Have you ever considered the importance of discussing the future of your family farm? Many families avoid this topic, but it is crucial to the success and longevity of the farm. In this article, we explore the benefits of having open and honest conversations about the future of your farm and provide tips on how to approach this sensitive topic.

The benefits of discussing the future

Engaging in conversations about the future of the farm offers numerous benefits. The most obvious advantages include reaching agreements on inheritance, management, and family involvement in its operations. This proactive approach can prevent heartache and reduce legal fees in the long run.

There are also less obvious benefits. For instance, banks may be more inclined to lend to a farm with a clear succession and business plan, as it represents a safer investment. Open discussions ensure that all stakeholders, regardless of their current level of involvement, understand the farm's short- and long-term goals. This transparency reduces inter-generational and family friction, contributing to the successful operation of the business.

Moreover, when plans are discussed and goals are agreed upon, the farm is likely to become stronger, supported by a happier and more cohesive team.

In summary, communication is key!

How to approach the topic

If you’re keen to have a conversation about the future but hesitant of bringing up the topic, it might be best to start gently. Allow family members time to mull things over and gradually warm up to the idea of having a conversation. A good starting point could be reviewing your current partnership agreement or considering the creation of one.

The importance of a partnership agreement

A partnership agreement is crucial for the success and longevity of the farm. Without one, you are relying on outdated legislation that may not be suitable for a modern farming operation. A partnership agreement allows for discussions on profit sharing, expectations of time and effort, and provides a succession plan in the event of retirement or death of a partner. Additionally, a well-drafted partnership agreement can provide tax benefits and clearly define what constitutes partnership property.

If you don't have a partnership agreement, you will have to rely on Victorian legislation! If you're running the farm with two or more people, sharing the profits, and you're not set up as a company, then you have a partnership under the Partnership Act 1890 (the Act). Without a partnership agreement, the Act steps in to regulate how your partnership is run. However, the Act is unlikely to be suitable for a modern farming operation for several reasons:

(a) Equal sharing: The default position under the Act is that all partners share equally in both the capital and profits of the business and in liability for the losses. However, there is no requirement for partners to work a particular number of hours and no entitlement to draw a salary. This can lead to one partner feeling that they are doing more than the others, and it does not take into account a partner's experience or capital investment. One partner may feel they are entitled to a greater share of the profits but may not have had that conversation with the other partners. A partnership agreement provides the opportunity to discuss profit sharing, expectations of how much time each partner will contribute to the farm, and whether they will be paid a salary for their work.

(b) Dissolution: The Act means that the retirement or death of a partner automatically dissolves the partnership. The partnership has to be started anew with any partner change, and there is no succession plan in place which can be problematic. The estate of a deceased partner will be entitled to the partner’s capital and profit share, which can be difficult for the surviving partners to pay.

A partnership agreement can save the partnership from dissolution due to retirement, incapacity, ill health or death. It can prevent the automatic dissolution of the partnership, allow for new partners to join, and provide for what should happen to a deceased partner’s share of the partnership’s assets and profits. For example, the deceased partner’s share could pass under the terms of their Will or the continuing partners might be given the option to buy the share, usually allowing them to pay for it over several years.

(c) Management: Under the Act, all partners have the right to manage the business. However, if partners fall out or one is accused of misconduct, the Act does not include any provision to suspend a partner while the issue is being resolved. A partnership agreement can outline the procedures for handling disagreements or serious allegations of misconduct among partners.

(d) Tax benefits: Additionally, a well-drafted partnership agreement can offer tax benefits by clearly defining what constitutes partnership property. As long as the business counts as a "trading" business, partnership property is eligible for 100% Business Property Relief, whereas personally owned property may only qualify for 50% relief.

What should you do next?

In conclusion, discussing the future of the family farm is crucial for its success and longevity. A partnership agreement is a valuable tool in facilitating these discussions, providing a clear plan for the future and potentially saving tax along the way. Don't shy away from this important topic - start the conversation today.