“It’s no silver bullet, but it can help pay off debt, estate costs and funeral expenses.”
Farm families can use life insurance to help with the transition from one farming generation to another. If this move is done correctly with life insurance, it provides funds that are not subject to estate taxes and can help farming heirs buy out, at least part of a farm estate from siblings who don’t want to continue farming.
Successful Farming’s recent article, “Using Life Insurance in Estate Planning,” quotes David Bau, a University of Minnesota Extension educator based in Worthington, Minnesota. He says, “Life insurance is expensive, but it’s still a very good tool in the process. The farming heirs can have insurance on their parents, and they can use that money to buy out the estate.”
Farm families typically can’t afford enough insurance to cover the increase in land values over several decades. Therefore, life insurance can be a tool to provide some fairness to the process and keep the farming business viable.
Term insurance covers death risk and increases in cost, as the covered person ages. Whole and universal life policies include a savings component with the term insurance, and these types of policies may grow in value over time.
Life insurance has many uses, including the following:
- Paying estate taxes. Even though few families are likely to be hit by estate taxes with the federal tax reform, some states also have estate taxes;
- Paying off debts, estate settlement costs and funeral expenses;
- Savings in whole life policies can be borrowed to cover retirement or nursing home costs for the older generation (but it reduces the proceeds that might go to heirs); and
- Providing an inheritance to non-farm heirs.
To get the benefits of life insurance, do some careful planning with an experienced attorney and avoid common pitfalls. For example, if you don’t want insurance proceeds to be included in a taxable estate, the heirs need to own the policy. The use of life insurance for paying estate taxes also really isn’t helpful for farmers whose spreads may not be worth as much as the nearly $22 million that a couple can now pass to a new generation tax-free. It should instead be part of an estate planning process designed to provide a fair transition to a new generation.
For most of us, we need to do estate planning with a qualified attorney to be certain that what we’ve worked hard to attain is passed on to the next generation.
Reference: Successful Farming (October 5, 2018) “Using Life Insurance in Estate Planning”