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Title of Presentation

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Getting Grounded in

Conservation Tax Law

San Antonio CPA Symposium September 19, 2012

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Overview

• Understanding Conservation Easements

– Introduction to the concept and the tool – Income tax treatment

– Estate Tax Treatment

• Popular Uses in Texas

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The Basics

What Is A Conservation Easement (CE)? • Voluntary legal agreement

• Signed by both landowner & land trust

• Filed at county courthouse

• TX Natural Resource Code Chapter 183

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The Basics

• “Partnership” between landowner & land trust to

accomplish goals of both

• Permanently protect land’s intrinsic values

• Can provide income or tax savings to landowners

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The Basics

Property ownership = owning a bundle of sticks

How Does CE Work?

Examples: - Mineral Rights - Water Rights - Hunting Rights - Access/Easement - Development Rights

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The Basics

• All restrictions negotiated

• Landowners continue agricultural use &

recreational enjoyment

• No public use required

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Who Should Consider A CE?

• Desire to preserve land or “keep in the family”

• Desire to continue current uses of the land

• Land with conservation value/public benefit

• Location - Development “pressure”

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Why Would Someone Reduce the

Value of Their Land?

To unlock the value that is attributable to the development rights they do not intend to use

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“Development Value” is Unused

Case Study 1975 - $300,000 • recreation or agriculture value 2008 - $7,200,000 • potential “development” value - Same 600 acres -

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Valuation

RULE OF THUMB -- How CE Impacts Land 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

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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

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Result After Easement

Easement Holder: • Conserve Habitat Water quality Open spaces • Low cost Landowner: • Cash or deduction

• Still use land

• Land can appreciate & can be sold

• Unlocked value

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Living with an easement

• Annual Monitoring

• Enforcement Potential

• Impervious cover limitations

• Land can be sold or gifted

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Conservation Easements:

Income & Estate

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Synergies And Strategies

• _{FLP or Multiple Owners}

• Asset Replacement Trust (ILIT) • _{Land Management Trusts}

• Charitable Giving

• _{1031 Tax Free Exchange} • Special Use Valuation

• _{Comprehensive Income & Estate} Tax Planning

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Structuring The Deal

• Donation

• _Sale

• Combination

• _{Phasing in CE over}

multiple tax years

• _{Letter of Intent or Contract}

• Donate CE after death Transaction Structure:

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The Basics

• Donation of CE = tax savings

• Sale of CE = cash

• Estate taxes = reduced estate How CE Provides Financial Benefits:

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The Basics

How Donated 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

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Case Study: Rogers’ Ranch CE Gift

1975 - $300,000 ($500/ac) • 70% recreation or agriculture value - Same 600 acres - 2012 - $7,200,000 ($12,000/ac) • 70% potential unused “development” value -600 acres -

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Summing Up The Tax Benefits

Strategy:

• Donate CE worth $5,000,000 in 2012 (69%)

Possible Tax Savings:

• Income tax savings - $315,000

• Estate tax savings - $1,925,000

• Capital gain tax savings - $720,000

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Calculating Income Tax Savings

• 30% AGI Limitation – was 50% • 5 Year Carryover Rule – was16 years • Tax Rates & Brackets

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Income Tax Savings 2012 - 2017

Donor’s AGI $ 500,000

Tax Rate 35%

Value of CE (69% FMV) $ 5,000,000 Max. Annual Deduction (30% AGI*) $ 150,000 Annual Tax Savings $ 52,500 Number Years to Use Deduction* 6

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PHASE-IN OF

ESTATE TAX CHANGES

Year Maximum Estate Tax Rate Estate Tax Exemption _Amount Estate Tax Unified _Credit

2001 55% (plus 5% surcharge) $675,000 $220,550 2002 50% $1 million $345,800 2003 49% $1 million $345,800 2004 48% $1.5 million $555,800 2005 47% $1.5 million $555,800 2006 46% $2 million $780,800 2007 45% $2 million $780,800 2008 45% $2 million $780,800 2009 45% $3.5 million $1,455,800

2010 35% (gift tax only) estate tax repealed estate tax repealed 2011 55% (plus 5% surcharge) $1 million $345,800

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Conservation & FET Planning

Leaving a Legacy

Ecosystem Fragmentation Driven By Tax Laws $10-16 TRILLION Transferred in next 10-20 years

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Estate Planning Using CE

Using CE to control size of Gross Estate:

- FET strategy

- Legacy: Protect “Homeplace”, provide community benefit, demonstrate values • Urge landowner to involve next generation • Purchase Agreement, Letter of Intent

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Calculate FET Savings with

$5M CE Donation

Single Donor Taxable Estate before CE = $11.2M

FET liability ($11.2 - $5,120,000 = $6,080,000 X 35%) = $2,128,000 Ranch Value after CE = $2.2M + $4M cash = $6.2M Taxable Estate

• Estate Tax before CE = $2,128,000

• Estate Tax after CE = $ 203,000

$2,200,000 (Ranch value after CE)

- $ 500,000 (Additonal CE EXCLUSION)

- $ 1,700,000 (taxable value of Ranch)

$ 580,000 TAXABLE ESTATE after exemption

x 35% = $203,000 FET

TAX SAVINGS $1,925,000

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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

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• CE must qualify under IRC Sec 170(h)

• At DOD taxpayer owned at least 30% of any entity • Land owned by decedent/family for at least 3 years

prior to date of death

• Can’t Retain Development Rights

• Only “de minimus” commercial recreation uses • Keep it in the Family Rule

• Exclusion works with “post-mortem” CE

RESTRICTIONS TO THE

SEC. 2031(c) EXCLUSION

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SUBSTANTIATION OF CHARITABLE

CONTRIBUTIONS – IRS FORM 8283

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• Mortgaged Property

Reg. §1.170A-14(g)(2)

• Severed Mineral Rights

IRC §170(h)(5)(B)

• Grazing and Property Tax Issues

Tx Property Tax Code§23.51

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Sources of Funding

• Local Programs

• State wide Programs

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City of San Antonio Program

• 2000 $45MM • 2005 $90MM • 2010 $90MM = 97,000 acres protected Aquifer Protection Program

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Texas Farm & Ranch Land

Conservation Program

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NRCS Programs

• Farm & Ranch Protection Program

• Grassland Reserve Program

• Wetlands Reserve Program

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Priority Regions

Matching Land and Funding Source

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Success Stories

• Nickols Ranch

• Blanco Creek

• Dahlstrom Ranch

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Braun & Gresham, PLLC

Thomas Hall [email protected]

Allison Elder [email protected]

www.braungresham.com

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