Knees Sore, Head Hurts
The knees are sore, the back hurts and the tractor is noisy. Worse, the cash has gone and the only thing working well is the national superannuation.
Maybe it's time to look at hanging up the farm boots.
If this is you, then don't make any rash decisions. Firstly, you need to lead from the front and not get pushed too much from behind or from the side. Leading involves good thinking, planning, decision making, timing and cash. Being pushed from behind involves resistance, frustration and confrontation. Make sure you are on the right end of all of this as nothing well planned tends to happen overnight.
Your son - let's call him Johnny - has been with you for 10 years and has been very supportive. Johnny's wife likes shopping but this is his problem, not yours. Johnny has a 20 per cent share of the farm assets - that means land, stock, plant and debt - and is capable of managing the property's sheep, cattle, vehicles and plant. Johnny works a lot harder than you, but plays a lot harder as well. You do though notice some of your own bad traits showing up in Johnny such as swearing at the wrong dog, being influenced by the tractor colour and feeling that the high overdraft is the bank's problem.
Your two daughters get on well with mother, but find you unpredictable and difficult to argue with, mainly because you never seem to have any money when it really matters. You have told them both many times that a large part of their inheritance is buried deeply in the farm, but the girls only want to talk about the here and now, not the future and the maybes.
Your spouse has to deal with your self-inflicted pain and your difficultness and feels that succession and retirement are better looking options, but she is going to be really annoyed if the first thing daughter-in-law wants to do is upgrade the kitchen and the bathroom.
Mum, Dad and Johnny agree on the overall concept and have asked their advisors to put down on paper any fishhooks that they might see. Dad is worrying about having enough income off farm and son is worrying about having enough income on farm – this 'mix' of viability on farm and off farm is a crucial planning issue for both parties.
Dad has been hammering away at the farm's term debt over the years and Johnny can now see how dad has helped all concerned with this approach, including his two sisters.
Mum does not want a fancy house, but wants it to be nearer facilities, have space for a good garden, have some spare bedrooms, be warm, be well landscaped and have a warm sunroom that dad can use to read, keep out of her way and snore in. Dad has only just realised that he hardly has any votes on this house issue so he is keeping his powder dry for the new car and the new boat issue.
Dad does not see why he and mum now need two cars, but his dry powder approach has not worked – two cars are apparently essential so dad wants to have the first new car he has ever had in his life. With 50 per cent of the net assets belonging to dad he is going to fight on this issue to the bitter end. Dad has never really had iron disease, but only because he never had enough money to pick up and develop this disease.
On their retirement mother wants to be able to give each of the two girls’ individual trusts and their hard working husbands a lump of capital cash of hopefully $250,000 each. Mum knows that once Johnny starts developing the back farm block there will not be any surplus capital cash available from the farm - for all sorts of valid reasons - until Donald Trump builds a 25 foot wall between the United States of America and Mexico.
Dad and Johnny feel that July 1 next year is the best takeover date. Mum is already looking seriously at travel brochures, dad is looking at cars, daughters are looking at house mortgage reductions, Johnny is chaffing at the bit and Johnny's wife has house plans – even the bank is happy.
Dad and the family accountant have calculated that mum and dad will need:
- $650,000 to buy a house off farm.
- $75,000 for dad's new car and fancy trailer.
- $20,000 for mum's (and dad's) second ever overseas holiday.
- $500,000 to lend in total to the two girls trusts.
- $20,000 for legal, accountancy and valuation fees.
- $5,000 for shifting their house contents 115 kilometres to a new house.
- $40,000 for dad's jet boat and trailer.
- $25,000 for a financial buffer for mum and dad.
This brings their subtotal to $1,335,000, less the $282,000 they have saved over the years and $3,000 less the trade-in value of dad's existing car. This means that they will need $1,050,000 in capital monies from Johnny and the bank.
The debt in this example still owed by Johnny to his parents will be $2.5 million at an interest rate of 2 per cent which, with mum and dad's national superannuation income, will mean they will have a gross taxable each year of the order of $80,000.
On the accountant's suggestion, Johnny has also taken over the ownership of his father's Whole of Life Insurance Policy which had a surrender value of about $150,000 and a death cover of about $600,000. Johnny will continue to pay the annual premium of about $4500. Dad has had the policy for 37 years, but feels at age 67 that Johnny may need to keep paying the policy for another 30 years, all going well. Dad feels that his son's decision is close to gambling on dad's life.
Mum wants to see each of the two girls getting another $750,000 each upon her and dad's death – the $650,000 house + section and life insurance of $600,000 should enable Johnny to scramble through on this issue in due course. The two sisters have been well educated and have finally appreciated that mum and dad have acted as debt-free bankers throughout their education years.
This is all character building stuff, but sometimes people feel their character is built enough and farm succession and its consequences has its challenges. Farming fathers and husbands often learn much more in the period after retirement than they ever learnt in that 65-70 years leading up to retirement.
Dad has often said that life is uncertain and that really we should all be eating our desserts before the vegetables.
Never forget that if it was easy to be in business then everybody would be in business.
Pita Alexander is a specialist farm accountant at Alexanders.