Merle Good has one piece of advice for farmers who are drawing up their wills: “If you’re going to leave land to a non-farming child, get creative.”
Thirty years ago, “hardly any land went to a non-farming child,” said Good, a longtime tax specialist with Alberta Agriculture and Rural Development who now runs a private consulting business.
“When I sit down with clients and look at their wills, the vast majority have some land going to off-farm children,” said Good.
“Parents are saying, ‘I think it’s only fair — not equal, but fair — that some of the land wealth will be transferred not to the traditional guy down the line from those who farm.’”
Producers used to believe they needed to own their farmland, but that mentality has changed as more and more producers rent at least some land, he said.
He said roughly 80 per cent of producers he talks to are willing some farm property to a non-farming child.
But to make the deal fair for both sides, farmers need to be creative with their wills — although finding ways to do that isn’t easy, said Good.
“Most lawyers are not very creative, and most accountants don’t even know what the word is,” he quipped at a breakfast presentation during Agri-Trade.
But creative approaches do exist, he added.
One is to attach a lease to the transfer of land.
“If I’m going to leave some of my personal wealth of land to a non-farming child, I still want to protect the business — and to protect the business, I want access to that land,” said Good.
“I can transfer the land to my daughter, on the condition that a lease be attached to that land so that the business has the right to farm the land for a certain number of years.”
The rental rate should also be stipulated in the will, he said. An easy way to determine a fair rental rate is to “take the high price average for the crop insurance on your rotational crops, at 80 per cent production, multiplied by 25 per cent.”
“You can put that in the will. ‘The rental rate shall be based on a third-party index.’ And then there’s no fights,” said Good.
The farming child should also be offered the right of first refusal to purchase the land if it’s ever put up for sale — and the right should apply to all subsequent offers as well.
“Make sure your offer in your right of first refusal says, ‘I have the right of first refusal on any offer or subsequent offer until the deal closes.’”
In cases where the majority of the land will be going to the farming child, producers can instead put a mortgage against the land willed to the farming child. The mortgage payments go to the non-farming child.
“You can transfer land to anybody with a mortgage attached to that land, and the mortgage goes to somebody else,” he said.
“I can transfer a quarter section to my son and say, ‘In the event of this quarter section being transferred, I place a $200,000 mortgage against that land, and that mortgage is transferred to my daughter.’”
“Effectively, I sold the land for less than fair market, but I’ve created an income stream for my daughter, and she’ll get that money totally tax free.”
However the will is worded, producers should be working on building a relationship between their children today, said Good. And that starts with the farming child handing a rent cheque every month to the non-farming child.
“If I know the southeast of 17 is going to my daughter, I’m going to rent it to her for land taxes, and then she can turn around and rent it to the farm operating company,” he said.
“If I’m going to guarantee — in my brain and in my heart — that some of my land is going to my off-farm child, I want the farm to rent it off her. If we’re going to do this, let’s create the relationship between brother and sister while you’re alive.”