By Larry W. Dykes, CLU, ChFC, AAMS
As you know, managing a successful farm takes time, strategy and a little luck. Farmers need a remarkable capacity for planning years into the future despite an incalculable number of variables.
Unless you are not planning to die or retire, you will need to apply the same kind of careful planning to your financial future—to devise a strategy for the day when the farm is passed on to the next generation. Without planning, you increase your chances of becoming one of the following statistics:
- 70% of first-generation operations do not successfully transition to the next generation.
- 90% of second-generation operations do not make it to the third generation.
- 96% of third-generation operations do not survive to a fourth generation.
Beyond transferring assets to your loved ones in the manner you wish, transition planning allows you to:
- Avoid conflict
- Provide estate liquidity
- Help cover debt
- Help supplement retirement
- Realize philanthropic goals
Dividing the indivisible.
Inevitably, death presents multiple opportunities for conflict. This can be especially disruptive when heirs’ expectations clash with estate realities. Disputes may also arise if directives in your will take loved ones by surprise, if your choices don’t make sense to your family, or if incomplete planning produces unintended consequences.
Almost everyone owns assets that cannot be easily divided. This is particularly true of farmers who have spent a lifetime building a business largely made up of nonliquid assets. This legacy—the farm—is a particularly challenging estate asset when it comes time to transfer the operation to heirs.
Passing along the operation . . . and everything else you own.
The farm is almost certainly the biggest asset in the estate. So let’s imagine for a moment a farmer with three children—only one of whom is working the land. What’s the best way to divide the operation among children with very different wants and needs?
- Give each child an equal share of the operation. This may sound fair on the surface, but it can lead to unimaginable conflicts. The child working the land will need to keep the operation whole to continue farming efficiently, but he or she may not have the money to buy out off-farm siblings. The situation could quickly grow complicated both financially and emotionally.
- Give each child an equal share of the estate. This is easier said than done because the farm is likely worth much, much more than any of the estate’s other assets. Balancing the value of inheritances among family members by bequeathing the operation to one and the liquid assets to the others would likely not provide equality and would probably result in bitterness and resentment by the off-farm family members.
Creating a “separate but equal” solution.
Life insurance provides a straightforward solution to this difficult problem. Here’s how:
- Bequeath the farm to family members who have chosen to remain active in the operation.
- Purchase a life insurance policy on your life. Name off-farm family members as beneficiaries of the policy. (Or let inactive children purchase a policy while you gift the premiums using annual gift tax exclusions.)
- Use life insurance proceeds to provide an inheritance for family members who have decided to pursue other careers.
Although inheritances may not be identical, they can be equitable—which keeps family members on the farm and peace within the family.
Of course, one of the keys to making this arrangement work is to discuss your plans with your children and explain the reasoning behind the choices you’ve made. A child who might otherwise feel slighted is more likely to accept the decision coming directly from you, especially when all of the children understand that you’ve taken enormous care to provide for each of them in an equitable way.