Every minute of every day, we lose two acres of agricultural land to development. That's one reason groups ranging from the American Farmland Trust (AFT) and The Nature Conservancy to your church and alma mater want you to consider charitable donations as an estate-planning tool. But is it a good idea?
“It depends on what one's desires are,” says Pat McGinty, a CPA and cattle feeder from Hereford, TX. Many families are interested in holding the family ranch together for subsequent generations. “Many times you can accomplish that with a conservation gift because they generally require that nothing changes in the way the land is operated and used.”
According to the AFT, an agricultural conservation easement is one way to accomplish this goal. A conservation easement is a deed restriction landowners voluntarily place on their property.
AFT says an agricultural conservation easement can permanently protect farmland from non-farm development and significantly reduce transfer taxes in cases where the market value of the land is much greater than its restricted value. The land stays in private ownership, on local tax rolls and the arrangements can help ensure the land stays in ag production for the benefit of future generations.
However, in most cases, the transfer is permanent.
“Any transfer, for it to be a valid estate-planning tool, has to be irrevocable at the time of transfer or you haven't accomplished anything,” McGinty says. “You need to be sure it's what you want accomplished.”
And that's where the desires of the landowner come into play.
“A conservation easement means the kids, the grandkids and the great, great grandkids will have a piece of property that exists just as it is now and they will be bound by those restrictions,” says Wayne Hayenga, an estate-planning attorney and Texas A&M University Extension specialist in College Station.
“Some folks are truly interested in preserving nature. That's their choice and I think it's wonderful. However, if they tell me they're doing a conservation easement to make the kids money, I've never been able to understand that.”
That's because a conservation easement locks in the value of the land to its productive agricultural value. For good. If the land is worth $100,000 today based on its production value, 100 years from now it will probably still be worth somewhere around $100,000 if a conservation easement is applied. Without the easement, the land could be worth quite a bit more based on its appreciated value.
If preserving the open spaces and the productive value of your land is important to you, then visit with your estate-planning counselors about the possibility of a conservation easement. But know what you're doing going in, Hayenga and McGinty say.
“Do you want to give it to your kids or do you want to give it to (an organization) because it's got this nice little program and if you do this in my nice little program, I'll give you some tax benefits,” Hayenga says. “The bottom line is you get a short-term tax benefit for a long-term value cost.”
Charitable Remainder Trusts
In addition to conservation easements, there are other charitable arrangements a landowner can consider, such as a charitable remainder trust.
“These allow an individual to give away assets of any kind, including property, during an individual's lifetime with the income generated by those gifts going to designated beneficiaries,” says Pat McGinty, CPA and cattle feeder from Hereford, TX. The beneficiaries can be the landowner, children, or a favorite charity.
The advantages, McGinty says, are the rancher gets property out of the estate, if done properly over time, which will reduce estate taxes. The individual gets a charitable contribution deduction and creates income flowing to the named beneficiaries.
At the death of the grantor, the property would go to the named charitable organization. McGinty says the grantor has the ability to change that organization up until the day of death.