Couples that own ranches and huge farms are faced with one dilemma: exercising fairness on their on-and off-farm children when distributing their assets. The main challenge is that most of the farm or ranch assets are what make up the family’s net worth and this means that there might not be a lot of assets to leave to their off-farm children. To help solve this Gordian knot, such couples result in purchasing life insurance to help equalize the inheritance. Here is how life insurance helps equalize inheritance:
- Irrevocable Life Insurance Trust (ILIT)
In this, the couple establishes this kind of trust and purchases a Survivorship Life insurance policy. The ILIT, in this case, is the owner as well as the beneficiary of the policy. The policyholders will normally name their off-farm children as the beneficiaries of the ILIT. When they pass on, the on-farm child inherits the farm/ranch while the other children split the proceeds from the ILIT.
- Living trust
In this option, the couple provides for each of their children in a living trust or will. The couples provide for a ranch distribution of a one-half interest to the on-farm child and a one-quarter interest to their supposedly two off-farm children. In their lifetimes, the three children strike a binding cross-purchase agreement where the on-farm child buys out at fair market value, the other interests that would be distributed to the off-farm children. The off-farm child can purchase a Survivorship Life insurance on the parents that is equivalent to the sum to be paid to the off-farm children. If he’s unable to meet the policy premiums, he can get a salary raise from the ranch. When the parents pass on, he will use the death benefit to acquire the interest.
- Charity Remainder Trust
Say, the couple is not able to meet the annual life insurance premium. To raise the money to pay for the annual premiums, they can opt to sell a lesser productive part of their land valued at say $1 million using a Charitable Remainder Trust (CRT) and using the annual income from it, they can pay off the annual life insurance premium. CRTs are tax-exempt entities and one will not be required to make capital gains tax payments.
As you have seen, life insurance can be a lifesaver to an agricultural family when equalizing inheritance. Additionally, there are many tax ramifications to benefit from with the ownership of life insurance. As there are numerous kinds of life insurance policies to choose from and multiple ways to structure these policies, work with independent agents and also estate planning attorneys.