Conservation Easements 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

C hallenges to Leaving a Legacy 1. Poor Estate Planning 2. Bad Tax Law RESULT: Ecosystem Fragmentation & Impoverished Families $10-16 TRILLION Transferred in next 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

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 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 $300,000 ($500/ac) 70% recreation or agriculture value - Same 600 acres $7,200,000 ($12,000/ac) 70% potential unused “development” value 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% Year Carryover Rule – 5 years 2015 Tax Rates & Brackets 2015 ONLY – SUBJECT TO CHANGE

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 Rate39.6% 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$ 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 tax First Major Principle: UNLIMITED MARITAL DEDUCTION Property passes to spouse outright or in qualified trust = NO FET... at 1 st death For some married couples FET postponed until 2 nd 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 = $11.2M FET liability ($ $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 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 2000 $45MM 2005 $90MM 2010 $90MM 2015 $90MM = 100,000+ acres protected Aquifer Protection Initiative

36 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

37 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

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

Thomas Hall “Death, taxes, and childbirth! There's never a convenient time for any of them.” Gone With the Wind