remains the answer to estate duty problems, the game may change; instead of trying to avoid paying the duties on death, the emphasis should be on calculating the liabilities and ensuring that these can be met and the family can continue. 

“Trusts, and especially transactions – such as interest-free loan accounts – undertaken by a trust are increasingly coming under the SARS spotlight,” says Mr Meyer.

 

“A trust, besides offering estate duty savings, has onerous tax administrations attached. To get assets in a trust can only be done by way of loan accounts or through donation – which attracts tax.

“In addition, trusts can sometimes unwittingly spark family conflicts. A spouse may want income, children want capital.”

  • The role of retirement annuities as a form of planning.

 

“A retirement annuity has additional benefits for farmers. It is not only a retirement tool; it should also be viewed as an alternative to a trust.

 

“Consider that a trust’s primary function is to administer assets for beneficiaries. An RA’s function is to provide benefits for dependents.  An RA is therefore a trust in its own right.

 

“Its main benefits are that it has tax approval, is tax efficient and has benefits. Funds accumulated within an RA do not attract tax. Therefore, there is no capital gains tax; no tax on dividends from equities in which the RA is invested, and no income tax.

 

“As a spouse is a dependent in terms of an RA, the spouse must be considered by pension fund trustees. Her maintenance needs must therefore be examined and met. Her income is also protected against creditors.

 

“The advantage, again, is that liquidity is created. Above all else, when a person invests in an RA, he or she also qualifies for a tax deduction against income that can be as high as 27,5%,” stresses Mr Meyer.

 

  • How succession planning can be fair to all offspring.

“Succession planning is about financial planning, estate planning and wealth planning being combined. Planning becomes extremely important when a farmer is planning to distribute his estate when there is more than one child to be considered. Above all else, succession planning should not be about money, it should be about people. Regardless of the value of the estate, there are many factors that have to be considered.”

Many a farmer’s inclination is to leave his farm to his only son. Points to be thoroughly thought through are:

  • Securing the spouse’s future through a usufruct guaranteeing her the right to live on the farm and also benefit from its income. A financial burden is then placed on the child continuing with farming. In the event of the farm enterprise failing, the spouse can lose her security and future.
  • The farmer’s son having to pay out siblings for their portions of the farm. This can set the son back to the point where the debt incurred can effectively put farm operations under stress.

“What must be considered is that although the farm may have a substantial value, the son inheriting the land is also taking on a cost structure and the risks associated with farming. Therefore, a daughter can be provided for with an inheritance that may be smaller, but has no risk at all attached to it.”

  • Increasing a farm’s size through acquiring more land is not always a sound strategy.

“A farmer will usually spend any available cash to buy more land. This may increase the value of the farm, but it also escalates the tax liability. Most importantly, liquidity that can be used for estate planning is absorbed,” says Mr Meyer.

“In the end, succession planning is about people and the future, and to a lesser extent, about money. Making sure that plans for the future include financial planning, estate planning and wealth planning and holistically consider all possible future scenarios is the most important task any farmer can face,” concludes Mr Meyer.


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