Article by Neil Hooper
I have heard a number of farmers say lately that they won’t transfer farm land in their lifetimes, because it will cost too much in tax.
Certainly, the massive jump in land prices and scale increase over the last 10 years, make the Small Business Capital Gains concessions almost impossible to access. So I definitely agree that there are some challenges.
But what are the potential repercussions if the land is not transferred in your lifetime, and is instead willed upon your death?
The first and most obvious issue is the risk of your will being contested. This is a very real risk if the farm land constitutes a substantial portion of the assets of the estate.
Anecdotally, we are hearing from legal advisors that they are receiving significantly more enquiries from the non-farming siblings in this regard. As such I would suggest the risk of contesting has never been higher!
This leads on to the second risk, that of the impact of the uncertainty of who will inherit the farm land. If you are in your 50’s or 60’s and the land has not been passed on to you, it would about certainly impact on your decision making. Compare that to the situation where the land has been transferred to your control, and you can farm with the security of knowing that improvements you do to the land will be for the benefit of you and the next generation in the farm business.
The third risk I would raise is the issue of the land being used as security. Let’s say you are in your 50’s, have a son or daughter home on the farm with you and are looking to expand the operations. Let’s also say that the majority of the existing land is still held in your parent’s name, and they are in their late 70’s and scaling back involvement in the farming operations. In most cases the existing land would need to be used as security to buy additional land, and as such the parents in their 70’s would need to act as guarantor.
As anyone who has signed a guarantee knows, this is a somewhat daunting thing to do. What if the parents don’t want to be a guarantor? Or, what about the possibility of either of the parents having lost capacity, and not being able to sign the guarantee? Yes it could potentially be signed under a Power of Attorney (POA), assuming the parents had signed a valid power of attorney. However there is a fiduciary duty on the person signing the guarantee under the power of attorney to be acting in the best interests of the person they are signing for. What is the direct benefit to the guarantor of them entering into a guarantee? It is an even bigger legal minefield if the POA is also the borrower of the money.
In summary, there is potentially considerable costs involved in transferring land within a person’s lifetime, compared to under a will. But there are also some significant risks in leaving it to be sorted under the Will.
One final point, if you are transferring land under a will, consider willing it to a Trust (or Testamentary Trust) so that the same issue does not occur at the next generational transfer!
Contact a Byfields Director at any of our offices to discuss your succession plans further.