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Life Health > Life Insurance

Life Insurance And The 'Green-Collar' Landowner

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Often, individuals who have wealth in landholdings have been approached by land developers who make enticing offers to buy their land. In many instances the land has been passed down through generations and these landowners may be concerned about preserving the property for future generations and protecting it from being developed.

At the same time, the landowner may be concerned about maximizing wealth or equalizing an inheritance among children. These competing goals can tend to paralyze the planning process.

But the landowner has even more incentive now than ever before to preserve land. Why? Because land is now recognized as playing a bigger part in connecting the dots between energy, the environment and the economy as the new Administration attempts to resuscitate our domestic state of affairs.

While our economy recovers, advisors would be wise to take stock of the profile of the new breed of wealth that is evolving, namely the landowner as “green-collar” millionaire. That is, the diverse uses of agricultural and forestry by-products as clean renewable energy sources may be the drivers of our new economy. Our ailing auto manufacturers have already begun to apply for the available low-interest loans and government subsidies to re-tool their factories in order to accommodate the use of these renewable energy sources.

Woody by-products and the non-edible parts of harvested plants, such as corn stalks, as well as various species of grasses including Switchgrass, for example, can all be used for the cultivation of clean fuel and energy.

But using land and crops to generate energy is often predicated on the conservation of land. And conserving land is a charitable endeavor. As such, there are charitable tax incentives available to conserve land. And because some incentives will expire at the end of 2009, now is ‘operation critical’ when it comes to land conservation.

It is general knowledge that land conservation is necessary in order to safeguard our country’s fragile ecosystems and critical community watersheds, to protect stunning views, wildlife habitats and migration patterns, and to promote sustainable agriculture, ranching, forestry and timberlands, and most recently to provide for mass production of energy crops. But what may not be widely known is that a landowner need not give up land or the income derived from it in the process of conserving property to achieve tax benefits and preserve wealth.

Government policy

Incentives were built into the tax code more than two decades ago at the federal, state and local levels to encourage more conservation. The recent passage of the 2008 Farm Bill extends the increased federal tax benefits provided for under the Pension Protection Act of 2006 that expired January 1, 2008.

In addition to the Farm Bill, the recent passage of the 2008 “Economic Stimulus Package” includes energy incentives. With this backdrop, it is clear that tremendous opportunities exist for financial service professionals and landowners to work together with land conservation experts to not only achieve the benefits of planning for family lands, but to also participate in the development of our country’s new economic paradigm: the green collar client.

Conservation options

Options available to protect property include the sale of the property and the donation or sale of a conservation easement to a qualified conservation organization, such as a land trust. Planning with conservation easements can be an effective and timely strategy for landowners with life insurance as the most efficient estate liquidity vehicle to preserve family wealth in the process.

For instance, a landowner may place a conservation easement on property. A conservation easement is an agreement in which the landowner continues to own, lease and/or generate income from the land, where applicable, but agrees to limit or restrict how the land can be used or developed. The easement must last forever, as outlined in IRC ?170(h)(5)(A) in order for tax benefits discussed below to apply.

Essentially, the landowner makes a donation of the right to enforce the restrictions to a charitable conservation organization, typically a tax-exempt regional or national land trust organization under IRC ?501(c)(3). The easement can be designed to meet the specific and joint objectives of the landowner and conservation organization and can cover all or a portion of the property. The conservation organization is typically the holder of the easement and a “steward of the land” responsible for monitoring the property to ensure compliance with the terms of the easement. As an alternative to donating the easement to charity, the landowner may consider selling the easement to the charity, providing the landowner with immediate liquidity.

Restoring economic value

The placement of an easement on the property reduces the land’s highest-use economic value due to limitations placed on the land’s potential uses. The difference between the value of the land before and after the easement is the value of the tax deduction.

So, if a qualified appraiser values the property at $10 million before the easement is placed on it, and $7 million afterwards, the value of the federal income tax deduction is $3 million. Life insurance can be used to restore, at discounted dollars, the economic value lost to the easement. And it may be possible to fund premiums from the potentially substantial tax savings.

The land that is restricted must provide a public benefit and qualify as useful for one or more of the following purposes for federal tax benefits to apply:

o To provide public recreation or education.

o To preserve a significant natural habitat.

o To provide open space for scenic enjoyment or government policy.

o To preserve historic value.

o To promote sustainable agriculture or forestry.

Tax benefits

A conservation easement may provide the landowner with not only a federal income tax charitable deduction, but also with state tax credits or deductions and local property tax rebates, where applicable. In addition, significant estate tax valuation discounts are available. Therefore, it may be possible for a preservation-oriented landowner to reap significant tax savings from a bona fide easement all while connecting the conservation dots. The financial advisor can partner with the client and conservation organization and add value by translating these tax benefits.

Federal income tax charitable deductions

The amount of the federal income tax deduction the landowner can take in any given year is based on adjusted gross income (AGI) and the type of landowner. Under previous law, the amount of the deduction was limited to 30% of AGI with a 5-year carry-forward. Currently, under the 2008 Farm Bill, for any donation of a conservation easement made until 2010, a landowner can take a charitable income tax deduction limited to 50% or 100% of AGI (or taxable income, if a corporation) and can carry forward any unused deduction up to 15 years.

Federal estate tax charitable valuation discounts

Significantly, a landowner who owns conservation property at death is generally allowed a 40% valuation discount from the taxable estate on the already reduced value of the land. The maximum amount of this exclusion is $500,000, subject to certain rules under IRC ? 2031(c). In addition, the land can be reduced up to an additional $960,000 (indexed to $1,000,000 in 2009) if it qualifies under IRC ? 2032A as a qualifying ranching or farming operation.

Life insurance can be an economical tool in the wealth transfer plan of the green-collar landowner. It can help a landowner to feel comfortable preserving and restricting the use of the land because the policy replaces the economic value donated when a conservation easement is placed on the property. Life insurance can thereby help to maintain the economic value of the land and can potentially provide heirs with the liquidity needed to equalize inheritance or pay estate taxes while helping the landowner connect the environment and energy to the new economy.

Lina Storm, CLU, ChFC, is a marketing manager in the Advanced Markets Group at John Hancock Financial Services, Boston, Mass. You can e-mail her at [email protected]


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