Perhaps the most well-known option, placing farming property into a trust, provides the following benefits:
- protection for assets from claims from third parties;
- increased protection from claims by spouses under the Property (Relationships) Act 1976, or other family members under the Family Protection Act 1955;
- the potential to benefit from welfare entitlements, without trust assets being affected; and
- protection from tax on death or capital gains tax, should these be introduced.
However, there are disadvantages to relying on a trust structure alone. Commonly, farming couples have one child who wishes to work on the farm, while other children pursue other careers. If the farm is sold upon the death of both the parents, and the proceeds split evenly between the siblings, the farming child may feel they have received no benefit for all their hard work. Alternatively, if the farming child continues to farm the property, the non-farming children may feel they have been overlooked.
A will cannot apply to property in a trust. Trustees should leave a Memorandum of Wishes outlining a desired succession plan for trust assets. This is not legally binding, but trustees are highly likely to follow these wishes.
While the trust provides some protection from claims by former spouses, claims against trust property can succeed in certain circumstances, for example:
- if the trust is part of marital property, the court may exercise its discretion to distribute trust property as it sees fit, under section 182 of the Family Proceedings Act; and
- a claim of a ‘constructive trust’ over trust property, where despite the property being in a family trust, a former spouse may be entitled to half the property due to contributions made leading to a reasonable expectation in an interest in trust property.
Farms are businesses, and companies were made for trading. Incorporating a company to own the family farm means that day-to-day decisions will be made by the directors or employees. Advantages to the company structure include that:
- it is simple to transfer a share in the farm through sale of shares in a company. It’s much more complex to transfer proportionate shares owned by an individual, a partnership or a trust;
- selling shares may avoid tax payments that would otherwise be required on sale of assets;
- companies have a set tax rate of 28%, which is lower than individual tax rates for income over $48,000;
- shareholders’ liability is limited to the amount they paid for their shares; and
- the Companies Act 1993 sets out clear rules for operating companies.
A farming couple could own the shares in the company, and the child who wishes to work on the farm will have the opportunity to purchase shares over time. Alternatively, the couple could decide that on their death, specific numbers of shares could pass to each of their children.
3. Trust and Company
A trust structure in conjunction with a company is a very useful option for farming families:
- the farm and other assets are held by the company, and shares in the company are owned by a family trust (Trust A);
- if one child wishes to actively farm the land, that child can purchase shares in the farming company and gift them into an inheritance trust established solely for the benefit of the farming child (Trust B);
- a farming child with a spouse may establish a discretionary joint family trust to hold shares acquired during the relationship (Trust C).
Upon the death of the parents, the assets of Trust A can be distributed among all children, without the farming child feeling their work has been overlooked. The farming child may be able to purchase the remaining shares in the company from their siblings, or come to an arrangement that works for all of them. A proportion of Trust A’s shares in the company will also be transferred to the farming child and as part of their inheritance can then be gifted into Trust B.
Upon separation or divorce, a spouse will likely be entitled to only their share in the relationship property held in Trust C, with the shares acquired by the farming child in Trust B remaining protected against a relationship property claim. The assets owned by Trust C can be used for the benefit of the farming child’s whole family (including the spouse), and the assets of Trust B can benefit the children of the farming child.
The farming child and their spouse are able to enter into a Relationship Property Agreement contracting out of certain arrangements. For example, in the event of separation the farming child’s spouse would be entitled to money but not a share in the property. However, the court has the discretion to set aside this agreement if it considers it would cause a serious injustice, so it is essential that the agreed arrangement is fair.
By combining the two structures, the farming family benefits from both the trading advantages of a company and the protection afforded by a trust.
4. Limited Partnership
Limited Partnerships are increasing in popularity as a tool for succession. The Limited Partnership has a separate legal personality, similar to a company, with the following features:
- it must consist of at least one general partner and one limited partner;
- the general partner is responsible for the day to day management of the business, and is also liable for all the debts of the partnership;
- a company is usually formed to act as the general partner, thus providing protection from individual liability;
- each limited partner’s liability extends only to the amount of capital they contribute. To retain this limited liability, they must not take part in the management of the partnership; and
- unlike companies, limited partnerships themselves are not taxed – instead, income and tax liability flows through to the partners.
The flexibility of this structure provides for different levels of involvement in the business. Children of farming parents who pursue other careers may wish to be involved as limited partners, while the parents and/or any farming children may be involved as directors of the general partner company.
The Limited Partnership allows for easy entry and exit of partners, making it a smooth tool for succession purposes. A Partnership Agreement must be created before registration of any Limited Partnership, but this Agreement remains a private document.
Where to from here?
The first step is for the farming parents to decide what they want to do in the next phase of their lives. To enable a family farming business to be passed successfully to the next generation, it needs to provide sufficient income to support two families (the retiring parents and the succeeding farming child).
No two farming families will have the same needs, and so succession plans need to be customised to suit each individual family’s specific circumstances. We recommend sitting down with your lawyer, banker and accountant to decide on the best succession plan for you.
Whether parents want to include their children in this conversation will be dependent on family dynamics. It may also be helpful to have an experienced facilitator to assist with family discussions about succession before bringing succeeding children into the substantive business discussion with lawyers, bankers and accountants.