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Life insurance as the key to farm succession

Farm Management: A solidly developed life insurance policy could be the key to hassle-free planning

Farmers often have something not all non-farmers have: the desire to see their lifelong work continued. Ideally, the next generation will take over, though maybe only one of your kids will stay on the farm. Land values have skyrocketed in the last 30 years and many farmers’ net worths are caught up in land values rather than cash liquidity. Do you want to leave something to your non-farming children without causing complication once you’re gone? Life insurance is one way farm families are dealing with succession.

You could just leave the farm to all of your children in your will, but dividing that asset among farming and non-farming children can be sticky. Remember when having conversations about what will happen to the farm, says Ken Rousselle, director, financial and estate planning services at FBC, Canada’s Farm and Small Business Tax Specialist, that “insurance can be part of the solution.”

Maybe Bill has been working the farm since he was old enough to do so, while Tom and Jane decided to pursue non-farming work. Is it fair to leave the whole thing to Bill, who has put in the sweat equity? On the other side of the coin, is it fair to have the children divide it up equally, even though two of them don’t live or work on the farm?

Let’s say the farm is worth one million dollars. Will Bill be able to access two-thirds of that in cash to pay off his siblings if it is left to all three equally? Probably not without going into a lot of debt.

“The reason people use insurance in this scenario is because it provides the money to pay for the market value of the farm without selling the farm,” says Lori Claxton, a Sun Life Financial advisor based in Edmonton, “so it truly works as a succession plan.”

A solution

If you have a permanent insurance policy for a certain amount of money — let’s say you take out insurance at $1,000,000, the value of the farm — and Dad passes away unexpectedly from a heart attack, with Mom as the beneficiary, Mom gets to decide what to do what that money, says Claxton.

“Remember we can create whatever we want with insurance,” says Claxton. It all depends on the plan your purchase. In this scenario, non-farming children don’t feel completely left out of inheriting something. If you consider buying insurance for this reason it “becomes a very private conversation with a farmer about what he believes is fair to the other children — ‘how can I make sure this is fair and equitable for everybody, so the business can continue and the others get some money?’”

To be clear, says Claxton, “all insurance does is provide the funds, it doesn’t provide the family intervention.” As you purchase your plan, you’ll need to clearly note who your beneficiaries are and what they’ll get. The farm, and who owns it after you pass, needs to go through the will. But the insurance plan will have named beneficiaries so if you go the insurance route, non-farming siblings can still get a piece of an inheritance.

Creating liquidity

Farm families are using insurance for succession planning for estate equalization because it’s really the only way of creating liquidity in the farm without selling, says Rousselle. “The farm doesn’t actually have the money to pay the children who don’t want to farm,” but having an insurance policy can help ease a tough situation.

Remember, if your farm is worth $3,000,000 and you have three children, one farming and two non-farming, that doesn’t mean you have to take out a policy for $2,000,000 to split between your two non-farming children. Treating children equitably doesn’t necessarily mean everyone gets the exact same amount. Maybe Bill inherits the $3,000,000 farm because he’s “worked the farm and added value,” says Rousselle, and the other two get $500,000 each through a $1,000,000 insurance policy payout. Having a plan in place is really important, says Claxton, because “when a farmer dies without a plan do you understand what it does to the family? Not just the business, but the family? And all you need is a conversation.”

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