The Role of Life Insurance in Estate Planning for Family Farms

Life insurance can play an important role in estate planning for family farms, providing for your heirs equitably while continuing the farming operation. Here’s the problem in a nutshell: you’re thinking about the future and want to put into place a solid estate plan. One of your kids (the farm heir) wants to maintain the farm, but the other one (the non-farm heir) doesn’t. You want to treat your children equitably, but the farm isn’t big enough to split in two and still leave enough land for the farm heir to maintain a viable operation. How do you allow the farm heir to continue farming while providing an equitable inheritance to the non-farm heir?

The Hufen-Edikt Disinherited a Large Number of Young Males…  

This isn’t a new problem. In 1773, Landgrave Frederick II of the Hesse-Cassel German state sought to fix a problem created by German inheritance patterns. English law, under the system of primogeniture, gave the oldest son all the family land holdings. In contrast, the German states divided the land holdings among all the sons when the father died. Over many generations these plots would become increasingly smaller until they were too small to sustain a family. To solve this problem, Frederick II issued the Hufen-Edikt which imposed the English pattern of primogeniture, leaving the entire plot to the oldest son, if a division of the land would result in holdings smaller than one hufe (approximately 30 acres, depending on the productive capability of the land).

…Incentivizing Them to Travel to America to Fight in the American Revolution

This policy disinherited a large number of young men who otherwise would have inherited these smaller plots. At the same time, the British Crown was seeking auxiliary troops from the German states to fight the rebellious Americans. Without available jobs as an alternative, many young Germans enlisted in their states’ militaries and traveled to America. German troops came from a variety of German states. Most of them, however, came from the states of Hesse-Cassel and Hesse-Hanau. This is why we refer to them collectively today as “Hessians.” (Interestingly, nearly 1,900 of the Hessians who were captured at the Battle of Saratoga in New York spent time in a prisoner of war camp just northwest of Charlottesville, Virginia. Today’s Barracks Road in Charlottesville is named for Albermarle Barracks, the site of the POW camp.) Following the war, many of the former POWs remained in the United States and became American citizens.

Life Insurance is a Better Option for Estate Planning in the Family Farm Context

So short of starting a land war in a foreign continent, how can you resolve the problem you’re facing? Life insurance is one option. Life insurance has always been a way to raise money for taxes and other expenses involved in administering an estate. With the increase in estate tax thresholds in recent years, though, the importance of life insurance for taxes has diminished. That said, it remains a very useful tool in this scenario. Working with your attorney, insurance agent, financial advisor, and any other member of your estate planning team, you can devise a strategy to protect the interests of the farm heir and non-farm heir alike, ensuring the ongoing viability of your farming operation while providing all your heirs an equitable distribution of assets at the time of your death.