Education and a gradual implementation process helped deliver mutually beneficial succession and estate planning outcomes for a retiring farming couple and their married adult children. Mark Story explains.
Trying to provide equally for each of their three children was already a delicate and oft-stressful task for Riverina-based mixed farmers, Peter and Kerry Stephenson. But it took on added sensitivity when it came time for the couple to exit the family farm and retire. In 1999 the Stephensons – then in their early 50s, and looking to diversify their assets beyond the farm gate – crossed paths with local financial adviser Justin Mulcahy at a farm expo.
Over the ensuing decade, Mulcahy was instrumental in providing a range of financial planning services to Peter and Kerry, and their three children. This encompassed everything from establishing a self-managed super fund (SMSF) and separately managed account (SMA) structures, acquiring a portfolio of direct shares, through to personal insurances. But Mulcahy’s biggest challenge came two years ago when Peter and Kerry charged him with get- ting the entire family to amicably agree on the future transfer and distribution of their farming wealth.
Mulcahy’s overarching brief was to help Peter and Kerry successfully exit their farming enterprise to fund their retirement. The success of this outcome was conditional on two “not negotiable” caveats. Firstly, the farm had been in the family for five generations, and it was critical to Peter and Kerry that it remained so after their exit.
Secondly, given that any proposed outcome would significantly impact their future inheritance, it was essential that all three children – John, Stephen and Cindy – and their spouses were completely happy with the proposed farm sell-down strategy and its execution. To significantly complicate the proposed farm succession plan, one son (Stephen) wanted to secure his future in farming, while John and Cindy both had independent careers and little interest in running or owning farming assets.
Selling the farm to Stephen was regarded as a no-brainer, especially as it would address two critical considerations – namely fulfilling Peter and Kerry’s exit strategy, while facilitating Stephen’s desire for farm ownership, which he couldn’t otherwise afford.
BALANCING ACT
Executing this strategy presented a real challenge for Mulcahy. While Stephen would obtain immediate benefits from the buy-sell agreement with his parents, the other two siblings’ future inheritance was exposed to multiple variables, not the least of which was how long Peter and Kerry would survive.
But Mulcahy ensured that John and Cindy were aware of the potential embedded within the value investing methodology being brought to bear on their parents’ financial portfolio.
“What helped to galvanise the trust of John and Cindy was the one-on-one time spent with them in their early 20s on understanding investing principles,” says Mulcahy.
“Based on a 12 per cent annual compound growth of their parents’ $2 million SMSF, they had sufficient comfort that our value investing strategy was delivering considerably more value than the broader market.”
Given that both land values and revenue were on the up – following the easing of both drought and GFC conditions – Peter and Kerry agreed with Mulcahy that it was a good time to sell. But with disagreements surfacing between spouses as to how any sale to Stephen should be executed, Mulcahy was quick to suggest a structured succession plan.
“The only way to quash any opportunity for ill will before, during or after the sale of the farm was to encourage as much buy-in as individuals felt they needed,” says Mulcahy.
He says key provisions within a succession plan that required mutual consent from all family members included: farm valuation, how to proceed with adequate successor funding, and how to provide for each dependant equitably.
“To ensure that nobody would be marginalised or overlooked during what could have been a stressful decision-making process, it was important to provide succession planning education,” says Mulcahy.
“The entire family was invited to attend a series of round-table discussions where all issues and considerations could be aired and mutually resolved before moving forward.”
Mulcahy’s succession plan was subsequently broken down into five steps:
1. Education on what was involved in succession planning;
2. Negotiating an alignment between all family members as to what a good outcome looked like;
3. The strategic planning;
4. The actual implementation; and
5. The documentation and support given to all family members.
THE SUCCESSION PLAN
Much of the initial process started with making Peter and Kerry feel comfortable with gradually letting go of the farm and handing control over to Stephen. Mulcahy also made them complete a retirement gap analysis to determine what was required from the sale of the farm to ensure they lived comfortably once retired.
While future income modelling was important to Peter and Kerry, what kept them awake at night was the potential for sibling rivalry.
“We were very mindful that we were effectively front-ending Stephen’s inheritance, and so it was important to ensure that our other two children, and their families wouldn’t be disadvantaged as future beneficiaries of our estate,” recalls Peter.
Holiday money and incidental purchases aside, Peter and Kerry concluded that they could live more than comfortably on around $60,000 annually. Given that it would provide sufficient wealth to fund their modest lifestyle, Peter and Kerry willingly agreed to accept a lower than market value up-front for the sale of the $5 million farm and $1 million in plant and machinery.
