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How life insurance affects farm estate planning

Tax Tips: As higher estate exemptions expire, it may be good to review your life insurance policy.

May 23, 2024

2 Min Read
A hanging file folder for insurance and other finances
ESTATE INSURANCE: Farmers and businesses acquire insurance to fund payments to a deceased member’s estate without causing the business too much financial burden. Peter Dazeley/Getty Images

by Dario Arezzo

Buying a life insurance policy is common in the farming business entity structure.

Often, farmers and businesses acquire insurance in order to fund payments to a deceased member’s estate without causing the business too much financial burden.

Let’s look at a common example of how a life insurance policy on the farm is applied:

John and Bob each own 50% of Family Farms LLC that is worth $6 million. They decide to get life insurance on each other to facilitate a buyout of the other’s business interest for $3 million each.

If John dies and the insurance is owned by both John and Bob, respectively — typically governed by what is known as a cross-purchase agreement — Bob would receive the proceeds, worth $3 million, to pay John’s estate. At the end of the transaction, Bob would own 100% of Family Farms LLC worth $6 million.

On the other hand, it is also common for actual business entities to own the policies. Here’s an example of how this could look: Family Farms LLC owns both $3 million policies on John and Bob. In this scenario, if John dies, the insurance money would come into Family Farms LLC, and then it would pay the money to John’s estate because it has a $3 million obligation.

Currently, the Supreme Court, in Connelly v. U.S., is hearing arguments where the facts are quite similar. It is the IRS position that immediately at John’s death, the business is worth $9 million. That is, the original $6 million, plus the $3 million coming in from the insurance proceeds.

Curiously, the IRS maintains that the $3 million obligation to John’s estate should not be considered a liability, which would offset the $3 million valuation increase, bringing the value back to $6 million.

Many individuals and businesses are in the process of evaluating their estate plans as we head toward the sunset of higher estate exemptions. This may be another area to review as those plans are reviewed.

Arezzo is the retail financial services leader for Farm Credit East. This column originally ran on the Farm Credit East website.

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