Understanding Life insurance in Farm Business Entities: Insights by Dario Arezzo

In the world of farming business entities, buying a Life insurance policy is a common practice. Farmers and businesses often acquire insurance to ensure that in the event of a member’s passing, the financial burden on the business is minimized. Let’s delve into how Life insurance policies are utilized in the farming industry through a common example.

Imagine a scenario where John and Bob each own 50% of Family Farms LLC, a business entity valued at $6 million. To facilitate a smooth transition in the event of one of their deaths, they decide to take out Life insurance policies on each other for $3 million each. This arrangement is typically governed by a cross-purchase agreement.

If John were to pass away, Bob would receive the $3 million insurance proceeds to pay off John’s estate. As a result, Bob would then own 100% of Family Farms LLC, which is still valued at $6 million. This strategy ensures that the business can continue operating without facing significant financial strain.

Alternatively, some businesses opt to have the actual entity own the insurance policies. In this case, Family Farms LLC would own the $3 million policies on both John and Bob. If John were to die, the insurance money would flow into the business, which would then fulfill its $3 million obligation to John’s estate.

Currently, the Supreme Court is hearing arguments in the case of Connelly v. U.S., which bears similarities to the scenario described above. The IRS contends that upon John’s death, the business’s value should be considered $9 million – the original $6 million plus the $3 million from the insurance proceeds. However, the IRS argues that the $3 million obligation to John’s estate should not be classified as a liability, which would negate the $3 million increase in valuation.

As estate planning becomes a focal point for many individuals and businesses, especially with the impending sunset of higher estate exemptions, it is crucial to review all aspects of financial planning. Evaluating how Life insurance policies are structured within the business entity can play a significant role in ensuring a smooth transition of ownership and financial stability.

Dario Arezzo, the retail financial services leader for Farm Credit East, highlights the importance of understanding the implications of Life insurance policies in the farming industry. As businesses navigate through estate planning and financial management, seeking expert advice can help in making informed decisions for the future.