July 23, 2021

Article

Over the past couple of years, we have seen a few high profi le cases on probate disputes regarding the splitting of assets on death.

Sometimes the cause for the case is the family trying to treat all family members equally. This is done by the business assets being split between both the farming and non-farming members of the family. This has often resulted in the farming members of the family feeling hard done by and the business future being put at risk.

It is therefore important to consider alternative options for treating your family fairly. This is often done by paying cash sums to the non-farming members of the family.

This is commonly done via two methods:

  1. A loan the bank to pay out cash with the business repaying the funds over a period.
  2. Taking out life insurance which will pay out a cash lump sum on death.

If we consider a practical example, Mr Jones aged 50 has a small farm, his fi rst child is active in the business and Mr Jones would like the fi rst child to have the farm on his death. His second child is not interested in farming and is employed and lives away from the farm.
Mr Jones would like to leave the farm to his fi rst child and give his second child a cash sum of £400,000 which he thinks is fair given his fi rst child has given their life to the farm and the other has made a different way in life.

So, if we consider the options:

  1. Assuming the business has suffi cient serviceability, the farm business, passing to the fi rst child, could take a bank loan of £400,000 repayable over 25 years and use the funds to pay out the sibling.
    This loan at an interest rate of 4% would cost approximately £2,110 a month and in total would cost the fi rst child just over £663,000.
  2. In this option Mr Jones would take out a whole of life insurance policy for the total value of £400,000. Assuming Mr Jones is healthy and a non-smoker then the cost per month would approximately be £524 a month for the rest of his life.
    If we then assume Mr Jones lives until age 90, then the total cost of the policy to death would be £251,250.
    As we can clearly see the total cost of the life insurance policy is cheaper than the total cost of borrowing the money. The cost of the cash sum is also bared by Mr Jones rather than the fi rst child, which means when the fi rst child receives the farm, they are free to continue the business as they wish without having to repay the additional debt.
    It is clear to see both the fi nancial and commercial benefi ts of using a life insurance policy to repay the cash sum needed. For farming families, it is therefore important to consider how they can fairly split their wealth amongst their family early on. Planning early and communicating this to the whole family can prevent disagreements in the future.

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