Estate planning fundamentals
By Darrell Tracey, CA, Edmonson Roper Chartered Accountants
If you are like most people, you equate estate planning with thoughts of your own death. Since this is not a very pleasant subject, you may wish to avoid it. But what if estate planning meant something positive - like wealth accumulation during your lifetime and maximizing the transfer of wealth to the next generation? Well, that is exactly what estate planning is, or should be.
Why prepare for an estate plan?
- to minimize taxes, probate fees and other costs
- to obtain peace of mind for you and your family
- to accomplish your objectives in the most cost-effective manner.
- as soon as you begin to accumulate wealth, although the specifics of the plan will evolve over time
- an estate plan is not a static, one-time procedure - but is a dynamic, ongoing process.
Prepare a current net worth statement
- have your tax advisor determine tax exposure
- stimate your own retirement cashflow needs.
Determine your objectives and priorities:
- your own retirement lifestyle;
- your desire to maximize the wealth transferred to the next generation;
- your desire to benefit charitable causes;
- timing of wealth transfer - during your lifetime or upon your death;
- your desire for equitable treatment of your beneficiaries;
- if a business is involved, how do you treat fairly the heirs involved in the business and those not.
Identify and assemble a team of advisors
- lawyer, tax accountant, investment or financial planner, banker, insurance specialist
- involve family members
- update your Will and ensure it reflects all relevant aspects of your estate plan; and
- don't procrastinate - this is a temptation most of us find hard to resist.
For those of you who are not involved in an agricultural business, the above comments cover most of the issues. However, if you are operating an active business through a corporation, you will also want to consider the potential to utilize the enhanced $500,000 Lifetime Capital Gains Exemption (LCGE) available on shares of a Qualified Small Business Corporation (QSBC). You may also want to consider creating a structure whereby this exemption can be accessed by more than one family member. For this, you will need your tax advisor's help.
Estate planning for farm families
For those of you involved in a horticulture, nursery or other agricultural business, either directly or through ownership of shares of a corporation or an interest in a partnership carrying on such a business, you are likely considered to be carrying on a farming business for income tax purposes. As such, the assets used in the farm business may qualify as Qualified Farm Property (QFP), the shares of the corporation may be shares of a Family Farm Corporation, or the partnership interest may be an interest in a Family Farm Partnership. In these cases, an enhanced LCGE may be available to you also, as was just described above for shares of a QSBC. This should definitely be pursued since it can have significant tax advantages. Also, the ability to multiply this LCGE among family members is much broader and easier in a farm context.
As farmers, you are engaged in a particularly capital-intensive business. As a result, your estate is likely to be sizeable, with the majority of your net worth represented by the family farm. You probably have children, some of whom are involved in the farm, but others of whom are not. As a parent, you want to ensure your children and grandchildren are all treated equitably, but you don't know how this is possible when the farm is your main asset. After all, you probably don't want the farm to be sold just to treat your heirs equitably. At the same time, the child or children involved in the farm will likely want autonomy in operating the farm in the future, so it will likely not be feasible to involve the non-farming children in the farm later. These are tough questions which require careful thought. You will likely consult your advisors extensively at this stage and you should involve family members in the process.
In addition to the general estate planning considerations already briefly mentioned, farm families should also do the following:
- Determine if you have family (child or children, grandchildren) who want to take over the farm business. If so:
- transfer piecemeal or in total - at what price?
- how funded - externally or by you as "banker"?
- do you want to retain some control?
- what are your after-tax retirement cash flow needs?
- how do you provide for non-farming children?
Learn about the estate planning tools available to you as a farmer:
- your Will is a key component and must be consistent with all other aspects of your plan;
- tax planning tools - the $500,000 LCGE
- inter-generational "rollovers" of farm property or shares of a family
- farm corporation, or interests in a family farm partnership
- replacement property rules
- capital gains reserves
- forms of business - proprietorships, partnerships, corporations
- ways to hold property - joint tenants, tenants in common, life interests
- Be realistic about cash needs and constraints that may be placed on the farm to fund all parties' needs
- Be practical - if external financing is involved, is the plan likely to be acceptable to your banker?
- Don't forget about family law and other non-tax issues. For example, consider the potential for marital breakdowns, creditor-proofing, etc. - how do you control who may have claims against the family farm?
These comments are intended as a general introduction to the concept of estate planning in a family farm situation. Obviously, the estate planning process is necessarily broad in scope, and very important in the agricultural arena. A good estate plan takes considerable time, effort and soul-searching to develop and maintain over time as circumstances change. It will be flexible, will address the concerns of all family members and be based on valued advice from your professional advisors.
In both the agricultural setting and for those involved in other businesses, the investment you make in time, effort and dollars now will more than be recovered in peace of mind, tax savings and convenience for all family members. So, give your estate and retirement needs some thought and consult your professional advisors. You and your heirs will be glad you did.
Darrell Tracey, C.A. is the tax partner at Edmondson Roper, a regional C.A. firm with offices in Abbotsford, Chilliwack and Hope, B.C. He specializes in tax and estate planning for small businesses and farms.