A tale of the forgotten FMD

Article by Neil Hooper

as featured in the Farm Weekly issue 15 April 2021

An underscoring theme of estate planning is that this process is so very easy to get wrong, especially for those involved in a farming family business where the professional assisting is not familiar with the industry.

Being exposed to a poor or unintended outcome upon passing of a family member, because you or your advisor didn't understand the farm business structure, or you overlooked assets that you may have thought belong to the farm business, is unfortunately becoming more and more common in our experience. To make things worse, this is being experienced at arguably the least convenient time.

Consider this example.

Ben's wife passed away five years ago and shortly after this, he diligently had a new Will drafted by the solicitors who dealt with his wife's probate. A farmer in his late 60's, Ben proudly had his daughter back on the farm and they were in the throws of formally transitioning the business over. Ben's son (35 yrs) was a very successful real estate agent in the city and never had much interest in farming, whilst Ben’s daughter followed her passion for the land. Ben, when he drafted his Will and other estate documentation, didn’t consult his accountant, because to him, it appeared a pretty simple affair. His daughter was to take the farmland and farming business, and his son the off farm assets which included a share portfolio, house in the city, and his super.

Ben unexpectedly and sadly passed away 3 years after executing his will. After the dust had settled, Ben's daughter and executor, pulled out the recent Will and started to go through it. At first glance, her father's Will had been crafted much along the lines as Ben wished, with off farm and farm assets split accordingly. Ben's daughter was taking over a viable farm, albeit it had struggled with debt in the early 2010's. Since then, with successful seasons, and Ben's aversion to paying tax, the debt was not reduced, moreover, Ben had squirrelled away significant amounts in Farm Management Deposits (FMD’s). He now had $500,000 of FMD's, with a large deposit made just prior to him passing. This war chest would be more than useful in retiring some of the farm business debt. Even if some tax was to be paid.

Unfortunately, when Ben drafted his Will with his solicitor, he didn't have any FMD's and therefore thoughts around this were not really front of mind. Ben thought that because the FMD's came from the farm business, that they were always going to go back to the business. A logical notion, but flawed! On close perusal of Ben's Will, the executor realised that the now substantial sum of FMD's were not specifically mentioned (known as bequested). This meant that the FMD's fell to what is known as the residuary clause. This clause might be familiar to you and is often worded as "I give devise and bequeath the whole of the remainder of my estate...". The FMD's formed part of this residuary and were to go to the son, not the daughter, leaving the daughter with a farm business laden unintendedly with debt. This was not Ben's wishes!

It is likely with $711.8mn of FMD's held across Western Australia at the moment, that a large portion of growers need to address this in their estate plans, to avoid the “forgotten FMD”.

If your accountant is not specialising in farm businesses you may wish to meet with one that does. Byfields Business Advisers regularly provide clients pragmatic, and yet experienced technical reviews of their estate plans. We work alongside lawyers to do so and are very well placed to understand what a testator’s wishes are.

Next Step

To discuss this article further, we encourage you to contact Neil Hooper on (08) 6274 6400, or your Byfields accountant.

 

Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.

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