Life Insurance in a Farm Succession Plan (2026)

Start With the Entity Chart, Not the Policy

Build a one-page map showing, for every life insurance policy in the operation: who owns it, whose life is insured, who pays the premium, who is the beneficiary, and which written agreement the policy is supposed to fund.

Three common patterns turn up, and each has different exposures.

Entity redemption. The LLC or corporation owns policies on each owner and uses the proceeds to buy back a deceased owner’s interest. Simple to administer, one policy per owner, but see the section on Connelly below, because this structure changed materially in 2024.

Cross-purchase. Each owner owns a policy on each of the others. Clean tax treatment on the buyout, with a basis step-up for the surviving purchasers, but the number of policies grows quickly and it creates a transfer-for-value trap when an owner exits and the others acquire that owner’s policies.

Equalization. A parent owns a policy naming the off-farm children, so the on-farm child can inherit the land without owing the siblings cash. This is the most common structure on family farms and the most fragile, because it usually depends on a single elderly insured and a premium the parent has to keep paying.

Write down which one you have. If the answer is that nobody is sure, that itself is the finding, and it is common. Related reading: when a buy-sell policy is no longer needed.

The Notice-and-Consent Rule That Voids Entity-Owned Coverage

This is the most consequential technical issue on farm-owned policies and it is missed constantly.

The Pension Protection Act of 2006 added Internal Revenue Code section 101(j), which changed the default tax treatment of employer-owned life insurance. Under it, death benefits on a policy owned by a business on the life of an employee are generally taxable to the extent they exceed premiums paid, unless the notice and consent requirements were satisfied before the policy was issued and an exception applies. The employee must have been notified in writing that the employer intended to insure their life, must have been told the maximum face amount, must have been told the employer would be the beneficiary, and must have consented in writing — all before issuance. There is no cure after the fact.

The reporting obligation is annual: employers file Form 8925 with their income tax return reporting the number of employees insured and confirming that consent requirements were met.

For a farm organized as an LLC or corporation that took out policies on family members who work in the operation, this applies. The exception categories cover, among others, insureds who were directors, highly compensated employees, or five percent owners, and situations where proceeds are paid to a family member, designated beneficiary, or estate of the insured, or are used to buy an equity interest from them. Many farm policies fit an exception on the facts. But the exception does not help if notice and consent were never obtained, because that is a threshold requirement.

Ask the question directly: was there a signed notice and consent before the policy was issued, and is there a copy? If the answer is no on a policy issued after August 17, 2006, that is a matter for the farm’s CPA immediately, not at the next death.

What Connelly Changed for Redemption Agreements

In Connelly v. United States, 602 U.S. 257 (2024), the Supreme Court addressed a closely held corporation that owned life insurance on its shareholders to fund a redemption of a deceased shareholder’s stock. The estate argued that the corporation’s obligation to redeem offset the insurance proceeds, so the proceeds should not increase the value of the company for estate tax purposes. The Court unanimously disagreed, holding that the redemption obligation was not a liability that reduced the corporation’s fair market value, and that the insurance proceeds therefore increased the value of the shares being valued in the decedent’s estate.

The practical consequence for a farm corporation or LLC using an entity redemption structure is that the death benefit can inflate the estate tax value of the deceased owner’s interest, producing a larger estate tax bill than the family modeled. On a farm already illiquid, that is exactly the wrong direction.

This is not a reason to panic and cancel coverage. It is a reason to have the structure reviewed by the farm’s attorney and CPA, since several alternative structures — cross-purchase arrangements, insurance LLCs holding the policies, or trust-owned arrangements — respond to the holding differently. What it does mean is that a buy-sell drafted before 2024 and never revisited should be revisited, and that the review should happen before a death, not after. Our page on policies funding a partner buyout covers the mechanics of restructuring.

Structure	Who Owns the Policy	Main Advantage	Main Exposure
Entity redemption	The LLC or corporation	One policy per owner, simple administration	Connelly: proceeds can increase the value of the deceased owner’s interest
Cross-purchase	Each owner, on the others	Basis step-up for surviving buyers	Policy count grows; transfer-for-value trap on an owner’s exit
Insurance LLC	A separate entity holding all policies	Consolidates administration, addresses some valuation issues	Another entity to maintain and fund
Equalization policy	The parent individually	Lets the on-farm heir keep the ground intact	Depends on one elderly insured and a premium someone must pay
Trust-owned	An irrevocable trust	Can keep proceeds outside the taxable estate	Requires trustee administration and Crummey compliance

Why Land Illiquidity Makes Insurance the Cheapest Equalizer

Run the arithmetic that farm families avoid running. Take the market value of the land, subtract the debt, and divide by the number of children. That is what each child would receive in a liquidation. Now ask whether the operation can generate that amount in cash for the off-farm children without selling ground.

On almost every diversified family operation, it cannot. Farm returns on land value are typically low single digits. An operation cannot buy out a sibling’s share at market value from operating income over any reasonable period, which is why the alternatives narrow to three: sell land, mortgage the operation heavily, or fund the difference with a death benefit.

The death benefit is generally the cheapest of the three in present-value terms, which is the honest case for keeping coverage that a family is tempted to cancel when premiums rise. It is also income-tax-free to the beneficiaries under section 101(a) when the ownership and beneficiary arrangement is clean.

Where it goes wrong is drift. The policy was sized in 2004 against land worth a fraction of today’s value. The off-farm siblings’ equalization is now badly underfunded, and nobody has looked. Or the reverse: the operation shrank, ground was sold, and the coverage is now far larger than any obligation it was meant to fund. Both situations are common and both are fixable, but only if someone puts the numbers side by side. Related: how exemption changes affect a policy’s purpose.

Ranking the Options for Coverage That No Longer Fits

Assume the review shows a policy that no longer matches any obligation — the partner was bought out, the children agreed on a different arrangement, or the insured is now eighty-two and the premium has become a burden on the operation.

1. Reassign the purpose. Before disposing of anything, ask whether the same coverage could fund a different need: estate tax liquidity, a lease buyout, a lender’s requirement, or the equalization payment the family has not yet formalized. Repurposing an existing old policy is nearly always cheaper than buying new coverage on a seventy-five-year-old.
2. Reduce the face amount. Carriers will generally reduce coverage on request, cutting the premium proportionally while keeping the contract and its original issue-age pricing intact.
3. Transfer the policy to the insured or to an appropriate holder. If the entity no longer needs it but the insured’s family does, transfer is often the right move. Transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer are enumerated exceptions to the transfer-for-value rule of section 101(a)(2). Note what is not on that list: a transfer to a co-shareholder individually. That omission is the classic trap in unwinding a cross-purchase arrangement.
4. Reduced paid-up. Ends premiums permanently, keeps a smaller permanent benefit. Sensible when the operation cannot carry the premium but the family wants something to remain.
5. Policy loan. A short bridge. On an entity-owned policy, be careful: loans against employer-owned contracts add another layer of tax complexity.
6. Extended term. Full face amount for a limited period, no more premiums. Useful when the obligation has a known end date, such as a note that matures in nine years.
7. Life settlement. Genuinely worth exploring when the insured is past seventy, the coverage serves no remaining purpose, and the premium is a real drag on the operation. Entity-owned policies are commonly sold this way, and providers are used to the documentation. See corporate-owned policies on retired owners.
8. 1035 exchange. Fixes a bad product, not a bad fit. Rarely the answer in succession planning.
9. Surrender. The floor. Fast and final, and on an entity-owned contract it can produce ordinary income to the entity in the year of surrender.

When Selling Is the Wrong Answer

The policy is still the equalization plan. If off-farm children are counting on a death benefit to receive their share, selling the policy transfers the problem to the land. Get every sibling’s written acknowledgment of the change before touching it, and expect that conversation to reopen the whole succession discussion.

A lender requires the coverage. Operating notes, Farm Service Agency loans, and land contracts frequently include a life insurance covenant with a collateral assignment. Selling assigned coverage is not possible without a release, and pursuing it can trigger a default review.

The buy-sell agreement is still in force. The agreement is a contract among the owners. Disposing of the funding without amending the agreement leaves an enforceable obligation with no money behind it, which is the worst of both worlds.

Estate tax exposure remains. A farm with real estate value above the state estate tax threshold — and several states impose one well below the federal level — may need the liquidity precisely because section 2032A and section 6166 relief carry conditions. Special use valuation, for instance, requires the heirs to continue qualified use for ten years, with recapture reported on Form 706-A if they do not. A family that expects to sell ground inside that window should not be shedding liquidity.

Notice and consent was never obtained. Resolve the section 101(j) question first. It changes the after-tax math on every option, including keeping the policy.

The insured is under seventy and healthy. The secondary market prices on life expectancy. Healthy insureds receive low or no offers, and the time spent finding that out is time not spent on the actual succession plan.

A Review Sequence for a Farm Family

Assemble in one folder: the operating agreement or bylaws, the buy-sell agreement, every life insurance policy with its schedule page, a current in-force illustration for each permanent contract, the most recent land appraisal or a credible county-level valuation, the lender’s loan documents, and the current wills and trusts.

Then hold one meeting with the farm’s attorney and CPA in the same room. Fragmented advice is the enemy here — the attorney who drafted the buy-sell often does not know what the policies actually do today, and the CPA who files the return often has never read the buy-sell.

Answer four questions at that meeting. Does each policy still fund an identified obligation? Is the amount right against current land values? Is the ownership and beneficiary arrangement consistent with the intended tax result, including the section 101(j) requirements and the Connelly holding? And what would happen, specifically, if the oldest insured died next month?

Any policy that fails those questions goes on a disposition list. For each one on that list, get a valuation before you act. A free policy review will produce the numbers on every path — kept, reduced, made paid up, surrendered, or sold — using the policy cover page, the schedule of riders, and a recent annual statement. That is a small amount of paperwork to know whether an asset the operation has been paying for since 1998 is worth ten thousand dollars or two hundred thousand. Related reading: policies held by a retiring business owner and a trustee’s duty on an underperforming policy.

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Frequently Asked Questions

Our LLC owns policies on my sons who work on the farm. Is that a problem?

Only if the notice and consent requirements of section 101(j) were not met before each policy was issued. The insured must have been told in writing that the business intended to insure them, the maximum face amount, and that the business would be beneficiary, and must have signed consent. Ask your CPA to confirm and to check Form 8925 filings.

What did the Connelly decision actually change?

The Supreme Court held in 2024 that a corporation’s obligation to redeem a deceased shareholder’s stock does not offset life insurance proceeds when valuing the company, so the proceeds can increase the estate tax value of the deceased owner’s interest. Entity redemption buy-sells written before that decision should be reviewed by counsel rather than assumed to still work as modeled.

Can we cancel the equalization policy and just leave the off-farm kids more land?

You can, but understand what it does. Splitting ground among heirs who do not farm is the most reliable way to break up an operation within a generation, because a co-owner who wants cash can usually force a partition sale. If you change the plan, get every sibling’s written acknowledgment and have counsel update the estate documents.

Does special use valuation reduce our need for insurance?

It reduces the taxable value of qualifying farmland, sometimes substantially, but it comes with conditions: material participation before death, percentage tests, an election on a timely filed return, and continued qualified use by the heirs for ten years with recapture if they stop. Liquidity is still needed for the tax that remains and for the risk of recapture.

The partner we insured was bought out years ago. What do we do with the policy?

First check whether it can be repurposed for a current obligation, which is usually cheaper than new coverage. If not, the options are transferring it to the insured, reducing the face amount, electing reduced paid-up, surrendering it, or selling it if the insured is elderly. Watch the transfer-for-value rules on any transfer to a co-owner individually.

Can a farm entity sell a policy it owns?

Yes, entity-owned policies are sold on the secondary market regularly, and providers are accustomed to the corporate documentation, resolutions, and signatures involved. The insured must consent and provide medical authorizations. Confirm there is no collateral assignment to a lender and no buy-sell obligation still depending on the coverage before starting.

Related Reading

• Buy Sell Agreement Policy Unneeded
• Buy Sell Funding Partner Bought Out
• Business Partner Buyout Policy
• Key Person Policy Executive Retired
• Corporate Owned Policy On Retiree
• Small Business Owner Retiring
• Estate Tax Exemption Change Policy
• Trustee Duty Underperforming Policy

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Pine Lake Life Solutions does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.