Enhanced tax incentives for conservation easements

December 6th marked some progress for tax reform, and in particular for those interested in using a conservation easement as an estate planning tool. The extension of Bush-era tax cuts agreed to by President Obama did allow for some estate tax relief, including a short extension of a the enhanced conservation easement tax incentive for tax years 2010 and 2011, retroactive to January 1, 2010.

Like other tax provisions, including the estate tax, the enhanced incentives for conservation easements expired at the end of 2009. And as with the estate tax, which is by far the most controversial with many Democrats, it is still possible the incentives may be dropped from the legislation entirely. If they are,  it would be a blow to efforts to protect Texas’ agricultural lands and wildlife habitats.

Federal Estate Tax Update

Estate taxes are one of the primary causes of fragmentation and loss of ag lands and native wildlife habitats. During his recent seminars for TALT in San Antonio and Fort Worth, noted tax expert Steve Small commented that, with an aging land ownership and 55% estate taxes, we will begin to lose agricultural lands at an accelerated rate.

TALT encourages all landowners to become informed about the efforts by Congress to reform the estate tax. The following is a summary of the current estate, gift and generation skipping tax rates, and a brief update on the most prominent bills regarding the estate tax and conservation easement tax matters.

Federal Estate Taxes – the Tax Reconciliation Act of 2001 provides that for the year 2010, the federal estate tax is eliminated for estates of decedents dying in 2010, and the tax basis of any assets transferred under those estates is changed from a “stepped –up” basis (meaning fair market value at the date of death) to a carryover basis. The Tax Reconciliation Act of 2001 provides that for the year 2011 and beyond, the federal estate tax would revert to the pre-2001 levels of a 55% top rate and an exclusion amount of $1 million (not indexed for inflation).

Federal Gift Taxes –even though the federal estate tax was officially repealed for 2010, currently the federal tax code gives you a lifetime gift tax exemption of $1 million that can be used to offset your taxable gifts, and  exempts up to $13,000 per year in gifts made by any individual to any number of other individuals - this is referred to as the annual exclusion from gift taxes. Beginning in 2010, the gift tax rate will equal the highest individual income tax rate.

Generation Skipping Taxes - for 2010, the federal generation skipping transfer tax, or GST tax, was officially repealed. For persons who died during 2009, the tax applied to transfers of more than $3.5 million that “skipped” one or more generations. “Skip” refers to either a transfer that was made to a relative who was two or more generations below your generation (for example, a grandparent to a grandchild), or to a non-relative who was more than 37 ½ years younger than you. Current law provides that the GST tax will come back in 2011 with an exemption of only $1 million that will be indexed for inflation in 2012 and beyond.

Bills Pending in Congress

As of 10-9-10

Family Farm Estate Tax Deferral Act of 2010 (Senate Bill 3664) - As a way to protect family farms and ranches before the estate tax returns to its pre-2001 rate, California Senator Feinstein and Idaho Senator Mike Crapo introduced the Family Farm Estate Tax Deferral Act of 2010 in July of 2010. The bill would defer the payment of estate taxes on farm and ranch assets until the farms or ranches are no longer operated by the family, or until they are sold or used for other purposes. Under the Family Farm Estate Tax Deferral Act, estate taxes on farm or ranch assets would be deferred, provided the following conditions are met:

• The farm or ranch must be passed down to a family member;
• The decedent must have been materially engaged in the farm's management and operation for a total of five of the eight years preceding his or her death;
• At least half of the decedent’s estate must be comprised of agricultural real and personal property;
• The family member inheriting the estate must continue to use the land for farming or ranching purposes;
• The average farm-related adjusted gross income of the decedent in the three years prior to death does not exceed $750,000 annually;
• At the time of his or her death, the decedent associated with the estate was a U.S. citizen or legal resident of the United States.

Under the bill, once the land is sold or no longer used for farm or ranch purposes, the estate tax would be “recaptured” using the value at the date the land is sold or its use changed and without a stepped up basis.

The Feinstein/Crapo bill also includes an expanded exclusion from estate tax for easement donors, increasing the IRC 2031(c) exclusion to 50% of the value of the protected land, and increasing the cap on that exclusion from $500,000 to $5 million.

Family Farm Estate Tax Relief Act of 2010 (HR 5475) - introduced by California Rep. Mike Thompson in May, 2010, this bill would amend the Internal Revenue Code to: (1) exclude from the value of a decedent's gross estate farmland used by an heir for farming purposes; (2) impose a recapture tax on an heir who disposes of such farmland after the decedent's death or who ceases to use such farmland for farming purposes; and (3) increase the limitation on the estate tax exclusion for land subject to a qualified conservation easement to $5 million and the percentage of the value of such land that is excludable.

Salazar Bill (HR 173) – introduced in January, 2009 by California Rep. John T. Salazar, this bill would amend the Internal Revenue Code to exclude from the gross estate of a decedent the value of farm or ranchland used by an heir of the decedent for farming purposes, with a condition that with respect to each of 3 or more of the 5 consecutive taxable years ending with the decedent's last taxable year, the decedent's gross income from farming or ranching exceeds 50 percent of the decedent's gross income. This bill would also impose a recapture tax on an heir who disposes of such farmland after the decedent's death or who ceases to use it for farming purposes.

American Family Farm and Ranchland Protection Act (H.R.3050/ S.3640) –introduced in the House by Oregon rep. Earl Blumenauer and in the Senate by Col. Senator Mark Udall, this bill would amend the Internal Revenue Code to increase to $5 million the limitation on the estate tax exclusion for land subject to a qualified conservation easement and to increase the percentage of the value of such land that is excludable.

TALT gratefully acknowledges the assistance of Arthur Uhl, a partner with the San Antonio based Uhl, Fitzsimons and Jewett PLLC, in compiling this update. Additional information can be found through the Land Trust Alliance, http://www.landtrustalliance.org/policy/tax-matters/estate-tax-reform-and-land-conservation, and the National Cattlemen’s Beef Association, http://www.beefusa.org/uDocs/deathtaxleavebehind.pdf.