Why estate liquidity matters in farm inheritance planning

For many South African farmers, a farm is more than an asset – it is a family legacy, a business, and often the entirety of their net worth. However, when it comes to estate planning, one critical factor is often overlooked: liquidity. Without adequate liquid assets, heirs may encounter financial strain, and operational challenges or even be forced to sell the family farm to meet estate commitments.

The structure of a farmer's estate plan directly influences the estate's maintenance and growth, ultimately shaping the future for the next generation.

Consider a scenario where a farm is owned solely by a parent without a corporate structure. The farm secures an overdraft facility for operational costs and a financial institution holds a mortgage bond over the property.  Upon the farmer’s passing, the heir inherits the land but before the transfer takes place, the mortgage bond needs to be settled. Without a liquidity plan in place, the bank won’t cancel the mortgage bond, and if insufficient liquidity is in the estate, the executor may be forced to sell the farm.

It is conceivable that the heir may discuss a further loan from the bank but they may hesitate to extend credit, especially given the uncertainty around agricultural loans in the current political climate. Banks are increasingly cautious about farm financing, particularly with ongoing discussions around expropriation without compensation,” Veldhuizen notes. “Without adequate liquidity to settle debts, taxes, and operational costs, the next generation could face severe financial stress, risking the very survival of the farm.

A well-structured estate plan ensures that the farm remains a viable asset rather than a financial burden or an estate nightmare. This can include:

• Life Insurance payable to the estate: Ensuring there are funds available to cover estate duty, executor fees, funeral expenses, transfer costs of property, cash bequests, capital gains tax, VAT, lease and hire purchase agreements, along with any other debts and liabilities.
• Investments: Diversifying assets outside of the farm ensures heirs have access to liquid capital in times of need. Setting up off-farm investments such as property portfolios, unit trusts, or retirement annuities - can provide a safety net to cover unexpected costs, and taxes or to compensate heirs who do not wish to be involved in farm operations.
• Corporate structuring: Separating farm ownership from operations, such as placing the land in a trust or company while running the business through a separate entity.

Updating estate plans annually to account for evolving family dynamics, assets, and legal regulations is a must, as are family discussions around the proposed succession plan. Understanding each family member’s goals and the role they want to play, and structuring the estate accordingly ensures long-term sustainability and avoids conflict.

It is worth mentioning that, unlike other estates where assets can be divided among beneficiaries, farms often come with additional legal complexities.  The Sub-Division of Agricultural Land Act 70 of 1970 restricts splitting agricultural land among multiple heirs without Ministerial approval - something rarely granted. This means careful financial and estate planning is needed to ensure continuity.

For farmers, the greatest inheritance is not just about land – it is a well-planned estate that safeguards their legacy for future generations.

* Veldhuizen is the MD of the commercial law firm Gillan & Veldhuizen Inc.

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