Landowners can use conservation easements to help manage the future. “In the most literal sense, a conservation easement is a perpetual restriction that prohibits future development and non-agricultural commercial uses, while allowing ag producers to continue doing what they do, whether it’s grazing, growing cotton or running a hunting operation,” said Blair Fitzsimons, CEO of the Texas Agricultural Land Trust (TALT) based in San Antonio. “In application, though, a conservation easement is often a land steward’s expression of their love of the land, enacted because they can’t bear the thought of their property being broken up.
Like all real estate transactions, a conservation easement is a negotiated document. Contrary to a widespread misconception, they are not a one-size-fits-all contract, Fitzsimons, a long-time TWA member, said.
“Anyone considering a conservation easement needs to consider and clearly define their goals for the property,” she said. “The goals will help dictate the way the easement is drafted because the agreement will be crafted to help the easement donor achieve those goals.”
Conservation easements can be created to protect different natural assets ranging from endangered species and water sources to open space and productive agricultural lands. In the case of TALT, the organization holds conservation easements for the latter.
“When it comes time to negotiate a conservation easement, there are certain parameters that must be met to satisfy the IRS, but within that framework, landowners have a great deal of latitude to shape an agreement that works best for their family,” she said. In all conservation easements, landowners retain title to the property. As owners, they can lease out their property or sell it if their goals or life situations change.
Common negotiated options include allowing a limited number of property divisions within the family; creating a limited number of home sites for family use on the property; and making provisions for future oil and gas development.
“Enacting a conservation easement is a philosophical decision with business ramifications,” Fitzsimons said. “It can affect a family for generations, so it’s important for donors to include the next generation in the decision-making process. It is an opportunity to identify and protect what is most important to the family.”
From a business standpoint, conservation easements also offer income and estate tax benefits.
“Conservation easements remove the possibility of development, thereby reducing the market value of the property,” Fitzsimons said. To determine the easement’s value, two appraisals are conducted. A “before” appraisal that estimates the value of the property before the easement transaction and an “after” appraisal that calculates the property’s value with the restrictions in place. The difference between the “before” and “after” is the value of the donated conservation easement.
For instance, a family owns a ranch in the Hill Country with high development potential. The market value is $20 million dollars. After the conservation easement, the value hypothetically may be $10 million. The $10 million dollar reduction in value can also be used as a $10 million dollar income tax deduction. The tax deduction may be applied to income tax liability over a 15 year period.
From an estate tax perspective, the reduction in value due to the conservation easement reduces the value of the land asset included in the overall estate. In the case of the above example, if the land was the only asset, the taxable estate value would be $10 million instead of $20 million. That reduction would cause the estate value to fall below the $10.9 unified tax credit for married couples.
“Estate taxes are the number one factor contributing to land fragmentation,” Fitzsimons said. “The conservation easement is a voluntary tool that allows landowners to keep control of their property, while addressing estate tax concerns and providing perpetual expression of their stewardship ethic.”
Opportunities and challenges
Determining whether or not to place a conservation easement on a property is a process that offers both opportunities and challenges. Landowners should approach the decision with their eyes open to both.
“A conservation easement makes sense for some families and not for others,” said Fitzsimons. “Each family has to determine whether or not a conservation easement accomplishes the family’s goals. To do that effectively, it helps to recognize the opportunities and challenges of the process, so that surprises will be minimized and families can focus on the end result.”
Open, multi-generational communication is one of the process’s benefits. Because a conservation easement is a perpetual covenant, it is important the family comes together and discusses the mutual goals for the ranch.
“Considering a conservation easement prompts families to have conversations about the future that we all tend to put off,” Fitzsimons said. “It’s not easy to talk about succession, heirs and the future of the land, but it’s not optional for families considering a conservation easement. Using a conservation easement as the impetus, families can embark on a strategic planning process, charting the course for the land and the family, and gaining the security of knowing that they all share the same vision.”
Additionally, a conservation easement can serve as the mechanism through which a family’s stewardship ethic can be communicated to succeeding generations.
“A conservation easement is a perpetual memorial to a family’s land ethic,” Fitzsimons said. “Family stories and family traditions may or may not be passed down and honoured, but a conservation easement is permanent, way of commemorating a family’s commitment to the land. A conservation easement stands as a constant reminder to succeeding generations of what their forbears considered important.”
While the concept of perpetuity offers opportunities for a family legacy, it also creates some practical challenges.
“The concept of perpetuity is not always easy for people to wrap their heads around,” said Fitzsimons. “Because these restrictions will be in place forever, each decision regarding the family and the land’s future has to be carefully weighed and considered.”
Because nothing can be taken for granted, the process of implementing a conservation easement can be lengthy.
“Drafting a conservation easement is not a quick process and it shouldn’t be,” said Fitzsimons. “It is important that families take their time and give some thought to the decisions involved.”
In addition, conservation easements require qualified legal and technical expertise as well as specialized information. None of these things are inexpensive.
“When a family is determining restrictions that will be in place forever, they need good advice and good advisors,” Fitzsimons said. “Depending on the complexity of the conservation easement, legal fees can be considerable.”
In addition to legal fees, there are transaction costs that include an appraisal, title policy, baseline report, and land trust staff fees.
“Because these appraisals are specialized, they require an appraiser who has experience working with conservation easements,” Fitzsimons said. “We strongly encourage landowners to hire an appraiser who has experience with conservation easements.”
Most land trusts, including TALT, also ask for a donation to a stewardship endowment, Fitzsimons said. Land trusts are charged with ensuring that a landowner’s goals are upheld in perpetuity and it takes financial support to accomplish that. In the case of TALT, a formula is used to determine the amount of the donation, which is then placed in a restricted account and employed to uphold the landowner’s easement.
“Families who are considering a conservation easement should put a pencil to the decision to determine the financial benefit,” Fitzsimons said. “People need to evaluate the transaction costs, know what the reduction in value will be, and be confident that this makes sense economically.”
She continued, “Families should also very actively involve the next generation in the decision making process because they are the people who will have to live with the easement. By design, conservation easements are very difficult to undo, so it is better spend time and resources getting the agreement right the first time.”
Conservation easements and estate planning
Conservation easements, as part of a comprehensive estate plan, can help families pass their ranches to the next generation.
“While TALT staff and board members cannot and do not give tax advice, we have witnessed the advantages of using conservation easements within the context of an overall estate plan,” said Fitzsimons. “We have seen families who used conservation easements in combination with Family Limited Partnerships and other tools minimize or completely eliminate estate taxes, and in doing so were able to pass along land without risking fragmentation of their ranch.”
Estate taxes are one of the leading causes of land fragmentation in the nation, she said. Many times, families, even with an estate plan in place, have to sell a portion of their ranch to pay off the estate taxes. One of the biggest benefits for families who invest the time, effort and resources in an estate plan is peace of mind.
“The sense of relief that comes with the realization that the ranch won’t have to be broken up to pay estate taxes is huge,” Fitzsimons said.
Conservation easements reduce the estate tax burden by removing the part of the land’s value that is attributed to development potential, such as residential subdivisions or industrial uses. The land is taxed on the remaining production values, such as ranching, hunting, farming or open space.
“If a family never intends to develop the farm or ranch for commercial, non-agricultural purposes, a conservation easement is a great way to release stranded capital,” Fitzsimons said. “The market value of a property can only be realized through a sale or development.”
Finally, a conservation easement memorializes a family’s commitment to stewardship.
“Landowners are bound by a common desire to leave their land better than they found it,” Fitzsimons said. “A conservation easement is a concrete, perpetual expression of that stewardship ethic. By conscientiously protecting their land from fragmentation, it is a declaration of what is important to them and their family now—and for generations to come.”
Oil and conservation easements can mix
Conservation easements and oil and gas development are not mutually exclusive.
“Under certain circumstances, oil and gas development can occur on lands placed under a conservation easement,” said Blair Fitzsimons, CEO of the Texas Agricultural Land Trust (TALT). “Landowners shouldn’t automatically dismiss the possibility of a conservation easement because of potential oil and gas development.”
While each property and each ownership situation requires individual legal and technical analysis, generally the IRS permits sub-surface extraction as long as there is “limited, localized impact… that [is] not irremediably destructive of significant conservation interests,’” Fitzsimons said. In other words, to obtain the IRS deduction, the extraction of the sub-surface minerals, such as oil and/or gas, must not cause major, permanent damage to the land, which then lessens or eliminates its conservation value.
“The landowner who is granting the conservation easement must have a degree of control over surface damages, either through a surface use agreement or surface protection provisions in the lease itself,” Fitzsimons said. “Otherwise, the deductibility of the donation may be questioned by the IRS.”
TALT’s history & TWA’s connection
Texas is losing productive, open space land faster than any other state in the nation. While suburbanization plays a role in rural land loss, fragmentation is also a serious threat. As large properties are divided into smaller parcels they can no longer support agriculture. Fragmentation leads to loss of wildlife habitat, water quality problems, and higher demand for county services.
To address this challenge, American Farmland Trust, a national non-profit, in November 2005, brought together leaders of Texas’ statewide agricultural, wildlife and landowner organizations. The group concluded that a Texas agricultural land trust, created by landowners who understand the day-to-day challenges of farming and ranching, will help stem the irreversible loss of rural lands.
Leaders from Texas & Southwestern Cattle Raisers Association, Texas Wildlife Association and Texas Farm Bureau convened a steering committee, and drafted by-laws and a certificate of incorporation. In developing the philosophy, mission and principles for the new land trust, careful attention was given to recognizing the landowner’s property rights and to ensuring that those rights will not erode over time.
The result was the creation of the Texas Agricultural Land Trust (TALT), a Texas non-profit organization. Modeled on agricultural land trusts in Colorado, Wyoming and California, TALT promotes the conservation of open space, wildlife habitats, and natural resources on Texas’ private working lands. Governed by a Board of Directors comprised of men and women who own land themselves, TALT today has partnered with landowners to conserve more than 226,000 acres of prime working lands. Created by farmers and ranchers for farmers and ranchers, TALT is proud to play a role in conserving part of Texas’ legacy of wide open spaces.