The Role of Life Insurance in Farm Transition Planning
Next Tuesday, March 24, is National Ag Day. A day when we celebrate what agriculture means in our daily lives. I feel fortunate to be married to the daughter of a farm family. I also feel fortunate to have been allowed to play a small role in the success of so many farm and ranch families that have worked with us over the years to establish business plans, estate plans, and transition or succession plans. So in anticipation of National Ag Day, I thought I would share some thoughts this week on the role of life insurance in the farm/ranch transition plan.
I am often asked whether I “believe” in life insurance. I usually respond that I did not know it was a matter of faith. Life insurance is really nothing more than a tool. However, it can be a powerful tool - even a swiss army knife for addressing many of the problems faced in transition plans. Professor Neil E. Harl writes in his book Farm Estate & Business Planning: “Acquiring life insurance involves making an investment. And, like all rational investments, it is well to consider (1) the need, (2) the alternative to meeting the need, and (3) the most economical way to meet the need.”
So, what are some of those needs? Among other common needs, needs in the farm transition context may include:
Providing an inheritance to non-farming children;
Providing money to pay estate taxes;
Providing money to purchase the farm from siblings; and
Providing money to pay for the departing owners’ long term care (you can read more about this one here).
In assessing whether life insurance is the best alternative and the most economical way of meeting those needs, you will need to answer:
Will the policy be a permanent policy or a term policy? Term is usually less money, but less likely to be there when you need it.
Will the policy be on the life of a single person or a second-to-die policy? The former will provide liquidity to the surviving spouse, the latter will make sure it is there for the successor farmer. Additionally, a second-to-die policy can be less expensive and easier to acquire.
Will the policy create an estate tax liability? While life insurance proceeds are generally not subject to income tax, they do count towards the total estate of an individual and may be subject to estate tax. This problem is usually solved by having the life insurance owned in an irrevocable life insurance trust.
How will the policy be paid for? One of the common problems with life insurance is that it becomes less affordable over time. Therefore, I usually recommend that the insurance be “paid up” over a set period of time. Meaning that at the conclusion of that time period, the policy will be able to pay for itself.
Who will pay for the policy? While the natural assumption is that mom and dad should pay for the policy, often it is the successor farmer that should be paying. He or she will be the one to benefit if mom or dad go into a nursing home and he or she will be the one to benefit if the money is to be used to buy the farm from the other siblings.
Life insurance serves numerous and diverse functions in a tax-favored manner. It is a tool that can be used to meet a variety of needs. When engaging in farm transition planning, I recommend that a quality life insurance professional be part of your planning team to help ensure that life insurance is properly considered and, where appropriate, utilized as part of your comprehensive plan.
These are trying times for so many. Life has been interrupted in so many ways by the corona virus. One of the reasons we will be able to ultimately defeat this scourge is the greatness of our agriculture community and the readily available and affordable supply of food. So on National Ag Day, pause to reflect on how fortunate we are and, if possible, express gratitude to a farmer or rancher for what they do. Then - go out and support them in their efforts.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.