Family farms are part of the fabric of rural Australia.
Unfortunately the landscape is dotted by a large number of farms that disappeared from families who either had no succession plan or the estate plan was seriously inadequate.
The impact of death duties is just one example of how a lack of planning destroyed the ambition of many would be farmers in the 1970s.
One aspect of family businesses that is rarely seen in any succession planning literature is family agreements for personal expenses. As I have indicated in previous articles, communication is a key issue with family farms and it is more than just discussing what will happen in five or ten years’ time.
In my experience, frustration and resentment in farming families often arises over which expenses should be paid by the farm and what expenses should be paid from personal bank accounts. Another common example is where the quality and size of each family’s residence is not the same.
Where there are two or more siblings and their spouses in partnership this conflict often results in the siblings farming independently. This is despite the obvious economies of scale including sharing machinery costs, combining labour units and minimising overheads.
Being able to operate your farming business independently is a powerful aspiration. Where there are two generation farms with the older generation including siblings, uncles and aunties often find negotiating with nieces and nephews difficult.
Whilst farming independently may be part of the succession plan, it is still necessary to put in place a family agreement in the meantime. The agreement will need to spell out which expenses are payable by the business that have a private portion.
These will include electricity, telephone, house insurance, motor vehicle running expenses and motor vehicle replacement. This will require some careful thought and often to simplify bookkeeping and to minimise conflict, the farm will increase partners’ drawings to cover all of these costs. This will provide an incentive for each family to minimise costs.
Naturally food, clothing, entertainment, private health insurance and education expenses will be the responsibility of each individual family.
The agreement will stipulate fixed drawings each month to be paid into a personal bank account with identical amounts to be drawn by each family. The amount of the drawings would be reviewed on an annual basis.
Housing arrangements can be problematic and there needs to be clear guidelines as to repairs and additions to any residence.
Where one family does not live on the farm then special arrangements will be required for house rent or mortgage repayments to maintain equity between families.
Clearly making improvements to a residence from the occupier’s personal funds on somebody else’s title is to be avoided wherever possible. Similarly, making improvements or substantial repairs on any particular property needs to be carefully considered in relation to the division of the property in the future.
Another bone of contention can be either voluntary or off-farm income particularly where partnership plant is used. Any interference with the farm program needs to have clear agreement with all farm partners.
Similarly, there needs to be a clear understanding of job roles, minimum seasonal working hours and holidays for each farming family.
Depending on the trading structure, there also needs to be clear rules for sickness and accident insurance or workcover. Particularly for the younger farmers, life insurance to cover debt and provide for the surviving family should be carefully considered. Where there is more than one family unit involved in the farm, a legal agreement as to what happens in the event of death, disablement or departure should be mandatory.
Dare I say get the right advice or pay the price.
My next article will discuss the options with minimising farm risk as part of your succession plan.
Important: This is not advice. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur rapidly. We therefore recommend that our formal advice be sought before acting.