Ask a farming couple in their 60s what is holding up their succession plan and you will often get an answer about tax, or the bank, or the children. Ask a few more questions and it usually comes back to something simpler. They do not know where they are going to live, or what they are going to live on.

These two questions quietly stall more farm successions than any legal or tax issue. They need answers before anything else is built.

Question one: what will you live on?

For most farming couples, the farm is the retirement fund. There is often very little else, because every spare dollar went back into the business. That means the succession plan has to produce an income for the parents, and the successor has to be able to afford it.

Start with a number. What do you actually need each year once you step back? Include living costs, travel, health, helping the grandchildren, and a buffer for the unexpected. NZ Super will cover part of it. The rest has to come from somewhere.

The common sources are:

•           Rent from a lease. If the successor leases the farm, the rent provides a regular income while the parents keep ownership.

•           Repayments on vendor finance. If the farm is sold to the successor with part of the price left owing, the repayments, and interest if charged, become income.

•           A share of profits or dividends. Where the farm is in a company or partnership, the parents can keep a stake that pays out.

•           Off-farm investments. Assets built up outside the farm, or released from it, can be invested for income.

The figure has to work for both sides. A plan that gives the parents a comfortable retirement but leaves the successor unable to service the debt is not a plan. Your accountant and the bank should test it before it is committed to.

Question two: where will you live?

There are usually three options, and each has legal consequences.

Stay in the homestead. Many parents want to stay in the house they have lived in for decades. That is entirely possible, but if the farm, including the house, is transferred to the successor, the parents need a documented right to stay. Without one, they are living in a house their child owns, on an understanding. If the child separates from a partner, gets into financial trouble or dies, the parents' position can become very insecure.

Build or move to a second house on the farm. Some families put up a new house for the parents, or the successor's family moves into a new build. That raises questions about council consents, subdivision, who owns what, and who pays.

Move off the farm. A house in town, closer to services and family, is often the cleanest option. It needs to be funded, which brings us back to question one.

Securing the right to stay

If the parents will stay in a house that ends up owned by someone else, the two most common tools are these.

A life interest. The parents have the right to live in, or receive income from, the property for the rest of their lives. When they die, it passes in full to the successor. A life interest can be created in a will, in a trust, or as part of a transfer.

A right of occupation. A documented agreement, sometimes registered against the title, that gives the parents the right to live in the house for life or a set period, on agreed terms about maintenance, rates, insurance and what happens if they need to move into care.

Either way, the details matter. Who pays for the roof? What if one parent dies or remarries? What if the farm needs to be sold? These are much easier to agree now, calmly, than to argue about later.

Planning for care

It is not a cheerful subject, but it needs to be on the list. If one or both parents eventually need residential care, eligibility for a government subsidy depends on their assets and income, and past gifting can be taken into account. The way the farm is transferred, including any debt forgiveness, can affect this. It is worth factoring in at the design stage, along with enduring powers of attorney so that someone you trust can make decisions if you cannot.

Settle this first

Where you will live and what you will live on are not side issues. They are the foundation the rest of the succession plan is built on. Work them out first, write them down, and everything else becomes easier to design.

For the wider picture, see our guide ‘The $150 billion conversation nobody's having’, and our post on balancing the interests of all your children, ‘Fair isn't always equal’. Our three-minute succession path checker will show you which path you are on and what to deal with first.

OCLaw works with farming families across the Waikato, Hauraki, Bay of Plenty and Coromandel. If you want to explore your options, 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.