The Rural Voice, 1995-01, Page 34Passing the farm to
the next generation
Quick! Can you name three ways
to pass the ownership of your farm to
your son or daughter? The answer is
by bequest, by gift, or by sale.
Chances arc you knew the answer to
the question. In fact if you arc at the
stage where you arc considering such
a transfer you may be weighing out
the pros and cons of each method.
Transfer by bequest:
Pros — Most farm assets can be
transferred from parent to child upon
death through a will, free of
immediate tax.
Cons — Transferring by wills alone
can cause uncertainty for children
and can be contested by other
beneficiaries.
Transfer by gift:
Pros — It helps the child gain equity
that can in turn be used to borrow
other capital. A gift can defer income
tax on capital gains and on recapture
of capital cost allowance.
Cons — Parents cannot, in some
circumstances afford to be so
generous because of their own
retirement needs.
Transfer by sale:
Pros — Some children would rather
buy at Fair Market Value than face
the uncertainty of a will. Parents can
take different forms of security for
the sale.
Cons — The sale of assets at Fair
Market Value to family members is
the same as a sale to anyone else.
You need to do some additional
planning to create the desired tax
results.
If you choose the latter method
you have several options.
Outright sale: In some cases a child
may prefer to get financing from a
private source. Sometimes a child
prefers owing money to an institution
over payments to a family member. If
you sell at fair market value, normal
tax calculations will be made and
some additional planning will be
needed to take advantage of tax
deferrals.
Sale with mortgage back: Title to
the property is exchanged and the
parent receives security in the form
of a mortgage registered against the
title. This arrangement can be helpful
30 THE RURAL VOICE
Advice
when the child cannot raise the
necessary funds or the parent wants
to spread some non -deferred capital
gains over several years.
Agreement for sale: In this
arrangement the child receives
possession of the property but the
parent retains title on the property
until the payment is completed. The
parent has a stronger security and can
be more forceful in demanding
payments.
Promissory note and bills of sale:
These instruments arc most
commonly used to transfer inventory
and equipment and to a lesser extent,
land and buildings. But a promissory
note is not a security for a debt but
only evidence of the debt.
Option to purchase and buy sell
agreements: These are used to give
some assurance to children who are
involved in a farming operation but
do not have title to the farm property.0
By Rob Gamble
Business Management Advisor
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