A succession plan is crucial for a smooth transition of a farming operation from one generation to the next. It should cater for both generations and any off-farm children. The continuing generation will require an economically viable farming operation to support their own financial needs and education of their children. The outgoing parties will likely have dedicated their working life to the farm and will want a reasonable standard of living in retirement and sufficient assets for their own security and to leave to their off-farm children.

A common scenario in succession planning is where the parents own all or most of the farming land and wish to move towards retirement. The son and daughter-in-law are living and working on the farm and the son has been there since he left for school, say, 20 years ago. The parents have a house in the city or on the coast somewhere and a small amount of superannuation.

A Deed of Family Arrangement (DOFA) could be entered into where control of the farming operation is given to the son and daughter-in-law over stages. The son and daughter-in-law pay the parents a sum of, say, $2 000 000 after tax over a period of ten or fifteen years. The parents can then use this money to build up their superannuation and for other investments. Once the agreed sum has been paid, control of the remaining assets can be handed over to the son and daughter-in-law.

To protect parents against the younger generation selling the farm, a provision can be included in the DOFA stating that if the property is sold within the next, say, ten years, then a certain percentage of the net sale proceeds goes to the parents. This percentage can be reduced over time. A second mortgage can be lodged over the farming land to secure this obligation to the parents.

The older generation may wish to protect their off-farm assets from the bank in the event of the farming business failing. In this typical situation, the parents are no longer in the farm business but still own part of the farm land that is required for security. Usually, you can negotiate with the bank to limit the bank recourse to the farming land. This would be reflected in the DOFA. 

We can assist if you require legal advice in relation to succession planning, estate planning or Agri-business matters.