What can be done to protect your farm if your heir passes away first?

The problem:

Our friend’s son was tragically killed in an accident. It’s made us think about our situation. We’ve gifted our farming son and his wife 160 acres. We own our machinery together. He has discounted purchase options through our will and life insurance on us to buy out his siblings. It should work if everything goes according to plan. But what if he died today? He only has a basic will. Sounds crazy, but his death could almost be a bigger problem to the operation than ours! What can we do?

• Submitted by email from N.L.
  

The Solution:

I’m sorry about your friend’s son. As a parent, I can’t imagine anything more heartbreaking. I’ve worked with families who have suffered the death of their heir. It’s horrible. On top of the loss, they’re tasked with closing the estate while moving the farm forward. Their passion for farming takes a blow, knowing their initial vision is gone. Eventually, their vision adapts. Their estate strategies can adapt too, but only if both parents are alive, capable, and hold all the assets. 

The challenge is that the answer will be different for every family. Ask yourself:

• Are you fully retired or actively farming? 
• How integrated are the two operations? 
• Will anyone else in your family farm? 
• Do you and his spouse get along? 
• What are the expectations for the land they own vs. the land you own?  
• Does his sweat equity transfer to his kids?
• Will his kids take over the business or would this be the end of the farm?

Consider these action items:

I strongly encourage you to sit down with your son and daughter-in-law to talk through this scenario and align your estate strategies. It’s simply an extension of the good stewardship you’ve shown through your planning. Keep in mind that if your son dies first, his share of your estate passes to his kids, not his spouse. It’s his job to take care of his family through his estate. 

Your son needs a plan for the gifted acres, shared machinery, and any other acquired assets. It could include rental and purchase options for his kids and/or you if you’re still farming. Your will may need updates too. Consider secondary options for any farming grandchildren so they can step into the same role through your estate. Sometimes parents will define a “Plan B” distribution if nobody is actively farming. 

Low-cost term insurance on your son solves a lot of problems. When coordinated properly, it helps his wife and kids, protects you, and secures the operation.

Could his wife remarry someday? Everyone wants her to be happy, but right now we don’t like that guy, or at least the idea of him owning the farm. Your son’s will could hold land in trust upon death. His wife gets the income, but the land gets preserved for their kids.  

Don’t overlook his insurance policy on you. Who should own/control it if he dies first? Who pays the premium? What’s its role if the goals change? Policy ownership transfers through the will, but it’s cleaner to establish a successor owner. 

Great job completing your farm estate plan! When walking out of the attorney’s office, families exchange firm handshakes, hugs, and occasionally tears to express the deep satisfaction of finalizing a plan. But that feeling should compel the farm heir to provide the same planning for his or her family too.

Mark McLaughlin is an associate with Farm Financial Strategies and co-owner of Farm Estate GPS in Ankeny, Iowa. He grew up on a family farm near Defiance, Iowa, and shares in the fifth generation of ownership. McLaughlin has helped farm families across the Midwest develop their farm succession strategies for the last 18 years. Find an online resource to help families understand their options and take control of their farm succession strategies at FarmEstateGPS.com.