Estate Planning Basics for Farm Families
By Pekin Insurance · Sep 15, 2020 ·2 min read
Do you want to keep your farm in the family? Will your estate plan pass on the right assets to the right people?
There’s a lot to think about when you consider your future. That’s why we prepared some estate planning basics for farm families.
Balancing the Interests of Children
How do you balance the interests of the children in the farm operation against the interests of off-farm children?
You answer this question by weighing the following factors:
- The limited cash flow available for funding legacies to, or purchases from, the off-farm heirs.
- The dedication and ability of the successor-operator or operators.
- The economic needs of the off-farm heirs.
- The desire of the parents to continue all operating properties or provide equal inheritances to all children.
- Whether growth in value of the farm assets should belong to the successor-operator only or should be shared with the other children.
- The desire of the off-farm children to continue the parent’s operating holdings or liquidate their shares.
- The potential of the successor-operator and the off-farm children to be able to work together.
Questions the Farm Owner Must Answer
- Will my brothers and sisters approve of my methods of farming and provide money for improvements?'
- Can I borrow the money to buy out my brothers and sisters if they decide to sell?
- Can a price be agreed upon without a public sale?
- If I have to borrow, can I increase my profitability to repay the loan?
- If I have a bad year, will my landlords (or brothers and sisters) be tolerant?
Questions the Non-Farming Children Must Answer
- How do I rent my share of the farm — cash rent or crop share?
- Am I receiving a fair rate of return on my inheritance?
- If I sell, can I earn more by investing the cash?
- Do I have a willing buyer who can obtain the money to buy my share?
- Can a price be agreed upon without the expense of a public sale?
Where Does the Farming Child Get the Money?
Option 1: Borrow the Money
- Interest is tax-deductible.
- At mercy of lending institution with regard to terms and interest rates.
- Cost to pay back is principal plus interest.
- Must increase profit by amount of loan payment plus tax bracket.
- Must accumulate sufficient money for down payment (May not have time to accumulate this amount).
Option 2: Fund a Buy-Sell Agreement With Life Insurance
Investopedia defines a buy-sell agreement as "a legally binding contract that stipulates how a partner's share of a business may be reassigned if that partner dies or otherwise leaves the business."
A buy-sell agreement funded by life insurance can pass the farm to the farming children and give off-farm children a fair price for their share of the land.
- Guarantees continuation of the farm.
- The event (death) that creates the need for the money also creates the money.
- Probable cost of the money is discounted dollars. Cost could vary depending upon health and age at death.
- Death benefit is paid income tax-free to the beneficiary.
- Cash value build-up can be borrowed for emergencies.
- Agreement will guarantee a buyer.
- Arrangement eliminates possible disagreements among the children.
There are a lot of moving parts in farm buy-sell agreements. Work with a Pekin Insurance agent to sort it out for the future of your farm!