Peter Veldhuizen | Managing Director | Gillan & Veldhuizen Inc | mail me |
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. In some cases, they may even be forced to sell the family farm to meet estate commitments. The structure of a farmer’s estate plan directly influences how the estate is maintained and grown. This ultimately shapes the future for the next generation.
Estate liquidity matters in farm inheritance
Consider a scenario where a parent solely owns a farm without using a corporate structure. The farm secures an overdraft facility for operational costs. Additionally, a financial institution holds a mortgage bond over the property.
When the farmer passes away, the heir inherits the land. However, before the transfer can take place, the heir must first settle the mortgage bond. Without a liquidity plan in place, the bank refuses to cancel the mortgage bond. If the estate lacks sufficient liquidity, the executor may have no choice but to sell the farm.
The heir might consider negotiating a further loan from the bank. However, the bank may hesitate to extend credit, especially given the current political uncertainty surrounding agricultural loans.
Banks are becoming increasingly cautious about farm financing. This is particularly true amid ongoing discussions around expropriation without compensation. Without adequate liquidity to settle debts, taxes and operational costs, the next generation could face severe financial stress. This situation puts the very survival of the farm at risk.
Preserving liquidity and protecting the farm
A well-structured estate plan ensures that the farm remains a viable asset. It prevents the farm from becoming a financial burden or an estate nightmare.
This plan can include:
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Life insurance payable to the estate
Ensure there are sufficient funds to cover estate duty, executor fees, funeral expenses, transfer costs of property, cash bequests, capital gains tax, VAT, lease agreements, hire purchase agreements and any other debts and liabilities.
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Investments
Diversifying assets outside the farm ensures that heirs can access liquid capital during times of need. Setting up off-farm investments – such as property portfolios, unit trusts, or retirement annuities – provides a safety net. These resources help cover unexpected costs, pay taxes or compensate heirs who do not wish to participate in farm operations.
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Corporate structuring
Separate farm ownership from operations. For example, place the land in a trust or company while running the business through a separate entity.
Estate liquidity matters and succession planning
Farmers must update their estate plans annually. This ensures the plan reflects evolving family dynamics, asset structures and legal regulations. Just as important are family discussions around the proposed succession plan.
Each family member should understand the plan, express their goals and define the role they want to play. Structuring the estate based on this input ensures long-term sustainability and helps avoid conflict.
It is worth mentioning that, unlike other estates where assets can be divided among beneficiaries, farms present additional legal complexities. The Subdivision of Agricultural Land Act 70 of 1970 prohibits the division of agricultural land among multiple heirs without Ministerial approval. However, such approval is rarely granted. Therefore, careful financial and estate planning is essential to ensure continuity.
For farmers, the greatest inheritance is not just about land. More importantly, it is a well-planned estate that safeguards their legacy for future generations.
