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Estate planning and keeping a farm in the family

Allen Wastler

Posted on January 30, 2023

Allen Wastler is a former financial journalist with over 30-years of experience, including time at CNBC, CNN, and Knight-Ridder Newspapers.
Seven family members of different generations having dinner outdoors in front of farmhouse
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Point out that dividing up farmland is typically not in the best interest of the operation or the heirs.

Describe the advantages of life insurance in handling taxes and estate equalization challenges.

Give a real-world example of the use of a life insurance policy for handling a farm transition.

A farm is like any other business ― and not like any other business ― when it comes time to pass it on after an owner’s retirement or death.

First and foremost, the largest asset, by and large, is land. While there is typically a ready market for real estate, many in the farming business are reluctant to break up a farm and sell property in parcels. The size of a farm, after all, has direct bearing on its money-making potential.

“Most of a farm’s wealth is in ground and equipment — things you need to make it work and operate, so you don’t want to break it up,” said Brian Roberts, CEO of Synergy Wealth Solutions in Chesterfield, Missouri. “Beyond that, there is emotional attachment. A farm is part of your upbringing, your family. It’s something that you want to show your children. Most people are reluctant to let that go, too.”

Indeed, there are over 2 million farms in the United States, and about 98 percent of them are family-owned.1

But the illiquidity of farms brings up two common problems:

  • Covering any taxes or costs due when the owner dies.
  • Bequeathing some part of the farm’s value to multiple heirs.

And the wherewithal of family farms to handle these issues can be limited. In 2020, 40.8 percent of farm households received an income at or below $67,521, the median for all U.S. households, according to the USDA. More than 25 percent of all farmers are beginning farmers, in business less than 10 years.2

Life insurance can play a role in handling these possible challenges. And there are provisions in the tax code designed to help with farm transfers as well.

Estate and Inheritance taxes

Given the illiquidity of most farms, paying a large estate tax bill could be a hardship.

“When I was a kid, I remember on weekends we’d go around to other farms that were having auctions and selling stuff,” recalled Roberts, who grew up in farm country. “My grandfather and dad would bid on equipment. And for $2, I could get a box of stuff containing anything from baseball cards to wrenches to various trinkets — a jackpot for a kid. It wasn’t until I got older and into this line of work that I realized … those were families scrambling to cover estate taxes and bills and keep their farm.”

Of course, because of the current threshold for the federal estate tax ― over $12.92 million in 2023 ― many farms these days might not face such circumstances. About 89 percent of farms are considered small ― meaning they bring in $350,000 or less in revenue a year, according to the USDA.

But there are still issues that might pose challenges.

Of course, the value of a farm often comes down to the land. And land value can change based on its intended use. Acreage dedicated to raising corn may be valued at a much higher price should it be appropriated for fracking or condominiums instead.

Luckily for those who may be inheriting a farm estate, the IRS has a valuation rule for actively farmed land. In fact, the rule was created to help reduce forced sales of land to pay federal estate taxes by allowing the land to be valued based on its farming capability.

But the rule has limits. It cannot reduce the value of a farm estate beyond a certain indexed amount. And if the land is transferred to a non-family member within 10 years, or the land is used for something other than farming, all taxes, recalculated at the higher value, are due within six months from the heirs.

Ordinarily, an estate tax bill is due nine months from the passing of the owner.

Here too, the federal tax code offers some relief. There is a provision in the federal tax code that allows for gradual payment of an estate tax bill over 10 years, starting five years from the death of the farm owner, making the debt a little more manageable. To use the provision, the farm has to be the bulk of the estate and continue in operation. And sometimes the IRS requires the new operator to purchase a bond to ensure future payment of the estate tax.

Beyond these federal estate taxes, there are sometimes state estate or inheritance taxes as well as outstanding bills that may become due after an owner’s passing. And there are no guarantees that current federal estate tax thresholds and payment rules will stay intact through the years.

“Given the state of politics, things could change in as little as a couple of years,” said Roberts. “That’s why I recommend life insurance. I’ve seen it help plenty of families. And it’s in place for your lifetime.”

The death benefit from a permanent life insurance policy could help cover estate tax liabilities and other costs at the time of the insured’s death. That would likely obviate the need for a long-term IRS payment plan and possible bond purchase. It also would give heirs flexibility to choose an option for the land other than farming or working it directly themselves. (Related: Types of permanent insurance)

Multiple heirs

What do you do when you have several children ― divide the farm among them? What if only one or two want to work the farm, and the rest want to pursue different, nonagricultural careers?

Life insurance is often used to fill the gap and equalize an estate inheritance among heirs: One (or more) gets the farm while the others get death-benefit proceeds. (Related: Estate equalization for business owners)

“I’ve seen instances where life insurance can be used to smooth the transfer of a farm ahead of time,” pointed out Ethan Eitel, a financial professional also with Synergy Wealth Solutions in Chesterfield, Missouri.

He illustrated the point with a situation he is aware of where a rancher has three sons. The eldest son works the ranch with the father, while the other two sons have pursued different careers. The family wants the oldest son to carry on with the cattle farm after the father is gone, but doesn’t want the younger brothers left out of their share of an inheritance. So the rancher and his wife have a survivorship insurance policy, covering themselves and naming the younger brothers as beneficiaries. The oldest son pays the premiums.

“Essentially, the older brother is prepaying the other brothers for their share of the cattle farm through the premiums,” said Eitel. “This will let him avoid having to take on a huge amount of debt when the parents pass in order to pay the other two for their share of the farm.”

Life insurance proceeds can also benefit a surviving spouse with final expenses and living expenses after a spouse’s death. And from a business perspective, permanent life insurance offers the ability to access the life insurance policy cash value during the insured’s life to assist with the business’s short-term cash flow needs.3

Obviously, circumstances, just like individual farms, will differ. In some instances, life insurance may not be the answer to planning for a farm transfer. But it’s a tool, like a tractor or brush hog, which should probably be considered.

Learn more from MassMutual …

Types of life insurance

Helping parents but preserving your own

5 mistakes when purchasing life insurance


1 USDA, “America’s Diverse Family Farms,” December 2021.

2 American Farm Bureau Federation, “Fast Facts about Agriculture,” 2020.

3 Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.

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The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.