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More off-farm investment, less sweat equity, could benefit both generations.
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Many farm families plow their profits straight back into the farm. The upside: the farm has capital to operate. The downside: when a new generation takes over.
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“Very few farmers diversify their portfolio with off-farm investments,” says Yvonne Thyssen-Post, Farm Business Advisor in Truro, Nova Scotia. “For most, all of their life savings are in the farm.”
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Hold on, some will say. The parents can live off of the farm they’ve built.
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The trouble is, if the farm has significant debt or there are several siblings to consider, there might not be enough to go around.
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What’s more, if the incoming generation has worked on the farm but not been paid a reasonable salary, they may lack the funds to buy the family farm from their parents. The fuzzy math of ‘sweat equity’ can complicate matters.
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“It is rare for the next generation to make a cash contribution,” says Thyssen-Post. “In any other business, you have to make a down payment.”
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She recommends that farm families think about retirement years or decades before it’s an issue. Invest off-farm early and steadily. Pay salaries rather than count on sweat equity.
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“If the parents invest early on and consistently, they can reduce the demand on the farm to fully fund retirement,” says Thyssen-Post. “That’s going to make a huge difference – both to the retiring parents and to the incoming farm owners.”
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Looking for ideas your farm can use? We’re here to help.
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This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
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