The last generation: Handing down the farm not always easy

Media Release

25 November 2014

- for immediate release

The last generation: Handing down the farm not always easy

Many farmers have a significant problem with regard to succession planning, meaning the majority of their children will be unable to receive an adequate farm-based income or continue farming.

That’s the impression from data gleaned from over 800 responses to a survey conducted by Lincoln University Senior Lecturer in Farm Management, Dr Kevin Old, and Research Fellow, Dr Peter Nuthall. The survey was designed to gauge the current situation for succession and governance on New Zealand farms.

One of the issues highlighted by the survey is the difficulty for farmers to divide their assets equally among their children while still ensuring a reasonable income for all concerned. For example, of the farmers surveyed who have children interested in becoming a farmer, 24 percent of them have more than one child.

When it comes to sharing the family assets, 47 percent of farmers note they will divide these equally among their heirs, even if it means selling the farm. The remaining 53 percent intend to divide the assets unequally, with some noting they will favour one particular person chosen to take over the farm, albeit with the expectation, in many cases, that the chosen heir will compensate the remaining children.

Some farmers have off-farm investments intended to support those children not following in their farming footsteps.

Surprisingly, Old and Nuthall found many farmers had an ownership interest in more than one farm. While the norm is still a single farm (58 percent), the average number of farms across all farm types is 1.75 per farmer. Some farmers, particularly in dairying, have multiple properties, with up to eight farms in some cases. For the 42 percent of those surveyed with more than one property, multiple ownership may further complicate succession planning.

Assuming the farm is divided equally among all children, Old and Nuthall note that a further succession problem reveals itself when it comes to the question of farm profit per child. The net asset per child is also relevant.

Measured in terms of net income, most child heirs would receive what might be regarded as a reasonably modest wage, with 74 percent of children receiving $60,000 or less, and, notably, 71 percent receiving less than $30,000.

Around 14 percent of children would receive somewhere between $60,000 and $100,000. The remaining 12 percent would likely receive a net profit greater than $100,000.

For Old and Nuthall, these figures beg the question as to how many would be content with such a return relative to the kind of income one might earn elsewhere, especially in light of the increasing number of individuals receiving a tertiary education. However, the researchers note that, as mentioned previously, such a question assumes the farm is equally divided between all children. In many cases some of the children do not want to become a farmer, yet still expect a share of the family assets in due course.

When measured in terms of net assets, on current valuations, 73 percent of children would receive $2.5 million or less. Another 14 percent would receive between $2.5 and $5 million.

According to the researchers, if a net return on capital of 4 percent was assumed, one would require a $2.5 million farm in order to return a $100,000 per annum income . Thus, 27 percent of the children would receive an income of $100,000 or more, while 13 percent would be more fortuitous through receiving an asset share exceeding $5 million.

The survey found that farmers appear reluctant to engage in succession planning. Currently only around 30 percent of the surveyed farms’ net assets have been assigned to chosen heirs, while 55 percent of farmers are yet to pass on any assets.

For the researchers, this relatively low figure may reflect a current tax system that does not encourage the transfer of assets prior to death. With gift and death duties effectively non-existent, the necessity for starting this transfer process early is partially negated. The question remains as to whether future governments will make policy changes in this regard, such as via a capital gains tax.

The majority of farmers (58 percent) stated that they do intend to pass most of their assets to the next generation. Although it is also noteworthy that 27 percent of farmers stated they intend to pass less than 50 percent of their assets on.

From anecdotal stories offered by many respondents, it is clear that setting up flexible succession systems is important. While everyone involved might be in agreement over plans, this agreement may well change as the years pass. For instance, children change their thoughts with regard to preferred occupations, they get married and have families, some get divorced, and occasionally some tragedy undermines any plans that were initially put in place.

According to Old and Nuthall, the succession problems outlined are not necessarily new, but the survey does emphasise the need for succession planning to be started early and with careful thought; especially as, despite a common assumption, most farms in New Zealand are still family owned operations and not large business concerns. Family members need to confer and consult to consolidate their wants and desires regarding succession as soon as possible. From there, professionals can be brought in to help with the planning details.

Dr Old concluded that “there are no magic solutions. Each case must be treated on its merits and some flexibility maintained in most situations”.

The full survey can be found at: http://researcharchive.lincoln.ac.nz/handle/10182/6261

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