Don’t gift the farm to your children, but make them buy it at full market value, says one intergenerational wealth expert.
“When we take shortcuts with the valuation and offer discounts to the family, we damage the confidence of the next generation. We actually undermine their authenticity,” said Tom Deans.
Deans, an author and business transition expert spoke during a webinar on farm transitions hosted by Farm Credit Canada on July 13.
Selling the farm for a fair price to family helps keep it in the hands of those who really want it, and can keep things fair, Deans said.
“When we ask people to pay market value, they are only going to do that if they believe in their own ability to grow that operation,” said Deans. “Plus, their brothers and sisters who may be outside of the farming operation are going to know that the full value is going to transfer to their parents, and when their parents pass away, typically every sibling is going to participate in equal amounts.”
Gifting the farm for free may also saddle an unwilling or ungifted farmer with land they feel guilty about selling, Deans added. They may feel they have to pass it on the same way they got it. It can cause tremendous heartbreak and destroy wealth.
Webinar viewers quickly pushed back in the chat box. With more than one person protesting this would make the farm entirely unaffordable.
Another said that if a young farmer bought the farm in small percentages over time, “on a multimillion-dollar farm, that young person will be working poor all their life.”
Deans agreed that buying the farm is a much larger burden than in the past.
“Long gone is the day when the next generation would just go to the bank, get… a small loan and buy the farm from their parents at full market value,” he said. “The next generation just doesn’t have the wherewithal.”
Farm kids may feel they’re stuck working on the farm until their parents die and pass it on for free.
“What they don’t realize is their parents are living vastly longer than any other generation,” Deans said.
This makes buying in young even more important, said Deans. He suggested parents take money out of the farm and gift or loan it to their kids — then offer if they want to buy into the farm now that they have money to do so.
With the choice to buy or keep the cash, this can get the farm into the branch of the family that wants it and has the ability.
“The earlier you start the more affordable it is,” said Deans.
Young farmers could also take small loans and buy a few per cent of the farm at a time and then use dividends to buy more and more shares, he said.
If you wait until you’re in your 50s or 60s, “it’s like trying to land a 747 on a postage stamp,” Deans said.
This can start with family meetings even when kids are quite young. Parents can explain that their kids are invited to buy in to the farm, and that they won’t get it for free. This can allow kids to let the idea percolate, and for them to have accurate expectations going forward.