Has Our Uninsurability Wrecked Our Plan?

Has Our Un-Insurability Wrecked Our Plan?

Problem: The parents were counting on life insurance to make their estate plan work, but unexpected health issues mean they didn’t qualify.

I’ve never been a fan of life insurance. I was skeptical when it was presented as a way for our farming son to buy out our other two kids through our estate. Then, I saw the cash flow projections with and without the insurance. I get it now.

We planned on dividing our 1,500 acres equally and giving our farming son the option to buy out his siblings at a 30% discount through our will. The life insurance on us was meant to help him fund it. Unfortunately, the underwriting process revealed some unexpected health issues. My wife ultimately needed a stent,and I had signs of prostate cancer. Fortunately, we caught everything early and we’re OK.

But now, life insurance isn’t an option, our plan doesn’t cash flow, and our insurance agent seems less engaged in the discussion. What can we do? – Submitted by email from E.W.

Solution:

It sounds like you’ve been on quite the planning roller coaster, E.W. I’ve worked with families who thought they had a clear path forward, then a major event happened and nothing’s clear anymore. They looked like they could run a marathon right up until that heart attack. Or a routine checkup led to cancer treatments. Good health is never guaranteed. I’m glad you caught everything early. Let’s not let this derail your planning.

 Some people hate life insurance. Either they or someone they know felt burned by it. For many families though, it’s simply another tool in the toolbox. Like all good tools, it should be simple to understand and designed to work. No extra bells and whistles required.

However, sometimes, people don’t qualify for life insurance. This doesn’t mean the inheritance problem can’t be solved. It’s just harder to fix because at least one of three things must bend:

1. Farm Heir’s Cash Flow: Without liquid cash upon death, the buyout depends more on traditional financing. This usually doesn’t pencil out. How much land could your son afford to buy at one time?

2. Value to Off-Farm Heirs: The purchase price must be lowered to keep loan payments manageable, meaning the non-farming heirs would receive less. How low is too low? Could non-farm assets fill the gap?

3. Timing: Given the challenges above, some will delay the timing of the buyout, or amortize it over longer periods. There’s a cost here for both parties. How long is it reasonable to delay an inheritance?

Explore each trade-off.What can bend without breaking the farm?

 Discounted purchase options through the estate is a common way to recognize the farm heir’s “sweat equity.” This sounds good on paper. However, if the transaction never occurs because it doesn’t cash flow without the insurance, would his sweat equity be wiped away too?

What if you applied the 30% discount to the number of acres the off-farm heirs inherit rather than their buyout price? Your will could leave 800 acres for your farming son and 350 acres for each non-farming child, subject to a purchase option at 100% appraised value. Off-farm heirs get the same total value, but your farm heir realizes 300 additional acres in sweat equity regardless of a buyout

Other considerations include holding the land in trust after the surviving spouse’s death, structuring entities, gifting strategies, or selling on contract. All have pros and cons.

 Unexpected health issues can be shocking. We all take our health for granted. While the lack of life insurance may be a critical factor in your planning, keep moving forward with the tools you have, but expect something to have to bend.