Succession Planning for Farming Families: A Property and Commercial Law Perspective

Kara Inglese

LawyerAitken PartnersView Profile

When farming families think about succession planning, the conversation often begins with wills, inheritances and family expectations; who gets the farm when the parents retire or pass away.

Beyond these matters, successful succession planning should also involve practical property and commercial law considerations; whether the farm business itself will continue to prosper into the next generation.

For many farming families, the farm represents decades of hard work, a family legacy and substantial capital value. A well-rounded succession plan which incorporates inheritance, property and commercial planning can help alleviate legal, financial and operational problems in future.

Understanding what the family owns

One of the most common issues encountered in farming succession planning is confusion about ownership. Ownership of farming property may be divided across a variety of structures, such as:

• individual ownership;

• family trusts;

• companies;

• partnerships;

• self-managed superannuation funds;

• unit trusts; and

• joint venture arrangements.

Problems and potential future disputes can occur where the different entities own different assets. For example, land is owned personally by one or more spouses or children, the farming business is conducted through a trust, machinery is owned by a company, water entitlements are held separately to the land, and livestock belong to yet another entity.

Before any succession planning can occur, families need a clear understanding of what assets exist and who legally owns them.

Separating land ownership from farm operations

One of the most effective succession strategies involves separating ownership of the land from operation of the farming business, which makes the transition into the succeeding generations clearer and can give protection to individuals from liabilities of the farming business.

A good example could be transferring ownership of the farm land to a trust or holding entity and setting up operation of the farming business through a separate company or trading structure.

This method can offer a range of commercial benefits, such as:

• protection of valuable land assets;

• improved asset protection against trading risks;

• greater flexibility in succession planning;

• smoother management transitions; and

• easier admission of future family members into the business.

Separating ownership of the farm land and other assets from operation of the business can also enable the next generation to gradually assume a managerial role, without requiring an immediate transfer of valuable farm land. Please contact us for advice in relation to the best structure for your circumstances.

The importance of proper leasing arrangements'

Leases are often overlooked in farming succession discussions. Many farming families operate under informal arrangements. Parents may allow children to work the land based on verbal understandings or long-standing family expectations.

While these arrangements may work when relationships are positive, problems frequently arise when circumstances change.

A properly drafted agricultural lease can provide certainty by addressing rent, maintenance obligations, insurance responsibilities, land tax and rates, capital improvements, renewal rights and succession arrangements.

From a commercial perspective, a formal lease can permit older generations to retain ownership while allowing younger generations to build and operate the business.

If any land is held by a self-managed superannuation fund, an arms length lease for market rent would usually be required if that land is to be used in the farming business.

Banks also tend to favour clear documented arrangements over informal family understandings when assessing finance applications.

Water and carbon rights and potential encumbrances

Modern farming businesses increasingly rely on assets beyond the land itself. Water entitlements, irrigation rights and carbon credit interests may be critical to the viability of the farming enterprise, and can represent a substantial portion of overall farm value.

Alternatively, the land could be subject to encumbrances which can have a detrimental effect on the land value, such as existing leases or agistment agreements to third parties, long term renewable energy or telecommunications agreements (although these may also bring in income).

Each of these assets may be subject to separate legal ownership and regulatory requirements.

A succession plan should take into consideration the farm land itself as well as these associated rights and encumbrances.

Shareholder agreements and family governance

Where a farming enterprise is operated through a company, succession planning should extend beyond ownership of shares.

Many family conflicts arise because there was no clear agreement regarding management control, decision-making powers, profit distribution, succession rights or exit mechanisms.

A well-drafted shareholder agreement can address issues such as ownership of shares, treatment of shares if a family member wants to leave the business, how the shares are valued, buy-out provisions and dispute resolution processes.

These agreements can provide clarity and minimise the risk of future litigation.

Asset protection cannot be ignored

A succession plan should not merely transfer wealth, it should also protect it. Future risks may include relationship breakdowns, insolvency, creditor claims, workplace incidents, legal proceedings and health-related events.

The appropriate use of trusts, companies and carefully structured ownership arrangements can minimise exposure to these risks.

While no structure provides complete protection, proactive planning may significantly improve the long-term security of family assets.

Fair does not always mean equal

One of the most difficult conversations for farming families involves the distinction between fairness and equality. A farmer may wish to divide their estate equally among their children. However, an equal division of ownership does not always produce a fair or feasible outcome. If one child has spent twenty years working in the business and intends to continue farming, while the other children have pursued different careers, distributing the land equally may undermine the viability of the farm. If farm land must be sold to fund equal distributions, the consequence may be the loss of the family business altogether.

The challenge for farming families is weighing up two competing objectives, being the preservation of family harmony and the preservation of the farming business. This unique position requires careful contemplation of the familial, legal and commercial implications.

Many successful succession plans instead seek to achieve fairness through a range of mechanisms, including life insurance, staged transfers, different asset allocations, buy-out arrangements and long-term leasing structures.

The objective is not necessarily to provide each child with precisely the same outcome, but rather to make commercially sustainable arrangements to reflect each person's circumstances and contributions.

Planning early creates more options

The most successful farming successions involve thorough planning, discussion and gradual implementation. Planning early allows owners to consider restructuring of ownership, taxation issues, family expectations; the prevention of disputes and the preservation of family relationships.

Fundamentally, adequate planning provides the next generation with an opportunity to develop the requisite knowledge and skills to operate the business successfully.

Next Steps

Succession planning for farming families is far more complex than simply preparing a will; it is imperative to carefully consider property and commercial law considerations of land ownership, legal structures, leasing arrangements, business operations, finance and asset protection.

The key question is not simply who receives the farm. The real question is whether the legal and commercial framework will allow the farm to continue thriving for future generations.

With proper planning, farming families can protect both their legacy, family harmony and livelihood, ensuring that the business remains productive, profitable and capable of sustaining subsequent generations.

Contact us for expert advice on all aspects of preparation a suitable succession plan and the associated transactions arising from it.