Estate planning – the family business of farming

For the producer estate planning is not as simple as it seems – it involves a family aspect which can complicate the process.

Estate planning can be defined as the arrangement, management, securement and disposition of a person’s estate so that he/she*, his/her** family and other beneficiaries may enjoy and continue to enjoy the maximum from his estate and assets during his lifetime and after death, no matter when death may occur.

It is therefore the process of a client managing his estate during his lifetime and ensuring that there is a contingency plan when he dies. This planning process involves the law of property, wills, trusts, insurance and tax law. As per the above definition, the estate should be enjoyed by the client and his family during his lifetime as well as after his death. Estate planning for producers, like other estate plans, has the usual financial aspect, but the element that makes it different is that in most instances it also involves a family succession aspect. With estate plans for producers, the successor of the family business is usually either a son or daughter. The direct family involvement relating to a producer’s estate plan is a rather sensitive, but necessary issue.

This article will briefly look at the various taxes, administration costs and the family succession aspect of estate planning for producers.

The estate
A producer’s estate usually consists of assets and liabilities and when the producer passes away, his death results in a ‘deemed disposal’ of his estate. The deceased producer’s executor is tasked to first settle all the liabilities and pay all the taxes by making use of the liquidity available in the estate, prior to transferring the estate to the respective heirs. As mentioned above, the estate first needs to settle its liabilities. This is where most producers make the mistake of assuming that the plan stops here. It is one of the biggest misconceptions, as there are also numerous taxes payable when a producer dies.

Taxes
Income tax is payable (at the producer’s marginal rate between 18% and 45%) on the movable farming assets in the estate, for example farming equipment and livestock. There is also capital gains tax (effective rate between 0% and 18%) payable on any applicable capital gain on capital assets in the estate, which usually consist of the fixed properties or even shares in private companies. Finally, there is estate duty payable on the net estate. Estate duty is calculated at 20% on the first R30 million of the dutiable estate and at 25% on the value above R30 million.

Administration costs
Over and above the taxes, there are administration costs payable by the estate, for example master’s fees, valuation costs, transfer fees concerning the fixed assets and the executor’s fees which can be as much as 3,5% (excluding VAT) on the value of the assets in the estate.

The process of estate planning
Producers should during their lifetime structure their estate with the objective to minimise the above-mentioned taxes and administration costs and furthermore to make provision for any shortfalls. This is done with the help of various professionals, each specialising in a certain field. The team should consist of the client’s accountant, attorney, financial adviser and in some instances a legal adviser.

These specialists are all responsible for certain documents that are essential to the estate planning process:

• The accountant is responsible for the producer’s financial statements, without which it is in most instances impossible to do a proper estate plan.
• The attorney usually assists the client with the structuring of his will and trust deeds. The client’s will is the blueprint of the estate plan, and therefore, any estate plan without a will, would result in a fruitless exercise. The attorney is also in most instances the person responsible for the administration of the estate.
• The financial planner is the person who has access to the client’s life insurance products, which need to be structured in such a way as to cover the liquidity shortfall in the estate.

Each of these parties has their own specialised field. However, the estate planning process cannot be done in isolation, and the input of all the parties is required for an effective estate plan.

In some instances, the services of a legal adviser specialising in estate planning may be acquired. A legal adviser is a person who specialises in estate planning, wills, trusts, insurance and tax law. They usually assist the above-mentioned specialists in finding the best solutions in the estate planning process.

Holistic estate planning requires the client’s will, financial statements, trust deed, marital contract (if there is one) and policy schedule. The parties, with the relevant documentation at hand, can assist the producer in structuring his estate in a way to minimise estate taxes and administration costs. They can furthermore assist the producer in structuring his will to ensure that the estate is administered in a fast and efficient manner.

The shortfall
The shortfall in estate planning refers to there being a shortage of liquidity in the estate to settle the above-mentioned taxes, liabilities and administration costs. Should there be a shortfall in the estate, the executor can supplement the shortfall, by asking the heirs to pay cash into the estate, in order to prevent any of the estate assets being sold. The heirs could even borrow funds to settle the shortfall. Estate planning is a way in which a producer can ensure that there is sufficient liquidity in the estate to settle the shortfall.

The family aspect
Other people that also need to be involved in the estate planning process, is the producer’s family members. There is a saying that no one has the right to inherit. However, it could be regarded as an exception to this rule if a child is involved in the farming business. As stated earlier, the purpose of estate planning is so that the family can also enjoy the fruits of the person’s (producer’s) estate, but this means that the next generation is usually burdened with the responsibility of maintaining and expanding that estate.

The way in which a producer’s estate plan is structured will have a direct impact on the maintenance and expansion of the estate, which will consequently have an impact on the next generation. For example, one could consider bequeathing a farm to a trust of which a child and their descendants are the beneficiaries, rather than bequeathing it to that child in his own name. This will result in that child not having to make provision for certain taxes and administrations costs on the inherited assets in his own personal estate plan. The estate plan of the producer will therefore have a direct impact on the estate plan of the child.

In some instances, there might be a shortfall in the estate of the producer, and the child would for instance need to borrow money to settle the shortfall in the producer’s estate to avoid estate assets from being sold to cover the shortfall. In other instances, the child might be required to look after the producer’s surviving spouse, or he might even be required to buy out a sibling. Therefore, the involvement of the producer’s child (or children) in the estate planning process will provide the child with the opportunity to make provision for a shortfall in the estate. It is consequently clear that the child needs to be present during the estate planning process so that he can be informed of what to expect when the producer dies.

Conclusion
The points discussed above are but some of the aspects involved in estate planning for producers. Clearly, the family business of farming adds additional complexities that need to be considered when a producer does an estate plan. It is always important to note that there is no one-size-fits-all approach for producers and that each producer’s unique circumstances should be considered during the planning process.

As discussed above, it is vital for producers to always ensure that all the relevant documents and role-players are present when structuring an estate plan. The planning process is not a once-off event, and the plan will evolve as the producer goes through different stages in his life. This plan, however, always needs to consider the next generation to ensure the preservation of wealth.

This article does not constitute tax, legal, financial, regulatory, accounting, technical or other advice. The material has been created for information purposes only and does not contain any personal recommendations. While every care has been taken in preparing this material, no member of Liberty gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy, or completeness, of the information presented. Please consult your financial adviser should you require
advice of a financial nature and/or intermediary services.

Liberty Group Limited is a licensed life insurer and an authorised financial services provider (no 2409).

*he meaning he/she throughout the article.
**his meaning his/her throughout the article.