In reading literature on farm succession in Australia I am always struck by one apparent over-simplification. This is that the various authors always refer to the farm business meaning the combination of both the farm real estate and the stock, plant & equipment and average trading capital. However, there are obvious differences between the two. The most important of these is that while both are essential components of a farm business, they do not have to be owned outright for farming to be possible. It is quite feasible for the farm real estate to be leased in by the farmer from a landowner who does not participate in the farming at all. In the USA, for example, 39% of farmland is leased.
A tenant farmer might own no land but definitely he or she owns a farm business. By the same token, a shopkeeper might own a thriving business but, being a tenant, not own the freehold of his or her premises. Similarly, someone might own thousands of hectares of farmland but never actually farm it, choosing to lease it out or to share-farm it with all physical inputs and labour being provided by the tenant.
Bearing all this in mind, one can easily see how Landlord’s capital can be distinguished from tenant’s capital. In farm and estate succession planning this is an important distinction since it allows for the farm business to be separated from the farm real estate. Thus one can structure an equitable estate succession plan based on leaving all of the tenant’s capital to the farming child or children with the real estate being equitably divided across all children with rent flowing accordingly and, quite possibly, an appropriate arrangement for the gradual buying out of the farm by the farming child/children.
