Retiring farmer selling off the farm

With no spouse and a disabled nephew, this Saskatchewan farmer is ready to close up shop

farmer surveys cornfield harvest
Photo: Thinkstock

In northwestern Saskatchewan, a 63-year old farmer we’ll call Rorie runs a mixed grain and cattle operation on 12 quarters of land. Helped by Sam, his 43-year old nephew, Rorie, who has never been married, keeps five quarters in wheat and oilseeds and grazes 80 cows on the remaining seven quarters.

Rorie has a lot of problems. Age has made it harder to work his herd. He wants to retire but never married. Sam is a good farm hand but has a mental disability that means he can never run the farm by himself. The problem: how to sell the farm and retire with enough income to live reasonably well.

Farm Financial Planner asked Rod Tyler, a financial planner who heads the Tyler Group in Regina, Sask., to work with Rorie. In his view, a plan for disposal of the farm and a plan for looking after Sam are feasible and will solve Rorie’s problems.

If Rorie can sell the pasture land for $420,000 ($60,000 per quarter) and the cultivated land for $500,000 ($100,000 per quarter), dispose of machinery for an estimated total of $360,000, and sell the cows at $2,250 each for a total price of $180,000, he will have cash proceeds of $1,460,000. Rorie’s capital cost works out to about $650,000, so his gain will be $810,000. That is just under the $813,600 lifetime capital gains exemption, Tyler says.

Rorie figures that he can buy a nice condo in Saskatoon for $300,000. That would leave $1,160,000 to be invested for income. He can add that money to his $80,000 RRSP and $280,000 in various savings accounts for total financial assets of $1,520,000. If that sum earns three per cent per year after inflation, it would generate $45,600 a year before tax. Add CPP at 65 about two-thirds of the maximum $13,110 at current rates or $8,784 and Old Age Security at 65 at a present rate of $6,846 a year and Edgar would have total, pre-tax income of $61,230 a year. After 20 per cent average income tax, he would have $4,080 a month to spend. That would cover living expenses of an estimated $2,500 a month and allow for a new pickup truck in a few years, and some travel.

Increased earnings

Rorie could get more income out of his assets by:

1. Shifting his RRSP and savings assets out of cash, where they are now held, to conservative, income producing stocks such as dividend aristocrats that 
pay rising dividends 
without fail;
2. Opening a Tax-Free Saving Account to make use of present space of $46,500; and,
3. Annuitizing capital to raise income.

A shift from savings accounts to stocks that pay three to five per cent in dividends and investment grade corporate bonds that pay three to four per cent for 10-year terms is, as the phrase goes, a no-brainer. This is indeed necessary to approach or reach the target return of five per cent less two per cent estimated inflation. Raising income further could be done with an annuity, Tyler notes.

Just using the annuity calculation — there is no implication that Rorie would actually buy an annuity from an insurance company — the $1,160,000 would generate $57,500 for 30 years from his age 65 to 95. That would push his total income up to $73,130 before tax or $4,875 a month after 20 per cent average income tax which would allow for no tax on return of capital by an annuity.

The difference between retirement income based on continuous payout of financial assets at three per cent a year and the annuity payout with tax advantages is $795 a month. An insurance-based annuity would shift all investment risk to the company and provide some degree of asset protection as well. Yet Rorie would be giving up control of his capital and perhaps his ability to look after Sam.

Obligations

Sam is in a day program for the disabled and will need financial help all his life. An annuity from an insurance company could be set to have many years of payments included after Rorie passes away, but its advantage over straight cash generation would then diminish.

There are solutions. Rorie can put 75 per cent of the $1,160,000 into an annuity. That would cut the payout to about $43,100 a year. It would still provide a decent living in retirement for Rorie with CPP and OAS added. The remaining $290,000 could be put into a so-called Henson Trust for Sam. The trust would provide the trustees with discretion to pay or withhold money for Sam’s living expenses and so preserve his right as a person with no other income to public assistance, Tyler observes.

The Henson Trust, which could be parallel to another trust to hold assets for eventual distribution to a wildlife charity, should use Rorie’s friends or family members as trustees. A majority decision of three out of four trustees with a right of replacement by majority if one trustee becomes ill or others are dissatisfied with his or her performance as trustee could be used. Family members could serve for nothing or for a predetermined and nominal fee of perhaps $200 per trustee per year. A trust company could be hired as agent.

The savings would be large — trust companies acting as sole trustees with fully executive powers can charge as much as five per cent of funds under management, on top of transaction fees. This fee would eviscerate annual income and force the trust to erode its capital. Acting merely as agent, a trust company’s fee might be just a few hundred dollars a year plus transactions charges.

Sam does not receive disability income, but he may qualify for various disability savings plans. There is a lifetime limit of $200,000 on contributions to Registered Disability Savings Plans and contributions can be made until the end of the year when the beneficiary, Sam, turns 59. There is no tax on asset growth within the plan and tax is charged to the beneficiary only when income is distributed. If Rorie diverts $200,000 to Sam’s RDSP, he would still have $960,000 in capital for his own needs. On an annuity payout basis to age 95 with any payments remaining in that space going to Sam, the annuity would pay $47,550 to Rorie and give him total income, including CPP and OAS, of $63,180 before tax or $4,200 a month after 20 per cent estimated average income tax.

Rorie would also like to donate a significant sum to a wildlife charity and perhaps purchase a long-term care policy.

The solutions are fairly direct. First, the wildlife or other charity could receive residual income from an annuity purchased from an insurance company and Rorie could make annual donations of funds he does not need for living expenses every year. Second, if he does need long-term care and must leave his condo, selling the condo would provide funds more than sufficient for his care.

If the condo remains unsold, it can be given to Sam for his accommodation as a testamentary disposition or sold for money for Sam, as his Henson Trust deems appropriate.

The complexities of dealing with Sam’s needs, the trust structure, and other testamentary matters need to be discussed with legal counsel.

“Rorie delayed dealing with his retirement and testamentary matters for decades, but we have a set of solutions,” Tyler says. “If he follows up with our recommendations, he can have a secure retirement and Sam can have a comfortable and secure future.”

Tagged ,
COPA Medallion COPA finalist in 2012, 2014 and 2015.
©2019 AGCanada is a production of Glacier FarmMedia Limited Partnership. Any affiliated or third party content is the property of its respective owner and is used with permission.
Please refer to Copyright Page for details.
Click here to view our Website Terms of Use.