The Role of Life Insurance in Estate Planning for Family Farms

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 wants to maintain the farm (the farm heir), 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?

This isn’t a new problem. In the late 1700s, Landgrave Frederick II of the Hesse-Cassel German state sought to fix a problem created by German inheritance patterns. In England, under the system of primogeniture, the oldest son inherited all the family land holdings. In contrast, the custom in the German states was to divide the land holdings in a particular family among all the sons when the father died. As you can imagine, after dividing these plots over succeeding generations the plots would become increasingly smaller until they would become too small to sustain a family. To solve this problem, in 1773 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).

This policy had the net effect of disinheriting a large number of young men who otherwise would have been inheriting these smaller plots. Without jobs available as an alternative, many decided to enlist in the army and serve as auxiliary troops for the British in the American War of Independence. Although German troops came from a number of German states, most of them came from Hesse-Cassel and Hesse-Hanau, which is why we refer to them collectively today as “Hessians.” (Interestingly, nearly 1,900 of them 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 citizens of the fledgling country.

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 an important tool in the estate planning toolbox as a way to raise money for estate taxes and other expenses involved in administering an estate. With the increase in estate tax thresholds in recent years, though, the role of life insurance has diminished in importance for paying estate taxes. 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.