By Claude Cloete
Let us first deal with death. I have picked up in discussions that there are many farmers who have not done adequate estate planning.
The biggest single cost any family business must deal with is death. This is when capital gains, estate duty, transfer costs and siblings will need to be paid. The aim should be to die with no assets in your name. It costs money to get into this position. It will cost more if you die with assets in your name.
Many people struggle with this concept of “giving” everything to the next generation. They are going to lose everything and starve to death. With proper planning, proper trust deeds and if necessary, the right outside people involved this should not happen. If you genuinely believe your children are going to destroy everything previous generations have built up, then rethink who inherits, if at all. Inheritance is a privilege not a right.
This becomes more complex with farms that have been in the family for generations.
Old businesses have a recipe that works, and it will do no harm to ask them how they do it. It must be remembered that inheritance within an estate will never be fair. Never. By trying to make it fair you could sink the business.
An advocate friend told me many years ago. It is important to use qualified, experienced people to do your estate. Our accountant did my father’s estate, and it took six weeks to finalise. His daughter is now doing mine. In the past the Deeds Office and Master of the Supreme Court all still were functional. Now your Executor must do their work for them. The quicker an estate is sorted out the better.
All my land is in a trust. The farming business (livestock, machines, etc) are in a (Pty) Ltd, Company. This means that when I die the business will continue. This process costs money, a lot of money.
There are many options and systems which can be put in place to reduce and manage these costs. You need qualified people to help you, and it cannot be done on the back of a cigarette box.
By putting your farmland into a trust, you fix the value at the current value. Any growth in value will be within the trust. If the farm stays in your name, the growth in value is in your name. On your death this growth in value will be subject to estate duty and capital gains tax.
It is important to note that if any land is sold by the trust the tax implications and capital gains are quite different to if it was “private” property. Discuss all details and consequences with your accountant. If you do not understand the process, then ask questions until you do understand. There are no stupid questions here. If your estate is not done properly, your children will be asking the questions. Like everything, ask the questions now.
Trusts are complex entities and require people who know what they are doing to set up. The trust deed must be written in such a way that the “living” people (beneficiaries) still have a say in the affairs of the business. A trust has capital beneficiaries as well as income beneficiaries. Choosing who fits where and who benefits is critically important. The trust deeds cannot be changed willy nilly. In our case when the trust was set up no sons were to farm, so both sons were capital beneficiaries. Now 20 years down the line one son is on the farm and his brother is in the city. What this means is that the son on the farm is working an asset that is half his and half his brother’s. We have had to change the Trust Deed, and it cannot just be changed. The Master of the Supreme Court must clear changes. In effect the brother in the city must be paid out for his share of the property.
This is clear and understood by everyone. It would be unfair and unrealistic to expect the son on the farm to farm land that is not his. The point I am making here, all decisions, deeds, contracts will have consequences long after you have died. It is important to use people that know what they are doing, it is expensive but would be much more expensive if done on the cheap and incorrectly.
It is a known fact that criminals use trusts to “hide” their assets. For this reason, the laws around trusts are continually changing and trusts are continuously monitored by the authorities. But that is no reason to avoid a trust.
A few years ago, the system of standard values on livestock was abolished. This has had major implications for farmers. For our business it meant 6 million in capital gains. Together with our accountant we are sorting this out, legally, but it takes time. The accountant has asked that I please wait at least six years before I die!
Planning for death is an ongoing process. The laws are continually changing. The best time to start planning was yesterday. The process must be done by someone who is at all times clinical as there is always a lot of emotion when family is involved.
It is always important to use someone who knows your business. Your accountant is already involved and is the best to do your estate planning. There are firms specialising in estates. Remember that shifting from your current bookkeeper or accountant to a new company can be very disruptive for the management of your business.
It is important that whoever does the planning is aware of the family dynamic. Are there siblings who will inherit? Who will care for and fund the surviving parents? It is important that all family members understand and are aware of the details in an estate. This must be done while you are still alive.
I know of too many people that at age 50, when their father dies suddenly, discover that the farm is not theirs or they have to pay out their siblings. To be able to do this, they suddenly have to sell their farm – not ideal when you are 50 years old!
Many people put off sorting out their estate because they do not want to be seen to be giving preferential treatment to certain family members. The longer you delay the bigger the mess and costs when you pass on. That’s why it is important to get an independent person involved. They are clinical and are used to dealing with difficult family situations. They are expensive but a lot cheaper than doing nothing and having a massive cost thrust on your family when you die.
The aim of an estate plan is to pass on a functioning business that is carrying as little baggage as possible.
Debt. With death we have no choice, but debt is your choice. There is good debt (buying a farm, improving infrastructure) and poor debt (extra machines, fancy cars).
We need to get into the habit of paying income tax. There is only one way to avoid income tax and that is by spending more than your income. The result is more debt. The tax system is designed to keep you on your farm. Believe it or not.
If you are paying income tax on a regular basis you will not go bankrupt.
Divorce. No comment.
I repeat, making changes is difficult. It requires focus and an ability to shut out the background noise. Just a final note – if it is not broken, don’t fix it!
Claude Cloete is a commercial wool and beef farmer in the Dordrecht district of the Eastern Cape.
