Plan early for succession

Bad succession planning is dying rather than having conversations that are sometimes hard, and refusing to make decisions that avoid unnecessary legal and tax expenses.

A good succession plan replaces assumptions, provides clarity for everyone, avoids legal challenges, and can provide a comfortable retirement for the principals.

A good succession plan identifies the property, assets and ownership structure of the business — and may lead to advice about changing the ownership structure of the business so it can be run more effectively and efficiently.

These were the messages at a farmers’ gathering near Bairnsdale recently.

Succession planning is about more than planning for the business, it is also about financial planning for retirement.

It is a risk management tool that enables the current owners to identify where their income for retirement is coming from, what insurances they need to keep paying, and where their income is being generated from.

Retirement at 67 years old for many people is unachievable now in Australia. That includes farmers.

In the next 10 years, in Australia, agriculture is one of the key industries where $5 trillion value of wealth transfer will occur through succession planning, said Ken White, one of the speakers and the principal accountant at White’s Accounting and Taxation Solutions.

A poor or non-existent succession plan affects how the assets and income of the farm business are assessed for the current and next generation.

A good succession plan enables the current farm owners to plan for an active retirement, identifies how they transition out of ownership, and how other people transition into ownership.

Ken said a number of Australian Tax Office and Centrelink concessions were available, but lack of planning put these at risk.

These included how GST, Capital Gains Tax, Stamp Duty, superannuation and gifting rules were applied.

Ken encouraged farmers to seek their accountant’s advice about how to frame their succession plans to the advantage of themselves and their successors, whether that was inter-generational transfer or the sale of the farm and its assets.

Ken recommended not leaving the issue of inheritance until after death. For one thing, transfer of wealth into superannuation during the principal’s lifetime had clear advantages.

“The sale of assets, even to family members, realises income that can be articulated into the superannuation fund of the exiting person or people,” he said.

“The dispersal of assets should be spread over several years, if possible.”

Dispersal staggered over several years affected income and tax assessment.

But assets transferred after the principal’s death — as inheritance — were very complicated to value.

Chris Jehu, principal of Countryside Business Partners and one of the speakers at the gathering, has facilitated many families through the succession planning process.

“Planning looks after current and future ownership,” he said.

Estate planning identifies how the assets are to be distributed. Retirement planning ensures wealth is adequate enough to meet your future needs. Transitioning the family business is about identifying what components need to continue, and under what management or control methods.

“But not every business has to be succeeded,” Chris said.

Succession shouldn’t be a ‘one size fits all’ situation.

“Therefore, it’s important to identify and know what components of succession planning is relevant to you,” he said.

“First there needs to be clear communication about the expectations of everyone involved.

“Approval of the way forward means implementation could be in stages, with targets and covering clearly articulated life stages and market events.”

This might include clearing sales of equipment and machinery, valuing of stock, and sale of stock.

For example, in a livestock enterprise that focuses on breeding, the progeny still have to be sold in a timely manner. In an animal agribusiness that focuses on finishing or fattening, the finished livestock have to be sold at the targeted weights.

In a horticulture or cropping farm business, product still has to be grown, harvested and sent to market.

These are the types of ongoing business transactions that should be documented in a succession plan against market events, Chris said.

“It’s also important that if assets are distributed before the will is read, activities need to be documented.”

There were some key legal tools that helped ensure good succession planning, according to Katherine Argentino, a lawyer and director of Argentino Law.

That included a Deed of Family Arrangement, that supports the will and estate plan, and outlines the agreement between all people with an interest in an inheritance.

“It helps to lock in the agreed arrangement and is signed by every family member involved in the succession,” Katherine said.

She recommends starting the succession conversation early. Katherine also recommends regularly reviewing the succession plan.

“Succession planning should be gradual and thoughtful, with lots of sharing of information and perspective, so it’s almost a non-event when it happens,” she said.

“Communication is key to success. Open, honest conversations are vital. No one likes a [life changing] surprise, at the end of the day.

“A plan should also be reviewed every three to five years, to ensure it encompasses anything that’s changed.

“Ensure any changes or transfers that occurred during that time are documented.”

She also recommended ensuring supporting documents are reviewed and up-to-date – including wills, power of attorney, end of life care, binding death nominees on superannuation.