Devil in farm structure detail
Children returning to a family farm business should be cautious about immediately taking on directorship roles, according to Pacer Legal managing principal Stephen Park.
While this might be a "feel-good" approach to introducing children to the business, Mr Park said it could unnecessarily expose them to liabilities for existing farm debts.
"A directorship of a farming business doesn't necessarily mean ownership of assets or equity in the business," he said.
"But it does mean you will expose yourself to personal liability for farm debts, because banking practice dictates directors must provide personal guarantees and indemnities.
"So in effect you are exposed to liabilities without the benefit of any ownership in farm assets."
Speaking at the Agricultural Women - Wheatbelt East business forum in Merredin last week, Mr Park said it was important to remember a director of any company was not only responsible to its shareholders, but also to its creditors.
"The last thing you want to do, coming back into any farming business, is to provide personal guarantees, particularly if you have assets off-farm," he said.
"When I became involved in my family farm and business, the first thing I wanted to do was sign the farm cheques.
"But in retrospect, children should have the experience of farming without the immediate exposure to liabilities."
Mr Park cfited numerous case studies in which children coming back onto a farm had lost off-farm assets because of the financial collapse of the farming business.
"But these situations never need to happen," he said.
"There are alternatives to being exposed to the liabilities of the business, such as becoming a shareholder of the company."
"Shareholders have no liability except the value of their share."
Mr Park urged farmers to read through trust deeds and understand the implications of a trust arrangement.
"When considering succession, it's important that all parties understand the legal implication of their chosen structure," he said.
"Accountants promote family trusts, but how many people have actually sat down and read the fine detail of their family trust deed?"
Mr Park said the inclusion of a deadlock clause to resolve disagreements was critical for the long-term survival of a business, particularly where control was shared between siblings inheriting control in a trust arrangement.
"In the absence of dispute resolution provisions, we would have to then go to the Supreme Court," he said.
Mr Park said he often advised clients to appoint a trusted arbitrator and to remember the trust's vesting date.
"Legally, no trust can run for longer than 80 years, and once the trust has been vested, you cannot reverse this," he said.
"If you don't distribute your assets before that vesting date, then they will automatically be distributed evenly between the trust members."
Mr Park said these beneficiaries could comprise children who had left the farm and the automatic passing of legal ownership of farmland to those people could be what he termed an unpleasant surprise for the child who had been working on the farm for many years.
Mr Park also urged farmers in a partnership arrangement to formalise this with a deed of partnership.
He said many people were unaware that in the case of a death, the partnership was immediately dissolved, which would lead to the banks freezing all accounts until a new partnership was formed.
"Understanding your business structure and the introduction of children into those structures involves a lot of thought and planning," he said.
"As parents, it's your responsibility to hand it all over correctly.
"Strategic planning for your business is a bit like servicing your car. You need to continually service your succession planning.
"Don't assume that just because you did it 15 years ago, things haven't changed."
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