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  • Land Trusts and Conservation Easements

     

    “My 34 years of tax experience has taught me that most people do not give to charity strictly for the tax benefits; but it sure helps.”

    Helping Land Trusts with Prospective Easement Donors

    While it is true that many people give to charity purely for altruistic reasons, there are many others who would not be as generous if not for the expected tax benefits.

    “We can help you “close the deal” by moving the conversation to a more comprehensive level.”

    The focus should be on achieving goals as opposed to negotiating price. Sophisticated planning techniques may allow the seller to achieve the desired outcome at a lower cost to the land trust. The structure of the transaction may be completely different depending on what the seller wants to accomplish, be it a stream of retirement income, cash in the bank as a financial cushion, cash for operations, cash to pay estate tax, etc.

    In a land trust’s endeavor to encourage people to donate or sell a land conservation easement, it will be an uphill battle to convince certain people unless it is clear what is in it for them. Our broad estate planning skills and specific knowledge as to tax incentives for farmers and ranchers (such as the tax benefits of a land conservation easement under sections 170(h) and 2031(c), the special valuation discount election under Section 2032A, and the election to defer estate tax under Section 6166), charitable lead trusts, charitable remainder trusts, and taxation of life insurance and annuities, might tip the scale in favor of a prospective easement donor proceeding ahead. Many people will need to thoroughly understand how an easement fits in with their overall estate plan, the problems it can solve, and the achievement of goals.

    Unlike certain charitable donors with substantial liquid estates, many large landowners are land rich and cash poor.

    Many do not understand the difficulties they face in trying to pass their land on to younger generations as a result of the U.S. transfer tax system.  For some a land conservation easement, in combination with the appropriate amount of life insurance, can allow them to continue to use the property for their desired purposes and provide the liquidity with which to pay the ultimate estate tax. It can make the difference as to whether the land will have to be sold at fire sale prices to pay tax or remain within the family.

    Life insurance is an established tool to provide the liquidity to pay estate tax.

    Many land owners however do not have the funds to pay premiums on a large life insurance policy; let alone pay a multimillion dollar estate tax at death.  This is where a land conservation easement can play a vital role in their personal planning.  The sale of an easement to a land trust can generate the cash with which to pay insurance premiums.  The insurance can be structured to be both income tax free and estate tax free, thereby providing the liquidity to pay the estate tax. It can allow younger generations to maintain ownership and use of the land.

    You might be thinking that if the easement is acquired, the land owner will have cash to pay estate tax. The problem is that the cash itself will be subject to estate tax unless some other planning is accomplished. Further, if that cash is reinvested into more land, the problem has not been solved.

    Stewardship & Acquisition Dollars through Life Insurance

    Perpetuity is a very long time. Easement acquisition is only the starting point. The holder of an easement accepts a long term stewardship commitment to monitor, defend, and enforce the easement that extends well beyond any of our lives. The IRS rules require that the holder of the easement have the resources to enforce the easement. It takes money. Insurance on the appropriate individuals can create a long term and repeating source of funds to enable the land trust to live up to its responsibilities. Life insurance can also create large sums of money for an easement acquisition program. As property values continue to increase, the future cost of acquisitions may rise. Life insurance proceeds can be used to supplement existing sources of acquisition dollars.

    If a land trust is successful in acquiring just a modest $10,000,000 of insurance policies per year through donations, over a fifteen to twenty year period of time substantial sums of money will become available as those policies mature. The growth in expected insurance proceeds is exponential.

    Life insurance allows someone the opportunity to leverage tax deductible gifts to a land trust for premiums that will mushroom at death into a significant sum of money; money that can be used for stewardship or acquisitions. You might set up a formalized program using segregated funds to hold the policies so that potential donors can choose the purpose for which they want the insurance to be used. As an example, a couple of advanced age might commit to an annual premium of $10,000 – $15,000 for a second-to die policy that will explode into $1,000,000 at the second death. The insurance allows a person who cannot afford to make a $1,000,000 gift feel like they can; the land trust is just going to have to wait a little while to get it.

    A few examples of lives that might be insured are:

     

    In addition to new policy acquisitions, some people may wish to donate existing insurance policies they may no longer need or want. We are available to discuss the tax consequences with potential donors.

    We encourage you to read our articles Charitable IRA and Zero Estate Tax Plan with Charitable Lead Annuity Trusts for other ideas. These are examples of how a testamentary gift to a land trust can be a win for both the land trust and the donor’s family. Life insurance is the big enabler in these transactions and often the determining factor whether the donor makes the testamentary gift.

    We are available for telephone consultations, personal meetings when appropriate, and educational seminars. We normally do not have to charge potential donors a fee since we will be adequately compensated through their purchase of life insurance that becomes part of the planning. For further details see the “Why Work With Us?” page.

    Wherever the land trust and the potential donors are located, email us at info@ebsresponsiblewealth.com to arrange for a free confidential consultation.

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    ESTATE PLANNING FOR FARMERS AND RANCHERS

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    INSURANCE TO PAY ESTATE TAX

    Internal Revenue Service Circular 230 Disclosure
    Pursuant to Internal Revenue Service Circular 230, we hereby inform you that any tax advice set forth herein with respect to U.S. federal tax issues was not intended or written by E. Brian Singer, Shaun Singer, EBS Group, EBS Responsible Wealth, or EBS Business & Investment Group, Inc., to be used, and cannot be used, by you or any taxpayer, for the purpose of avoiding any penalties that may be imposed on you or any other person under the Internal Revenue Code.

    Our role is to help you evaluate planning techniques that can reduce your future estate tax and gift tax, and increase the wealth transferred to your family. Brian Singer is not an attorney. Although he is a CPA (Inactive-California), it is not his intention to become your CPA. He no longer engages in the practice of public accounting. This and any other analysis or discussion is not meant to address all the issues and risks as you might find in a technical legal analysis. That task, if necessary, and if you are willing to pay the fee, is the responsibility of your attorney. Brian Singer attempts to take complicated tax principles and reduce them to understandable techniques for the layperson, in plain English. Any discussion and/or written analysis are meant to give you an overview of the anticipated benefits to be derived by employing specific techniques.  Final responsibility for the tax aspects rests with the attorney of your choosing. All techniques require careful drafting by a highly competent tax attorney with specialized knowledge.  A concept that might work when competently drafted, could fail as a result of mistakes made in the documents prepared by an attorney not proficient in these areas. The appreciation rates, investment earning rates, tax rates, valuation discounts, and other factors are hypothetical assumptions.  The benefits from implementing any technique will ultimately be better or worse than described depending upon variation from the assumptions. There are no guaranteed results; either in an economic analysis or in application of the tax law. We hope you will decide to use our services. Any planning we propose is incidental to the purchase of insurance. Since insurance is used to pay estate tax, the less tax you will owe, the less insurance required. The planning is essential in the determination of your insurance needs. You are in no way obligated to purchase any insurance. If it makes sense for you, then buy it; if it doesn’t make sense for you, then don’t buy it. You are not expected to do anything that you feel is not in your best interest. We may choose to disengage at any time.

    Copyright © 2011 EBS Responsible Wealth