Life insurance can be a key tool for farm and ranch businesses to provide tax-free death benefits at the death of the insured if the policy is structured correctly. This article will discuss using life insurance to fund a buy-sell agreement.
Sometimes farms and ranches want to limit who inherits farm or ranch assets at the death of an owner. Coming up with cash at the death of an owner can be difficult for the surviving parties. One solution to this issue could be the use of a life insurance policy to fund a buy-sell agreement.
To illustrate how this tool could work, we have two people. A parent and an on-farm child. The parent is the insured, and the on-farm child will be the owner and beneficiary of the policy.
The parent owns the majority of the farm assets. The on-farm child has siblings who are not involved in the operation. According to the parent’s estate plan, the on-farm child will have to “buy out” their siblings at the death of their parent.
To ensure the on-farm child has enough cash at their parent's death, the on-farm child will do two things. First, they will enter a formal buy-sell agreement with their parent, stating that at their parent’s death, they would buy any farm/ranch asset from the estate, that they do not inherit, for a specific price. Second, the on-farm child will purchase a life insurance policy on the parent. The on-farm child will be the owner and beneficiary of the policy. At the parent’s death, the on-farm child would receive the death benefit, tax-free (if the policy is structured correctly), and purchase the farm from the estate.
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