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.
Max/Top tax rate
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Federal Gift Taxes –even though the federal estate tax was officially repealed for 2010, currently the federal tax code gives you a lifetime gift tax exemption of $1 million that can be used to offset your taxable gifts, and exempts up to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.
Range management is important strategy, conservationists say.
By Asher Price AMERICAN-STATESMAN STAFF Published: 11:07 p.m. Tuesday, March 9, 2010
ROUND MOUNTAIN — On the hills of the Reagor Ranch, a pretty piece of prickly-pear-laden Hill Country land, a burbling draw of clear water slakes the thirst of cattle and deer. And, as it turns out, it might supply the drinking taps of Austin, 60 miles to the east .
When Marjorie Reagor inherited the 900-acre ranch two years ago — it has been in her family since the 1870s — it was crowded with cedar trees and, save a creek, largely dry.
Last June, she and her husband, John Reagor , started a partnership with the federal Natural Resources Conservation Service to clear the water-sucking cedar, plant native grasses and restore open space. They hope the range management improves cattle production since there will be more grass for livestock to forage.
Already, new draws have appeared, with water coursing through the land. That water flows into the Pedernales River, which eventually contributes to the Highland Lakes, the main drinking source for Central Texas.
In short, as Texans prepare for the next big drought, squeezing as much water from the land as possible is becoming a necessity not only for ranchers, but also for city folk.
As water supplies become more valuable, conservationists say proper range management is an important way to improve them in urban areas, and the conservation service has begun an effort it calls Rural Land-Urban Water to promote the connection to urban audiences.
"We can't make it rain in Texas when and where it's needed," state conservationist Don Gohmert said. "But conservation measures on the state's vast rural lands can increase the amount, and improve the quality, of water available to Texas cities."
In the long run, as cities grow and political power grows farther removed from the soil, the effort is partly a survival measure for the agency itself, which splits the cost of conservation work with landowners.
Staffing in Texas for the conservation service has halved since the 1960s as the economy has shifted away from the land. In 1962, the agency had 1,521 employees in Texas. This year, there are 747.
"Support of our agency comes from all taxpayers, and most of them are not farmers or ranchers," Gohmert said. "Most wonder why they would pay for something on private land. When private land is managed properly, it accrues environmental benefits that urban folks may not understand."
He said proper range management prevents sediment from muddying up waterways, for example, and cuts down on allergens in the air.
The work is not exclusively on private land. The federal agency is teaming with the U.S. Geological Survey and the Texas Parks and Wildlife Department as well as several river authorities and other agencies to determine how clearance on the Honey Creek State Natural Area north of San Antonio affects watersheds in the Hill Country.
The land belonging to the Reagors, who both worked until recently at Texas A&M University, had been managed long before the federal agency offered help. Marjorie Reagor's great-grandfather settled the land in 1874, and cedar has been chopped down by ax for generations.
But the kind of heavy-duty brush control work that requires heavy machinery was long out of reach for many landowners.
"For poor families, the land had to pay the price," said Kirby Hohenberger, a cowboy-hatted, white-mustachioed man who runs a company doing work on the Reagor land. "Unless a Houston doctor or lawyer lived here, who made money somewhere else, the family doesn't have money to clear the land."
According to figures from the Natural Resources Conservation Service, brush management in Central Texas costs roughly $200 per acre ; native grass planting costs another $120 per acre; fencing, a practice that helps ranchers move livestock in a manner that resembles the grazing patterns of buffalo and elk herds, costs about $2 a foot; pipelines to ship water and promote even livestock distributions can cost $1.75 a foot ; a 2,000 -gallon livestock water trough, which improves water quality in lakes and streams, goes for $1,200; and vegetative buffers along waterways cost $370 per acre.
When a landowner enters into an Environmental Quality Incentives Program contract with the conservation service, he or she is responsible for 40 percent of the cost and the federal government will pay 60 percent, according to the agency. (Landowners still have to pay taxes on the amount the government covers.) The conservation service spent $64 million in Texas on the incentive program in 2009.
"The partnership gets rid of the cedar, which would be impossible to do financially on my own," said John Reagor.
He and his wife are working with C.A. Cowsert , a conservation service soil conservationist based in Johnson City, to do conservation work on 500 of their acres.
The land has to be in agriculture production to qualify for these programs. The contracts are typically from one to three years. Follow-up and maintenance of the conservation practices is the responsibility of the landowner.
"When conscientious land stewards ably manage their resources, as they do every day, they are ranching water just as surely as they are ranching cattle or wildlife," David Langford , a vice president emeritus with the Texas Wildlife Association, told the state water development board in 2006.