Farm Succession Planning and the role of permanent tax-exempt insurance

Last year in the farm issue of This Month In Elgin I wrote Helping the family farm survive. Farm succession planning.  To branch out on the need for farm succession planning we will expand a bit further on the role of permanent tax-exempt life insurance.

Efficient planning is required to successfully transition the family farm to the child(ren) who plan to actively work the farm, while also creating estate equalization for the child(ren) who do not wish to be involved in the family farm operation.  The creation of this succession plan requires careful consideration to create inheritance for non-farming children, while not handcuffing the farming children with financial burdens that could lead to failure.  

Succession planning of any kind generally requires liquid funds upon death of the original owner to help the successor owner make equalization payments owing or pay any immediate tax liabilities.

A problem that presents itself at death can be best solved with a strategy that pays out at death.  This is why permanent tax-exempt insurance becomes a key tool in the execution of a succession plan.  

Using life insurance (health permitting) in farm succession planning allows for the farm business to pay pennies on the dollar for the estate equalization rather than multiple dollars on the dollar through loan financing.  

Rising property values and tax liabilities continue to create challenges for farm succession plans and make it more pressing than ever for farmers to consider getting their farm succession plans in order.   Rising asset values and increased tax liabilities create larger needs and potentially larger financial gaps that require funding to transition the farm and create estate equalization at the same time.

Some people are surprised to hear that life insurance is a key tool for business or farm succession planning; and yet once the subject is delved into, it becomes clear why this is often the preferred tool of choice.

Life insurance proceeds are paid out tax-free and created simple liquidity when needed. It reduces financial liabilities of the farm and allows the family farm to thrive into the next generation.

There can be a stigma attached to life insurance and a misguided belief that the wealthiest individuals in our society do not need life insurance because they are perceived to be independently wealthy.  In many cases the opposite is true.  High net worth individuals (whether it be through farm, real estate or business assets) often chose to own and employ the largest permanent tax-exempt life insurance contracts around.

The bottom line is, large estates, farms and businesses often have a high need for liquidity upon death for the purposes of things like estate equalization or payouts for business succession.  Large amounts of liquid assets may be required to pay tax liabilities.  Short of being forced to sell an asset to meet these needs, credit would be the next logical choice.  However compared to tax exempt permanent insurance it is a more expensive option and may not be available at the time it is needed.  For these reasons, the permanent tax-exempt life insurance contract usually becomes the clear winner for being the least expensive way to create liquid funds at death and being able to pay proceeds when taxes or payouts are due.

It is important to note, being able to obtain life insurance is not a guarantee. Your ability to obtain one of these contracts is dependent on your health and medical underwriting.  Future health concerns are another reason to have farm succession discussions early.

Whether your permanent tax-exempt insurance plan is set up with the purpose of equalizing asset distribution or creating liquidity to pay tax liabilities, family farm operations are not the only businesses who can benefit from this as part of their succession strategy.   So too can people looking to pass on other business operations, a family cottage or other real estate to the next generation.

Talking about your succession wishes with your family and seeking professional advice in creating a plan will serve you well.   Do it while you are in good health and can clearly communicate your wishes.  The next generation will thank you for your planning and foresight.

Column appeared in This Month In Elgin October 2020 issue

Stephanie Farrow, BA., CFP., Stephanie has over 26 years' experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation.  Stephanie has been writing a financial column for local business magazine Elgin This Month/This Month in Elgin since 2010.  Stephanie and her husband own Farrow Financial Services Inc.  About our Farrow Financial Team.

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