The Challenge of a Fair if Not Equal Farm Transition

Because of the special tax rules for farm enterprises, estate planning tends to focus on ensuring that inter-generational rollover conditions are met in order to defer the taxes to the next generation. Where other non-farm businesses would use life insurance to pay off taxes as part of an estate plan, this may not be necessary with a farm as taxes can be successfully rolled over to the next generation when all conditions are met.

However, in the case of family farm operations, this usually represents the bulk of the farming parent’s assets. Issues will arise as the parents start the planning process on how to divide their estate between their active and non-active farming children. Like with all businesses, mixing active farming children with non-active farming children can be very problematic, as conflicts will arise from their differing objectives.

For example: where there are three or more children and only one wants to farm, how will the estate pay-out the non-active farming children so that the active farming child can operate the farm without their interference?

One solution would be to borrow the necessary funds to buy them out. The question then arises, will the farm be able to finance 60% – 75% of the farms’ value (especially at today’s inflated prices) to pay out the two or three children not involved in the farm? In many cases that will be too much debt for a farm to carry in order to pay out to the non-active farming children.

Another problem with the farm rollover is that it just passes the tax bill onto the next generation. If for some reason the farm fails, the active farming child receiving the rollover may have to pay the deferred tax bill at a time they can ill afford to should they be forced to sell. Somehow this rarely comes up in the estate planning discussion. It is assumed that the child inheriting the farm will continue to be successful and grow the farm.

To address this, the estate plan should include the obligation to pay out the non-active farm children as part of the debt calculation. Just like a non-farm business uses life insurance as a funding mechanism to fund a buy-sell agreement to buy out a partner’s interest on their death, the farmer should look at their non-active farming children as partners in the farm enterprise that need to be paid out cost-effectively. This can be addressed with a combination of reasonable debt that the farm can handle and additional life insurance to pay out the obligation.

The problem with this is most farmers are usually in their mid to late 50’s when they create an estate plan and by that time, the cost of purchasing sufficient life insurance to fund the obligation can be cost-prohibitive. The result is that the farmer may not purchase enough insurance today to provide for a fair distribution to the non-active farming children. 

So that’s the problem. So how do the parents purchase enough life insurance to payout the non-active farming children without crippling the farm’s cash flow needed to operate effectively or take advantage of growth opportunities? That is where a little-known strategy called an Immediate Financing Arrangement (IFA) comes in. When setting up correctly, it may allow the parents to purchase sufficient life insurance to meet the obligation to pay out the non-active farming children with minimal out-of-pocket costs. I state may because each farm situation is different. The effectiveness of this strategy is dependent on the farmer’s age, health, and the current debt load the farm is carrying.

For information on whether utilizing an Immediate Financing Arrangement is suitable for you, feel free to email me at or call me at (604) 855-6846.

The above is a simplified summary of the described strategy. For complete tax rules, estate planning, risks, and lending practices, please consult the appropriate tax, legal, accounting, and lending specialists.

It is recommended that the appropriate tax, legal, lending, and estate specialists be consulted before, during and after implementing any planning scenario. Adverse tax consequences may occur if the proper steps are not followed. It is recommended that the plan be monitored on a consistent and ongoing basis. Tax and lending practices are subject to change.

The above-described timelines are dependent on the performance of non-guaranteed features of life insurance policies. Please refer to the complete policy illustration for client-specific details, risks, and alternate scenarios.

For more farm succession strategies check out my book Ready to Sell Your Farm? – or Transfer it to the Next Generation This book examines what you need to do to prepare your farm for a successful transfer to the next generation or sale to a third party.

Ready to Sell Your Farm? is available as a free PDF download at
Alternatively, the book is available from as a paperback and Kindle version from this link:  Ready to Sell Your Farm? – Amazon


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