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 identitycohesion, 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 TRILLIONTransferred in next10-20 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

• “Partnership” between land trust & landowner to accomplish goals of both

• Permanently protect land’s intrinsic values

• Provide income / tax savings to landowners

What Conservation Easements Do:

The Basics

Property ownership = owning a bundle of sticks

How Does CE Work?

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

• All restrictions negotiated, none are required

• Landowners continue agricultural use & recreational enjoyment

• No public use required

How Landowners Are Protected:

Possible 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

• Subdivision• Additional buildings• Commercial activities• Agriculture or grazing• Mineral development• Hunting and fishing• Habitat restoration• Road building• Motorized vehicles• Exotic species• Agency restrictions

The BasicsHow 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

1975 - $300,000 ($500/ac)• 70% recreation or

agriculture value

- Same 600 acres -

2015 - $7,200,000 ($12,000/ac)• 70% potential unused “development” value

-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

•50% or 100% AGI Limitation – 30% 2015 •15 Year Carryover Rule – 5 years 2015•Tax Rates & Brackets

2015 ONLY – SUBJECT TO CHANGE

Income Tax Savings 2015 – 2030 If Incentives ReturnDonor’s AGI $ 500,000Tax Rate 39.6%Value of CE (69% FMV) $

5,000,000Max. Annual Deduction (50% AGI*) $

250,000 Annual Tax Savings (33% tax rate) $

88,013Number Years to Use Deduction*

16

TOTAL TAX SAVINGS $ 1,408,208

Income Tax Savings 2015 – 2020 Current LawDonor’s AGI $ 500,000Tax Rate 39.6%Value of CE (69% FMV) $

5,000,000Max. Annual Deduction (30% AGI*) $

150,000 Annual Tax Savings $

55,013Number Years to Use Deduction*

6

TOTAL TAX SAVINGS $ 330,078

Difference = $1,078,130

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 taxFirst 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 taxSecond 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 taxUnused 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 DonationSingle Donor Taxable Estate before CE = $11.2MFET liability ($11.2 - $5,430,000 = $5,770,000 X

40%) = $2,308,000Ranch 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 BenefitsStrategy: 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

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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

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City of San Antonio – Aquifer Protection

Initiative

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City of San Antonio

• 2000 $45MM

• 2005 $90MM

• 2010 $90MM

• 2015 $90MM

= 100,000+ acres protected

Aquifer Protection Initiative

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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

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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

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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

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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

“Death, taxes, and childbirth! There's never a convenient time for any of them.”

Gone With the Wind