Conservation Easements 101
2015
Texas Association of Realtors
Succession Planning for
Legacy Land
The owner’s goals should guide the planning process.
The owner’s goals should guide
the planning process
Love and protect the land - unwanted development potential
“Keep it in the family”
Financial security, but also other values: family identity
cohesion, stewardship as wealth
Treat our children fairly (not equally)
No heirs – charitable gifting
Save on taxes
Challenges to Leaving a Legacy
1. Poor Estate Planning
2. Bad Tax Law
RESULT:
Ecosystem
Fragmentation &
Impoverished Families
$10-16 TRILLION
Transferred in next
10-20 years
Synergies And Strategies
•
•
•
•
•
•
•
•
Multiple Owners, LLC or FLP
Lifetime Gifting
Installment Sales
Multiple Users, Use Agreements
Irrevocable Trusts
Asset Replacement Trust (ILIT)
Land Management Trusts
Government Programs
Synergies And Strategies
•
•
•
•
•
•
•
•
Mitigation Banks
Carbon Sequestration
1031 Tax Free Exchange
Special Use Valuation
6166 Installment FET Payment
Charitable Giving
Deed Restrictions
Conservation Easement
Donation or Sale
The Basics
What Is A Conservation Easement (CE)?
• Voluntary legal agreement
• Signed by both owner & land trust
• Filed in county real estate records
The Basics
What Conservation Easements Do:
•
“Partnership” between land trust & landowner to
accomplish goals of both
•
Permanently protect land’s intrinsic values
•
Provide income / tax savings to landowners
The Basics
How Does CE Work?
Property ownership = owning a bundle of sticks
Examples:
- Mineral Rights
- Water Rights
- Hunting Rights
- Access/Easement
- Development Rights
The Basics
How CE Protects Land:
• Limits intensity of use or
development of land to protect
conservation values
• Gives partner organization the
right to enforce restrictions
Select a Land Trust
• Partnership – values fit with
landowner
• Capacity to do the deal
• Long term capacity
• Landowner resource
• Costs
http://www.texaslandtrustcouncil.org/
The Basics
How Landowners Are Protected:
• All restrictions negotiated,
none are required
• Landowners continue
agricultural use & recreational
enjoyment
• No public use required
Possible Restrictions???
•
•
•
•
•
•
•
•
•
•
•
Subdivision
Additional buildings
Commercial activities
Agriculture or grazing
Mineral development
Hunting and fishing
Habitat restoration
Road building
Motorized vehicles
Exotic species
Agency restrictions
•
•
•
•
•
•
•
•
•
•
•
Recreation
Outdoor education
Care of scenic features
Care of water features
Care for historic features
Land Trust monitoring & access
Public access
Trash & dumping practices
Timber management
Management plan
Development plan
The Basics
How CE Impacts Property’s Value:
Near cities reduction/deduction
can be 50-90% of land’s
appraised value
Rural land reduction/deduction
can be 30-60% of land’s
appraised value
“Development Value” is Unused
-600
1975 - $300,000 ($500/ac)
• 70% recreation or
agriculture value
- Same
2015 - $7,200,000
($12,000/ac)
• 70% potential unused
“development” value
acres -
600 acres -
The Basics
How CE Provides Tax Savings:
• Income tax deduction when donated
•
•
•
•
•
Lower appraised value of land in estate
Exclude part value from estate tax
Lower capital gains tax
Property tax relief in some cases
Tax credit in some states
Calculating Income Tax Savings
2015 ONLY – SUBJECT TO CHANGE
• 50% or 100% AGI Limitation – 30% 2015
• 15 Year Carryover Rule – 5 years 2015
• Tax Rates & Brackets
Income Tax Savings 2015 – 2030
If Incentives Return
Donor’s AGI
$ 500,000
Tax Rate
39.6%
Value of CE (69% FMV)
$ 5,000,000
Max. Annual Deduction (50% AGI*) $ 250,000
Annual Tax Savings (33% tax rate) $
88,013
Number Years to Use Deduction*
16
TOTAL TAX SAVINGS
$ 1,408,208
Income Tax Savings 2015 – 2020
Current Law
Donor’s AGI
$ 500,000
Tax Rate
39.6%
Value of CE (69% FMV)
$ 5,000,000
Max. Annual Deduction (30% AGI*) $ 150,000
Annual Tax Savings
$ 55,013
Number Years to Use Deduction*
6
TOTAL TAX SAVINGS
Difference = $1,078,130
$ 330,078
Challenge:
Federal Estate Tax
• What is the FET?
“Tax on your right to transfer property at your
death”
• How do you calculate it?
Gross Estate – Deductions = TAXABLE ESTATE
x 40% max = FET
• How do you report it?
Form 706 if estate big enough
• How do you plan for it?
FET due 9 months from death date (6 mo. Extension
permitted but FET must be paid regardless)
Estate Planning 101:
FET – a voluntary tax
First Major Principle:
UNLIMITED MARITAL DEDUCTION
• Property passes to spouse outright or in
qualified trust = NO FET . . . at 1st death
• For some married couples FET postponed until
2nd death
Estate Planning 101:
FET – a voluntary tax
Second Major Principle:
FET EXEMPTION AMOUNT (or Tax Credit)
$5,000,000 indexed to inflation
$5,430,000 in 2015
• Applies to transfers to non-spouses
• Personal to each taxpayer
• Married couples have $10,860,000 in 2015
• Unused exemption “portable” between spouses
Estate Planning 101:
FET – a voluntary tax
Unused Exemption Portability
•
•
•
•
•
•
Applies between spouses
Last spouse controls
Partial election
Requires filing 706 at first death
Does not require credit shelter trust for spouse
Obtains “step up” of tax basis
Using Conservation Easements
to Avoid or Eliminate FET
CE used to reduce the value of Gross Estate
• Donate or sell CE during lifetime
• Post-Mortem Donation in Will or Trust
FET TAX LAW:
For Charitable Deductions
30% or 50% of AGI Rule IRC§170(b)(1)(C)
5 or 15 Year Carryover Rule IRC§170(D)(ii)
Exclusion Election IRC §2031(c)
Allows for exclusion from the gross estate up to 40%
of the value of the land subject to qualified CE
BUT capped at $500,000
Calculate FET Savings with
$5M CE Donation
Single Donor Taxable Estate before CE = $11.2M
FET liability ($11.2 - $5,430,000 = $5,770,000 X 40%) = $2,308,000
Ranch Value after CE = $2.2M + $4M cash = $6.2M Taxable Estate
• Estate Tax before CE = $2,308,000
• Estate Tax after CE =
$ 81,000
$2,200,000
(Ranch value after CE)
- $ 500,000
(Additional CE 2031(c) EXCLUSION)
$ 1,700,000
(taxable value of Ranch)
$ 270,000
TAXABLE ESTATE after exemption
x @ 30% = $81,000 FET
TAX SAVINGS $2,227,000
Summing Up The Tax Benefits
Strategy: Donate CE worth $5,000,000 in 2015 (69%)
Possible Tax Savings:
• Income tax savings - $330,078
• Estate tax savings - $2,227,000
• Capital gain tax before CE = $1,642,200 (23.8%)
Sell land after CE donation: $ 401,363 (18.8%)
• Property tax savings – Market or Rollback
Who Should Consider A CE?
• Desire to preserve land or “keep in the family”
• Concerned about increasing ownership costs
• Land with conservation value / public benefit
• Location - Development “pressure” drove up
value & that unused value locked in the land
• Sufficient income to use large tax deduction or
ranch big enough for estate taxes
Success Story
Birk-Sommerfeld Heritage Ranch
•
•
•
•
•
Owned land in other state
Old living trust plan
FET Planning
Limited Partnership
Conservation Easement
30
Sale of Conservation Easement
Sources of Funding
• Local Programs
City of Austin Aquifer Protection
Hays County Open Space Bond
San Antonio Aquifer Protection Bond
County Habitat Conservation Plans (HCP) and Mitigation Banks
• State wide Programs
TX Farm & Ranchland CP
• Federal Program: ACEP
Agricultural Land Easement
Wetland Reserve Easement
City of Austin – Barton Springs
Aquifer Protection
33
City of San Antonio – Aquifer
Protection Initiative
34
City of San Antonio
Aquifer Protection
Initiative
• 2000 $45MM
• 2005 $90MM
• 2010 $90MM
• 2015 $90MM
= 100,000+ acres protected
Dahlstrom
Dilemma
• Owned 2,275 ac
ranch worth $30M
• Low tax basis
• Looming FET liability
• Need to provide financial stability for family
• Wanted Ranch to be preserved forever
• Desire to share Ranch with public
• Current quarry operations on Ranch
36
Dahlstrom Success Story
• Sold $21.8M Conservation Easement for $9.9M
• Partner with Hays County to lease 348 acres for
public access
• County right of first refusal
• Family donated $11.9M CE
& paid no capital gain tax
37
Conservation Easement Terms
•
•
•
•
No subdivision
Limited building
Protect archeological sites
Protect water quality
& quantity
• Allows agricultural &
eco-tourism business
• Allows existing quarry operations until 2060
38
Stay Informed and Connected
• Join our Landowner Alert System
http://www.braungresham.com/contact-us/#contact
• Like us on Facebook
www.facebook.com/BraunGresham
• Follow us on Twitter
twitter.com/BraunGreshamLaw
39
“Death, taxes, and childbirth! There's never a
convenient time for any of them.”
Gone With the Wind
Thomas Hall
thall@braungresham.com
512-894-5426
www.braungresham.com
“Death, taxes, and childbirth! There's never a
convenient time for any of them.”
Gone With the Wind
Thomas Hall
thall@braungresham.com
512-894-5426
www.braungresham.com