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Financial plan

A fair and efficient agricultural financial plan for all

A 63-year-old grain farmer we’ll call Owen grows 1,000 acres of grain near the Manitoba-US border. He has three children aged 35, 34 and 29. The eldest, Jack, wants to take over the farm. His two siblings, who we’ll call Max and John, have jobs in town and don’t want to farm.

Owen’s dilemma is how to transfer the farm to Jack, earn an income of $ 50,000 a year at age 65, and provide a living income or compensation for the two children who do not want to farm. The problem is both a question of fate, that is to say to ensure the sustainability of the farm through the management of Jack, and to ensure a fair settlement for Max and John.

Owen enlisted the help of Colin Sabourin, a Certified Financial Planner from Harbourfront Wealth Management in Winnipeg, Manitoba, to prepare for the farm transfer.

We need to look at the basic finances of Owen’s farm. The farm company has current assets of $ 6.5 million, current liabilities of $ 1,013,000 and net worth of $ 5,487,000. There are also non-farm assets, including a $ 450,000 house, Owen’s Registered Retirement Savings Plan (RRSP) of $ 245,000, and his Tax-Free Savings Account (TFSA) of $ 90,000. $. Non-farm assets total $ 785,000. Total net worth is $ 6,272,000.

The best solution – do an estate freeze at age 65, then buy back $ 60,000 of the preferred shares of the farming company for the rest of Owen’s life, suggests Sabourin.

The company is worth $ 5,487,000. Assuming it grows by five percent a year, it will be worth $ 6,049,420 in two years when Owen is ready to retire, notes Sabourin. He can then issue new ordinary shares to his farmer son. Any future growth of the company will be in the hands of his son.

In the first year of retirement, Owen can buy back $ 60,000 of preferred stock and do so annually, increasing the funds withdrawn from the company by 2% per year to slow inflation.

This process is expected to generate an annual income of $ 60,000, and there is $ 6,000 from the Canada Pension Plan and $ 7,380 from Old Age Security (OAS).

After tax, this cash flow would generate $ 58,768 per year. There would be a deficit of $ 1,232, which Owen can cover by drawing on his RRSP or TFSA, explains Sabourin.

OAS clawback could be problematic as it is triggered when net income exceeds $ 79,845. The repurchase of preferred shares is treated as dividend income, so there would be a loss of a few thousand dollars on clawback. This process will leave Owen with sufficient retirement income until he is 90 years old.

The estate freeze will allow Jack to avoid having to shell out money for the buyout. Owen will continue to control his farming company. If the oldest son Jack doesn’t run the farm well, Owen can step back and regain control, warns Sabourin.

In two years, in 2023, farm assets before inflation adjustment would be $ 5,487,000. Assuming Jack withdraws $ 60,000 from the farm in the first year of the transition and assuming 2% inflation going forward, the preferred stock would generate a lifetime payout of up to 90 years of 1,960,254 $. At 90, the farm would have an undistributed value of $ 4,089,163, Sabourin estimates.

Add $ 250,000 in personal investments and the farm house of $ 450,000, Owen’s total life equity would be $ 5,089,163. A million dollar life insurance policy Owen bought ten years ago will fund an inheritance of $ 500,000 for each of the off-farm children. They will have to sell the preferred shares they hold to the farming company, Sabourin explains. The farm child will have to buy these shares along with the $ 1 million life insurance policy that will be paid to the farm corporation tax-free. This money will allow the child farmer to buy his siblings’ shares at $ 500,000 each.

With all of this done, the non-farming children will have received $ 1 million each, while the farming child will have inherited the $ 3,089,163 of preferred stock.

Is it equal and fair? The child farmer is going to have $ 3 million in preferred stock while the two brothers will only get $ 1 million each. But the farm child will have to sweat for their income, get up to feed the animals each morning and run the farm, while the non-farmer siblings will each receive $ 1 million in passive inheritance. The million dollars per child at an assumed rate of return of five percent per year will provide them with $ 50,000 per year each for life. Overall, it’s a fair and effective plan, concludes Sabourin.

This plan sounds complex, but it’s really just a tax-free, tax-free distribution of life insurance payouts to keep the operation going and provide a means of reorganize the social capital of the operation. It is open, fully compliant with tax legislation, and not difficult to administer once the plan is in place. Most of all, it allows Owen to treat his three sons fairly, with the farm going to Jack and a good chunk of the money to his two nonfarming brothers.


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Louis R. Hancock

The author Louis R. Hancock

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