Using Life Insurance to Cover Estate Taxes

Lee Lytton (Professor of Law, St. Mary’s University School of Law) recently published his article entitled “Save the Land from Uncle Sam”:  Using Life Insurance Premium Financing in Estate Planning, 2 Est. Plan. & Community Prop. L.J. 421 (2010).  The introduction is below: 

Perpetuating the legacy of landownership requires careful estate planning by today’s farmers and ranchers.  Unfortunately, the federal estate tax can be particularly destructive to these estates where there is a desire to pass on legacy holdings to succeeding generations, but the estate lacks adequate cash for the family to pay the resulting taxes.

Common strategies in estate planning include gifting programs, family trusts, by-pass trusts, family limited partnerships, and others. While all are worthy topics, this article focuses on a specific estate planning strategy that utilizes life insurance premium financing to generate a ready cash pool to pay estate taxes and ultimately save the family farm or ranch from the taxman. While this strategy is not universally applicable, for those who qualify it can provide a cost-effective estate planning option for legacy preservation. This article is divided into separate sections that discuss: (a) the unique characteristics of agricultural landownership; (b) wealth transfer taxes with specific focus on the federal estate tax, its criticisms, and its purposes; (c) a general review of life insurance as an estate planning tool; and (d) premium financing as a means of assuring sufficient estate liquidity for agricultural legacy preservation.