Wealth planning is a process that should begin with a detailed review of all aspects of your financial life and a thorough understanding of your personal situation. The purpose of a wealth plan is to create a customized road map you can follow to position your assets in a way that will help achieve your objectives in the most tax-efficient manner.

There are various tools in the income tax act to help farmers mitigate tax on the sale of farm assets or on a transfer of farm assets to the next generation. As a result, tax is often the driving force behind many planning strategies – and for good reason.

Yet the best tax plans can have devastating effects if your retirement income needs or your estate objectives are not integrated into the planning process.

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We’ve all heard stories of farmers who transferred valuable farm assets to their children only to realize cash shortfalls during retirement, not to mention the stories of families torn apart after the death of their parents when valuable (or emotionally tied) farm assets were inherited by some children to the exclusion of others.

How many of us have wills that transfer everything to our children equally? What would happen if the children suddenly all became equal partners in the farm?

I’m often reminded of a client tasked with the difficult decision of what to do with the farmland after his father passed away. He had seven siblings. One farmed with the father and felt his father would have wanted him to have it, and three wanted to sell it while the other two wanted to keep it in the family as a source of rental income.

Nobody could agree on a price. He finally decided to sell the land but has not spoken to two of his siblings since. This situation may have been avoided if Dad would have taken the time to prepare a proper estate plan.

The dilemma

Many farmers reinvest their profits back into their farm, either to pay down debt or to purchase inventory and equipment. It is quite common for the farm to make up a significant portion of their net worth. As these individuals approach retirement, they are faced with difficult circumstances:

• They may want to transfer ownership of the farm to one child but be concerned about being fair and equalizing the estate with the non-farming children.
  
  
• On retirement, they may need to realize the value built up in the farm, but the children can’t afford to pay for it.
  
  
• They may want to sell the farm operations but keep the farmland in the family. How and when should it be transferred to the children? How should the children own it to reduce conflict? How will the rollover or the capital gains exemption be impacted?
  
  
• If selling to a third party, does the ownership of the farm have to be restructured in order to claim the capital gains exemption? Could they use the children’s capital gains exemption as well?

If any of these questions are keeping you up at night, or if you’ve never contemplated their implications, it might be time to do some wealth planning.

Which road will you travel?

Deciding which course of action to take depends on a number of factors. A financial adviser can help define your objectives and provide valuable information to assist you in making these difficult decisions.

Once you’ve defined your retirement objectives, a detailed financial analysis is the next step. A financial analysis evaluates your current net worth and outlines your personal financial goals and lifestyle needs.

It can provide you with an estimate on what you would need to net after tax on the sale of your farm, what you would need to draw from your farm during retirement, or how much you would need to set aside each year to achieve your objectives.

You can use this information to determine which option is most plausible.

For example: If you want to transfer the farm to a child but determine you need X amount each year going forward to support your lifestyle while your child needs Y, could the farm remain viable while supporting both of your lifestyles?

A financial analysis would generally be followed by a personal and business plan. These two plans can cover important planning strategies, such as:

• Income splitting with family members during your lifetime
  
  
• Minimizing tax on the sale of the farm
  
  
• Tax-efficient buy-out strategies when transferring the farm to a child
  
  
• How to structure the farm to minimize or defer annual tax and provide added asset protection
  
  
• Estate equalization strategies for non-farming family members

Finally, an estate plan is an important part of a wealth plan. It involves many different components, including understanding your current circumstances and intentions, planning for the most efficient distribution of your assets, preparing a will, making appropriate beneficiary designations and ensuring documents are in place to address the possibility of incapacity.

Keeping your children informed of what you are doing and what you are trying to accomplish can go a long way in preventing family conflict in the future.

Integrated wealth planning means analyzing all aspects of your financial life and making sure they are all working together to support your financial and estate objectives, whatever they may be.

It is important to understand that an integrated wealth plan is not a one-time isolated event. Your goals, financial and family situation as well as tax laws change over time and so should your wealth plan.

You should work with your financial adviser to implement and monitor your plan, making updates and changes as your life and circumstances evolve along the way.  PD

Mark Driediger provides many farmers with exclusive access to the Wealth Planning Group of Assante Private Client, a division of CI Private Counsel LP. The Wealth Planning Group is a dedicated team of accountants, lawyers and financial planners who specialize in solving the many tax, estate, succession and financial planning issues that plague many farmers today. Visit Mark Driediger's website for more information.