Nerissa McNaughton
Welcome to part three of seven. This series is designed to help every farmer with affordable, easy, hassle-free continuity planning.
Planning for farm succession is no easy feat. It’s an emotional, financial and logistical challenge that can leave families feeling stuck and unsure of where to begin. That’s where 33seven comes in. With a focus on farm continuity planning, 33seven helps farmers and their families smoothly transition their legacy to the next generation. Their tag line, ASK A FARMER WHO KNOWS®, says it all. Founder and farmer Derryn Shrosbree started the company after witnessing the challenges his own family faced by overlooking continuity planning. Determined to help others avoid these pitfalls, he developed a plan that simplifies the process, ensuring your farm and family can thrive both now and for future generations. It all begins with understanding your farm’s value – and the factors that influence it.
Think for a moment about your children. You love them and want the best for them. You worked for years to help set them up for success. So, why would you go to the bank, take out a large loan in their name, and let them be surprised when you pass on and the hefty payments land in their lap?
“Nonsense!” you say. “I would never do that, and bank loans don’t work like that!”
Maybe not, but if you have not engaged in continuity planning for your farm, that is exactly what you have already done. From business debt to taxes to splitting the farm among beneficiaries, those liabilities don’t die when you do. If you have not planned for these contingencies while you are alive, then you are essentially undoing all the progress you wanted to hand over to your children.
In his decade plus of working with clients, mostly farmers, Shrosbree knows that about 88 per cent do not have a continuity plan.
“And why is that?” he notes. “Here at 33seven, we strongly believe it is because billable hours and invoice fatigue are major obstacles to getting a succession, or continuity, plan in place. It’s difficult enough to start – many farmers don’t know where to start. Then the bills pile up. Accountants, lawyers, consultants and none of them are talking to each other, creating an expensive pile of confusion. What farmer wants to deal with that when they can just go outside and plant canola?”
He continues with sobering statistics. “We see only about 12 per cent of farmers having a continuity plan and here is why this is a huge problem. According to Farm Credit Canada, $600 billion of net worth in the farming community will change hands in the next eight to 10 years; $528 billion does not have a continuity plan. That is a tsunami of tax coming down the pipe – for your beneficiaries.”
If you are working hard to create a legacy, don’t turn it into a liability.
Shrosbree adds, “Kicking the can down the road by planting canola and going to look after the cows – that’s great for the short term but ultimately, it’s not going to end well.
“Since farm and land value have gone up so much, the tax bill upon your death is now so high that the farm cannot go to a bank and borrow money to pay it. The other option is, do you want to sell acreage, a.k.a. your legacy? No farmer in the history of humankind ever wants to sell acreage!”
Make no mistake, the tsunami is coming. The average age of the long-term North American farmer is 60+, so if you don’t know anyone facing this issue at the moment – wait a year or two. It’s inevitable.
Shrosbree explains, “When they start dying, that’s when the tsunami comes and if they don’t do the planning and they die, the tax bill accrues.”
It’s not hopeless. 33Seven has a long-term solution that allows farmers to deal with one firm and avoid excess taxes, invoicing and all the fatigue that can come with continuity planning. It’s a solution heavily designed around and for farmers, created by a farmer who has lived through the disaster of what happens when the patriarch passes and the farm lands in limbo – with more than one sibling wanting to profit from it whether they have invested time and dollars into the farm or not. For Shrosbree, it’s deeply personal.
Here is how 33seven fixes the liability issue.
“For example, let’s consider a farm worth $10 million. If you have a $100 million farm, just extrapolate it by 10 and you’ll get the same numbers. Let’s say 50 per cent of that farm is tax exempt. Let’s say you have an ice-cream shop, or a petting zoo or add roof trusses or something that’s non-related to the farming enterprise, that 50 per cent of your enterprise value is going to be taxed at your highest marginal tax rate. Upon death, your tax bill is around $1.25 million (25 per cent). Your legacy is $10 million, your liability is $1 million. If you die today, who writes the cheque for a million bucks?”
He admits the numbers make it sound easy. Hey, if the value is $10 million, the liability is manageable! Right?
Not really.
“I have not met that many farmers who have a million dollars just sitting in their chequing account. Most farmers are asset rich and cash poor. Therefore, that million dollars becomes a huge problem when you die, because now who’s paying the bill? Your children. Now the opportunities are limited because to raise the money the beneficiaries must sell acreage or accrue debt.”
Shrosbree cannot stress enough, “You have to plan ahead. Two bad options – you pay exorbitant tax and get invoice fatigue or your kids pay the liability in the end. One good option is you get a third party to pay the bill.”
Wait … what?
He sighs, knowing that this is where most farmers give up.
“I’m going to say three words that people really don’t like, but we’re going to have to change that mentality. When they hear these words, most farmers would rather grab gasoline, pour it upon themselves and light themselves on fire; but it’s 2025 now so we’ve got to get with the program.”
Brace yourself for those three words. Are you ready?
“Leveraged life insurance.
“You, the farmer, goes out and buys a life insurance policy on your life paid for by the farm,” Shrosbree dives into the explanation. “Let’s say it’s a $100,000 premium. Farmers now lose their mind. They’re like, $100,000? I’m never paying that! Let’s just get over that – bear with me. Your farm pays the $100,000. We go to a bank or a credit union. We get you the $100,000 back because you borrow back the premium. Therefore, you have the same amount of money in your account as when you started.
“You get your money back and you can go and use it for the farm purposes that you were going to use it for anyway. The cost of that is the net interest expense on the loan. The loan is, on average, net interest 2.5 per cent. It’s $2,500 a year and you’ve just saved yourself a million-dollar problem. That’s $200 ($2,500 divided by 12 is $200) a month. For $200 a month, you’ve just made sure that your entire farm moves from your generation to your children’s generation with zero tax implications for $200 a month. That sounds like a great deal to me. When the referred are gone, your on-farm and off-farm children will still have supper together.
“We have two transactions. One is leverage. One is insurance. Combine them and you get to keep your farm. Put away that gasoline! We have a solution for you. Don’t worry about it. You’re going to be OK. That’s what we do; solve your estate problem, maintain the farm liquidity, prevent the beneficiaries from having a liability and it’s only costing you $200 bucks a month.”
Shrosbree concludes, “At 33seven, we bring clarity, control and a farmer’s perspective to every transition we guide. Take the first step today and start securing a future your family can be proud of for generations to come.”
This is the third instalment of a seven-part series designed to provide you with the tools and insights needed for seamless farm continuity. With the right plan, your family’s legacy will remain strong and conflicts can be avoided. Stay tuned for part four and explore more at www.33seven.ca.