Most parents want to treat their children equally. Most farms cannot be split equally and still work as a farm. That tension sits at the heart of almost every farm succession, and it is the single most common reason plans stall for years.

The problem in one example

Take a dairy farm worth $6 million with $2 million of debt. There are three children. One has been working on the farm for 12 years. The other two left for careers in Auckland and Brisbane.

Divide the farm three ways and the farming child has to find $2.7 million to buy out their siblings, on top of the existing debt. No bank will lend that against a farm that size. The farm gets sold, and the child who stayed loses the business they have spent their working life building.

Leave the farm to the farming child and the other two get very little. They may be gracious about it, but they may also feel, with some justification, that their parents' main asset went to one person.

Neither outcome is what the parents wanted. That is why fair and equal need to be treated as two different things.

Fair is a judgement, not a sum

A fair outcome takes account of more than the balance sheet. The child who stayed may have worked for years on a modest wage, building up the value of the farm that would otherwise be split. Their siblings may have had university paid for, help with a first house, or simply the freedom to build careers elsewhere. Some parents decide those contributions should count. Others decide they should not. There is no right answer, but there needs to be a decision, and everyone needs to understand the reasoning behind it.

How families balance it in practice

There are several well-established ways to give the farming child the farm while still looking after the others. Most plans use a combination.

Off-farm assets. Investments, rental property or savings built up outside the farm can be directed to the non-farming children. This is the simplest approach when the assets exist, and a good reason to start building them early.

Life insurance. A policy that pays out to the non-farming children on the parents' death can create an inheritance for them that does not have to come out of the farm.

A deferred or staged payment. The farming child takes the farm but owes an amount to their siblings, paid over time or on a future event such as the farm being sold. This needs careful drafting so it is realistic for the farm to service and enforceable if circumstances change.

Gifting and debt forgiveness. Since gift duty was abolished in 2011, parents can sell the farm to a successor and then forgive some or all of the resulting debt without a tax cost. That flexibility can be used to even things up over time. It does need to be planned alongside the parents' own retirement needs and any future eligibility for a residential care subsidy, which takes past gifting into account.

A share of future upside. Some families agree that if the farm is sold within a set period, the non-farming children share in the proceeds. It protects them against the farm being received at a family price and sold soon afterwards at a market one.

Why "we'll sort it in the will" goes wrong

Many parents intend to deal with all of this through their wills. A will on its own is a fragile tool for farm succession.

Under the Family Protection Act 1955, children can challenge a will if they believe they have not been adequately provided for. Under the Law Reform (Testamentary Promises) Act 1949, someone who worked for the deceased on the strength of a promise to be rewarded in the will can make a claim if that promise was not kept. On a farm, both can apply at once: the siblings argue they were left too little, and the farming child argues they were promised more.

And the people who could explain the reasoning are no longer there to do it. Most farm succession disputes do not start because of the decision itself. They start because family members find out what was decided after the funeral, with no chance to ask why.

A plan put in place while the parents are alive, with some of it already done, is much harder to unpick, and much less likely to need to be.

Tell everyone

The most effective thing parents can do is tell all of their children what they are planning and why, while they are alive and able to explain it. That includes the children who are not farming. Especially the children who are not farming.

It is not always a comfortable conversation, and some families find it easier with an adviser in the room. But siblings who understand the reasoning, even if they would have chosen differently, rarely end up in court.

Getting started

If you are a parent, the first step is to work out what fair means to you, and whether your current wills and structures actually deliver it. If you are a sibling who left, it is reasonable to ask your parents whether there is a plan.

Our three-minute succession path checker will show you where your family stands and what to deal with first. For a fuller picture of the decisions involved, start with our guide ‘The $150 billion conversation nobody's having’.

OCLaw works with farming families across the Waikato, Hauraki, Bay of Plenty and Coromandel from our Hamilton and Waihi offices. If you want to understand your options before the family conversation, get in touch at oclaw.co.nz/contact.

This article is general information only and is not legal advice. Every family's situation is different.