Dear Michael: We have been trying to get our estate organized so that our farming son can keep on operating and our daughter, who does not farm, gets an equitable inheritance from our estate. Sadly, we weren’t able to put aside much into retirement funds and savings to provide some benefit to her. We also have quite a bit of grain in storage – or we did before the planting season began. Now it’s been sold and used to purchase fuel, seed, and all the things we’ll need for the year. Is grain a good thing to leave to our daughter in lieu of cash? It’s a sizeable amount but doesn’t our son need that to farm? – Grain Dilemma.
Dear Grain Dilemma – An important side benefit of the past decade of good prices is that many farmers now keep enough grain to pay for upcoming expenses in the following season.
Prior to this time, farmers routinely went in to the bank in the spring, got an operating line of credit, and used what they needed throughout the year. They would pay it back in the fall or winter when they sold their grain. However, many farmers found it hard to effectively market their grain when they knew they had interest adding on to their operating loan and had this incentive to sell their grain. Having grain in the bins, not having to borrow money, and being able to market grain timely has been a great expense saver.
In cases like this, we have to remember two things. One, you have to determine the cost of having to borrow the operating loan if your son didn’t have the grain to use as you do. What would it cost annually to borrow your operating costs?
If the annual cost of having to borrow this amount of money for the months he’ll need operating capital is more than the cost of buying term insurance or second to die life insurance for the two of you, then buy the life insurance to cover the amount of the grain. Your daughter is assured to receive a cash benefit and your son will receive the grain to continue operating as is.
Normally, the interest cost of borrowing today’s operating budgets – even for just half the year – can add up to tens of thousands of dollars in costs. You two can buy a lot of term or second to die insurance to guarantee your daughter’s inheritance for a lot cheaper than that.
Second, you are looking at the here and now when you are thinking about your estate plan – what you have now, what your situation is now, how best to do things with the assets you have today.
In estate planning, you have to take two views of your life. Of course, you have to consider the here and now. But you also need to consider where you will be in ten years, fifteen years and twenty years? Who will own the assets then?
By then, your son should have acquired these assets from you – such things as machinery, grain, etc. You’ll be in your seventies and your son will be approaching his fifties. Your son should have slowly purchased these assets. This should have created a larger savings account for you by then.
Or maybe, in the typical transition of assets, you really didn’t add anything to your savings as your son stepped in without actually paying cash for these assets.
However, you’ve just passed from one risk area of life to another. Now things like becoming ill, needing long-term care, or needing more income can cause serious doubts as to whether your daughter will receive any savings from your estate while your son, in essence, already has his.
If you had been really, really smart when you were young and purchased enough second to die life insurance to fill in the holes for the grain on hand, the ‘future you’ could sit back knowing your daughter is guaranteed her inheritance – even if you do need long-term care and/or burn up all of your savings. And the premiums would be so low because you bought young, they’d be an afterthought in your expenses.
Estate planning is a short-term and long-term planning process – one view as it is today and another of how it will be in the future. Plan for both when you do your estate planning. No one likes life insurance premiums – unless you’ve had it for a while and now realize what a bargain it was at the time.