Life Insurance And The 'Green-Collar' Landowner

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.