In farm and family business succession planning, permanent life insurance policies play an extremely important role in that they equalize an inheritance between heirs who want to receive and run the farm or business and those who don’t.
Combined with other succession planning tools, like limited liability companies and trusts, permanent life insurance provides properly structured succession plans the means to buy out heirs who aren’t interested in running the farm or business. This allows heirs who are interested in running the farm or business to do so without angering family members or incurring excessive debt to buy out other heirs.
If a business or farm is owned by partners, benefits from permanent life insurance can also provide a means for one partner to buy out the interests of the other partner’s spouse or other heirs if that partner dies.
In addition to providing for the passing of farms, businesses or other assets to heirs, properly structured succession plans also provide protection for those assets to ensure that they get passed to heirs, rather than creditors. Succession planning tools that help accomplish this include limited liability companies and trusts.
Details can vary from case to case, but essentially your permanent life insurance policies should be placed in an irrevocable trust and funded by the farm or family business. The succession planning process should also place the farm or business in a limited liability company also owned by an irrevocable trust. The same trust may own both the insurance policies and the limited liability company; your succession planning consultant will make appropriate recommendations based on a thorough review of your assets and situation.
Permanent Life Insurance vs. Term Life Insurance
You’ll notice that above I specifically refer to “permanent life insurance.” Permanent insurance is used in the succession planning process, rather than term life insurance, because succession plans require insurance benefits that are guaranteed to be available when the farm/business owner passes away.
Term life insurance is not appropriate and not among the preferred succession planning tools because it becomes unaffordable around age 65. Although more expensive than term life insurance, permanent life insurance can be purchased at reasonable rates when purchased early and will guarantee benefits for your estate.
For more information on how Gudorf Law Group can help with your farm and family business succession planning, please visit www.daytonestateplanninglaw.com