This post comes from Cathy Leahy, a financial planner in Southern Alberta.
“Long Range Planning does not deal with future decisions, but with the future of present decisions.” (Peter F Ducker quotes)
In Alberta, there were 51,800 employed in Agriculture (as of 2011). Of these people, many are ranch or farm owners, where the land has been passed on down through from one generation to the next. Currently, the value of these properties; especially any land near a larger city such as Calgary; hold the potential for some very large capital gains to be passed onto to the generation left behind. Recently I have been dealing with one of these Albertans that not only inherited the farm but also several million in capital gains liabilities as well as some unpaid debts. With a little tax and estate planning all this heartache and stress could have been prevented.
Since moving back to Alberta and as a result of working in a small town near Calgary, I have met many ranchers and farmers and have discussed the issue of how they are going to pass the land onto to the next generation. Unfortunately, most of them are very reluctant to prepare any plan, and certainly are not open to using life insurance to estate plan. Most of these people have walked out of my office and never made a decision to move forward with any plans for their estate. This saddens me at times because I know of so many families that had to sell off assets to pay taxes due when a parent or grandparent has passed away.
Without proper estate planning, my client’s spouse may have to sell the ranch due to the large tax bill now owing and some other outstanding debts as they settle out the estate. Fortunately, the land has increased substantially in value and can be sold to cover all the debts and capital gains that are due by next year.
Using life insurance
It is never too early to prepare a succession plan for the family farm. Leave it too long and insurance may not work in the planning due to health issues. Insurance can be set up so that taxes from significant capital gains do not result in the family having to sell off the land. The time it takes to set things up properly can play a hure role in taking a burden off the family that is left behind.
Every situation is different, some farms and ranches run as a family corporation, some are individually or jointly owned. Life insurance can be set up with the corporation paying the premiums and then the insurance pays out to the corporation to cover any debts or taxes due. If the farm is individually or jointly owned, life insurance can still be used to cover off millions in estate taxes and debts for a much smaller price than selling off the family land.
Many people tell me they don’t like life insurance and they won't purchase any as they have the cash in the bank. However; if this is your plan, be sure that the accounts are set up jointly or they may be locked up while the estate settles. Also be aware that there can be capital gains on investment accounts too.
Segregated funds offered by life insurance companies allow direct beneficiary designations to ensure that monies bypass the estate and avoid probate . A big advantage is that many of them have a 100% death benefit guarantee. You never know if markets will be up or down when you pass away.
If you own a farm or ranch and you care about keeping the assets in the family please spend some time with a qualified financial planner. One guarantee in life is that we will all die, we just don't have a crystal ball that tells us when that is going to happen.