Whilst a Deed of Family Arrangement (DOFA) can be useful for succession planning, it is essential to ensure that the Deed does not trigger Capital Gains Tax (CGT) or Duty provisions. For example: if the older generation receives a lump sum for resigning as Guardians and Appointors of the family trust, that sum may be taxable as a capital gain with a zero-cost base. The solution is to make the payment for something else or keep the resignation and payment separate in time and documentation.

Under Section 119 of the Duties Act, a change of trustee of a family trust is free of Duty as long as it is not part of an arrangement to the detriment of any existing beneficiaries. It could be said the older generation suffer a detriment in transferring the role of trustee to the new generation, making the transfer dutiable. 

A similar position applies under Section 67 of the Duties Act dealing with changes in shareholders of a corporate trustee of a family trust. The risk of these provisions can be mitigated by keeping the changes of trustee/shareholders separate from the succession agreement in time and documentation. 

Sometimes we have used a Memorandum of Understanding (MOU’s) in place of a DOFA. We have used MOU’s where we felt there were CGT or stamp duty risks in having a formal deed. There may be other reasons for not having a formal deed including, that the younger generation’s marriage is rocky or their commitment to the farm is uncertain.

Although an MOU is not legally enforceable, it could support the younger generation’s claim in equity if the older generation reneged on the terms of the succession plan.

Sometimes there is no DOFA or MOU. In 2017, I commenced acting for the parents and with the help of their advisors, we set out in correspondence the succession plan with the son. This plan was implemented over the next 4-5 years including, the transferring of control of all entities except for the trust that owned the home farm. All that we had to do last year was establish an agreement where the son pays the parents $1 million over 20 years.

Both sides were protected in the interim; the son by the parent’s wills and the parents by retaining control over the Trust that owned the home farm, which would pass to the son on the death of the surviving parent.

We can assist if you require advice in respect of succession or estate planning or any agribusiness matter.