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Farmers Planning for Retirement — Slowing Down and Enjoying Life
A version of this article originally appeared in the January issue of Country Guide.
Farmers retire? Retirement is not something farmers think about often, if ever. It is important for farmers to think about retiring, to slow down and enjoy life, to minimize the adjustment when the time comes. Formulating a retirement plan should be part of the conversation when creating a succession plan. The emphasis of much succession planning is on transferring the business to the next generation with little consideration of the retirement plan for the outgoing generation.
Questions to ask oneself are:
- How do I want to retire?
- How can we fit that into our succession plan so we can retire the way we want to?
A retirement plan that considers lifestyle and how to financially support retirement should be incorporated into every succession plan. Successfully implementing a retirement plan into a succession plan requires not only proper planning, but looking at the mechanisms of transferring the farming operation from the perspective of the retiring farmer.
Retirement Plan
A retirement plan involves two primary considerations:
- Financial; and
- Lifestyle
The retirement plan needs to outline what is going to happen in retirement, being the lifestyle, and how it will be financed. Lifestyle considerations include desired leisure activities, how involved the retirees will be in the ongoing business and living arrangements. The financial component considers any funds the retiree has saved (i.e. RRSPs, RRIFs, CPP, life savings, etc.) and if there are any supplemental funds from the farming operation. These considerations need to factor into the legal documents drafted to support the succession plan.
Lifestyle
A farmer doesn’t have to retire from the operation cold turkey, and it is often the best case scenario to gradually transition management and control from one generation to the next. By bringing in the next generation to take on a managerial role, a farmer can take a step back and see where they can delegate responsibility. This can be difficult to pass on the management roles, but it’s important to allow the next generation more involvement and the farmer slowing down can still be involved to provide guidance and input on bigger decisions.
The lifestyle does depend on the financial stability of the farming operation and if there are multiple families pulling income from the farm. It may not be possible for a farmer to step away as their labour is required to make the operation financially feasible.
We recommend incorporating the transition of managerial roles into a partnership or shareholders agreement where specific milestones, such as the reduction of equity of the outgoing generation below a certain threshold or at a specific time. For example, a farmer may be required to resign as an officer of a farming corporation after 500,000 of their special shares are redeemed.
Financially Supporting Retirement
Many farmers put their life savings into the farming operation and when passing the farm to the next generation; if that is by sale of the business, gifting or some other method, they will most likely need funds from the farm to fund their retirement.
A shareholder’s agreement is an important document that can outline how the retiree would be paid from the farm corporation to ensure the retiree receives an income and that allows the farm corporation to remain financially stable.
Different options for someone to be paid from a corporation is by wages, redemption of special shares or dividends. Wages are straight forward as they’re paid to the farmer through payroll and taxed as employment income. The retiree may exchanged their common shares to special shares as part of reorganizing the farm corporation to pass the business onto the next generation. Each year the retiree may redeem so many special shares to live off of. The retiree may be paid by dividends each year, dividends can be paid out on either common shares or special shares. Tax implications would be considered for what is the best method. We recommend adding an adjustment clause tying the payment amounts to inflation to ensure your purchasing power does not decrease over time.
From a legal perspective, it is important to negotiate releases from personal guarantees to any financial institutions; ensure there is sufficient equity and cash flow in the operation to fund the lifestyle the farmer wants to have; and obtaining security over assets to ensure financial security. A shareholders agreement or partnership agreement should contemplate a reversal of the succession plan if the next generation mismanagements the operation. This may seem like a harsh outcome, but so is living on less because you failed to ensure your financial security in retirement.
How to come up with a Retirement Plan?
As mentioned above, the retirement plan is a critical part of succession planning that can be minimized during the process. Figure out how much income is needed to support your lifestyle. The lifestyle cost needs to be within what the farm operation can support and still allow for growth. The goal is not to distress the farm’s financial situation or to disrupt the other parties surviving off the farm operation. Everyone needs to be in agreement on the retirement plan, or it could mean that the scope of the operation needs to change and other assets sold off to support the plan. Once determined, draft and implement accordingly with milestones that allow for gradual succession.
About The Authors
If you have any questions with regard to planning for retirement or this article, please contact Jon Barnett or Ashley Podolinsky. Both have extensive experience with agri-business and succession planning.
