How to pass on your farm

How does an older farmer exit farming, fund their retirement and keep the family happy?

The average age of a farmer in Australia is 54 years old. If you are a farmer and haven’t yet thought about your retirement and succession plan, now is the time.

Handing over control of the farm in exchange for an annual income?

An often suggested retirement plan is for the older farmer to:

  • Retire from day-to-day operations;
  • Hand the management of the farm over to the ‘next generation’ farmer; and
  • Receive an ‘annual distribution’ from the farm income to fund their retirement.

In our opinion this is a risky strategy – both for you and for the children taking over.

You need to be clear about who’s in control. You also need to be sure that the person in control has the skills and experience to keep the farm profitable – so that everyone gets paid.

Sometimes the work ethic and approach to life of the older generation is not matched by the younger generation. Many within the younger generation are married to non-farmers, and things like a social life, participation in sport and clubs, holidays, and time in the city with friends take a high priority. Sometimes this is offset by a keener interest in technology and data, which can improve farm performance. But if you are intending to retire on an income from the farm, then you need to ensure that your children will be able to produce it.

The other issue that can arise from passing control to the next generation, is that you don’t actually pass control… This can soon lead to arguments between you and the next generation as to how things should be done.

In our view, if you retain ownership of the farm, pass control to the next generation, and still require an income from the farm – then problems are very likely to arise.

Giving the farm away?

Often, rather than merely handing over the management of the farm to the next generation, the older farmer proposes to give their farm to the next generation farmer. Why? Often the intention is to reduce your assets to get a pension from Centrelink or lower Residential Aged Care fees from Services Australia (formerly the Department of Human Resources).

The other reason we see people passing over ownership of the farm early is because they have tried the option above (i.e. only passing control) and have ended up in big arguments with their kids, who have now convinced their parents to pass it all over!

Once again, this strategy needs to be thought through very carefully. For the purposes of Centrelink or Aged Care, the gifted assets will be deemed to form part of your assets for a period of five years. So, for that deprivation period, you will be dependent upon the next generation farmer to fund your retirement.

Further, those assets are now vulnerable to third party claims made against the next generation farmer – creditors, a disgruntled employee or most commonly, an ex-spouse. In the event of a divorce, half of the farm assets may leave the family.

So, what do we recommend?

Partial sell down of farm assets

One option to consider is a partial sell down of the farm to the next generation farmer. This allows you to fund your retirement and to extract some wealth from the farm in your lifetime. This strategy:

  • Reduces the risk that your retirement might go unfunded; and
  • Ensures that on your death, if the balance of the farm assets is left to the next generation farmer, there are some non-farm assets available to provide for other family members.

How will the partial sell down of farm assets be funded?

It may be by ‘vendor finance’, by ‘instalment’ or through an ‘earn-in arrangement’ (that is, the longer the next generation farmer works on the farm, the more equity they acquire). These arrangements need to be formally documented to avoid arguments between you and your kids (and among your kids) down the track.

How can we help?

Transitioning to retirement can be tricky for older farmers, especially if there has been a lack of financial planning, family infighting or a lack of communication. We have been advising farming families on retirement strategies and succession issues for decades. We can help you put in place a successful retirement and succession plan that will minimise disputes and look after you and your family. Call us on 1300 654 590.

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