A common dilemma among agricultural families is how to be fair to both on-farm and off-farm children. Because the assets of a farm or ranch typically represent the vast majority of an agricultural family’s net worth, there are typically few assets to leave off-farm kids.
As a way to equalize inheritance, parents can purchase life insurance for the benefit of their off-farm children.
Parents often pass the farm or ranch equally to all of their children, leaving them to “figure things out for themselves.” This is often a recipe for disaster because the off-farm children often want their value of the farm or ranch after their parents are gone.
Because the on-farm child usually can’t afford to buy out his siblings’ share of the farm or ranch, he or she will be forced to sell. This often results in bitter feelings among the siblings.
In the example below, we will examine a common scenario among agricultural families and show three solutions of how life insurance can be used to help the family achieve their financial goals.
Example
John and Mary own a ranch valued at $8 million in central Montana. They are both age 65 and have three children, Steve, Mark and Sue. Besides the ranch assets, they have savings and investments of $200,000.
John and Mary’s son Steve has lived and worked on the ranch his entire life. They pay Steve an annual salary of $30,000. Mark and Sue have other careers and are not interested in coming back to the ranch.
John and Mary would like to pass the ranch to Steve and provide a “fair” inheritance to Mark and Sue. Their goal is to leave Mark and Sue an inheritance equal to half of the current value of the ranch divided equally between them. John and Mary meet with their advisory team to explore their options for providing Mark and Sue each with $2 million.
Option 1 Save
The family estimates John and Mary’s joint life expectancy to be 20 years. Assuming they could earn an average annual return of 6 percent on an investment, they calculate they would need to save over $110,000 per year for 20 years to come up with $4 million to leave Mark and Sue. Option 1 won’t work.
Option 2 Borrow
They call their local banker and Farm Credit Services representative to see how much it would cost for Steve to borrow $4,000,000. Using a fixed interest rate of 6 percent and a term of 20 years, Steve’s monthly payment would be $26,398.23. Over 20 years, his payments would total $6,335,575. Option 2 won’t work.
Option 3 Insure
The family obtains quotes on a $4 million survivorship life insurance policy on John and Mary’s life. Based on standard ratings, the annual premium would be $60,000. The family concludes that using life insurance to equalize the estate is the best option. Three potential solutions are presented involving life insurance.
Solution 1
John and Mary establish an irrevocable life insurance trust and purchase a $4,000,000 survivorship life insurance policy with the ILIT as owner and beneficiary of the life insurance policy.
John and Mary name their two off-farm children, Mark and Sue, as beneficiaries of the ILIT. When John and Mary pass on, Steve inherits the ranch, and Mark and Sue split the $4 million life insurance proceeds 50-50.
Solution 2
John and Mary, in their wills or living trust, provide for a distribution of a one-half interest in the ranch to Steve and a one-quarter interest each to Mark and Sue.
During their lifetimes, they have Steve, Mark and Sue execute a binding cross-purchase agreement whereby Steve agrees to buy out, at fair market value, the one-quarter interests ($1 million each) that will be distributed to Mark and Sue.
Steve then purchases a $2 million survivorship life insurance policy on John and Mary. If he needs additional funds to pay the premiums on the policy, the ranch may be in a position to increase his salary or bonus additional money to him on an annual basis.
Upon the deaths of John and Mary, Steve uses the death benefit to acquire Mark and Sue’s interests per the cross-purchase agreement.
Solution 3
The family determines they cannot afford the $60,000 annual life insurance premium. To come up with the money to pay the annual premium, they decide to sell a lesser-productive portion of their land valued at $1 million through a charitable remainder trust (CRT) and use the annual income from the CRT to pay the annual life insurance premium.
Because the CRT is a tax-exempt entity, it will not have to pay capital gain tax on the sale. Assuming they net $1 million from the sale of land and select a 6 percent payout in the CRT, they will receive approximately $60,000 per year from the CRT.
They will use this income to pay the annual life insurance premiums.
Life insurance can be an effective tool for an agricultural family. There are many types of life insurance polices and many ways of structuring policies for achieving one’s goals.
There are also serious tax ramifications associated with the ownership of life insurance. It is important to work with an experienced independent agent and to involve the assistance of an estate-planning attorney.
For more information, request the wealth guide titled: Life Insurance: An Effective Estate Planning Tool for the Agricultural Family. 
Chris Nolt is the owner of Solid Rock Wealth Management and Solid Rock Realty Advisors, LLC.
