Using an Agricultural Conservation Easement to Protect Farmland From Development (Episode #281)

0:29 Well, good afternoon, Michiganders. It is Tuesday, May twenty third, twenty twenty three, and this is Tuesday with Tom, Michigan's only weekly podcast where we answer your questions about the state planning and the state settlement in Michigan, and we don't send you a bill. As always, I'm your host, Tom Doyle, a state planning attorney, lifelong Michigan resident, and ambassador for all things good in this great state of Michigan. Welcome, Welcome to today's program. Well, just a brief recap of last episode. I talked about several ways that Secure at two point zero might affect your retirement planning.

1:17 So, if you're in the process of getting ready to retirement, retire and you're looking at your IRA, your four one K, maybe what's going to be required by way of minimum distributions, what your options are going to be, et cetera. Or maybe you've got a five to twenty nine plan for children or grandchildren. There's some changes relative to those plans included in Secure at two point zero. So if you're looking at retiring, I invite you listen to the last episode so that you'll be up to date on what your various planning options are as a result of this most recent legislation that was enacted during the Biden administration today's show. I'm excited about today's show in particular because we have a guest, Kara O'Connor from the American Farmland Trust, and during the program, I will be talking to Kara about how you might be able to use agricultural conservation easement to protect farmland from development. But as always, please remember what I'm about to discuss during the program is for educational purposes only.

2:38 It is not intended to be legal advice. You need to work with your attorney to determine what is appropriate for you and your estate plan. Well, Tara, I want to begin by thanking you for joining me for today's Tuesday with Tom episode. It's a pleasure for me to have you on the program, and I thought a good place for us to begin today would be for you to provide just a brief explanation of what the American Farmland Trust is.

3:27 American Farmland Trust is a nationwide nonprofit organization that cares deeply about protecting farmland. So we work to protect the farmland that we have and also to enhance the conservation practices that are in place on America's farms to make sure that we keep that important top soil and the soil tilt that makes our farmland so productive. You've talked before a little bit about the farm Legacy. What is the program all about? Farm Legacy is American Farmland Trust opportunity to give farmland owners forever promise that their farm will always stay a farm. So when landowners are thinking about what's coming next for their farm, they can consider donating the farm to American Farmland Trust in exchange for our assurance that we will protect the land and make sure that it's always in the hands of someone who's farming it. So it kind of raises us question, what folks are a good match for that program. Yeah, it's a great question. It won't be a great fit for lots of people who have a farmland successor in place and already have a plan for selling their farmland or casting it along to a child or a neighbor and next generation owner. But there are lots of people that I talk to you on a daily basis who either don't children, don't have children, or

5:01 successors who are interested in farming the land and they really want to think about what ensuring that their legacy of care for the land stays in place for the future. And so the most common candidates, the ideal candidates for the farm Legacy Program are people without children or other errors who are interested in taking over the farm, or people who have other assets that they might want to leave to their children, and the farmland might be the component of their estate that they think about as a charitable donation. So that might be someone who has retirement income from elsewhere and might have assets from elsewhere that they might want to pass along to their errors, and the farmland is the thing that they're going to give philanthropically. The people who are participating in the American Farmland Trust farm Legacy Program, are they donating their farms during their lifetime or is that something that they're doing as part of their estate plan. Great question, and the answer is we can do either or, I should say more specifically, the donor can choose either of those options, and there there are advantages each way depending on someone's unique situation. So someone who donates their land during their lifetime will get a significant charitable tax deduction that they can use the offset income on

6:32 their income taxes and that deduction can be carried forward for five years if they don't use it all in year one, two, three, or four, and so that can be a real advantage to someone who is in the stage of life where they are still earning income or maybe receiving income that's taxable from retirement accounts. Farmland donation can be used to offset that at tax from that income. The other reason that sometimes people want to make a donation during their lifetime and sooner than later is for medicaid or long term care planning purposes. With that five year lookback period, an asset would be considered part of someone's estate for five years looking backward from the time that they would make a donation, and so sometimes people anticipating that they might want to avail themselves of that medicaid or nursing home assistance in the future, want to make sure that their past that look back period by the time they might need nursing home care.

7:34 So those are some of the reasons why someone might make a donation during their lifetime. Someone might instead choose to make a donation a farmland in their estate after their passing because they really like to be in the driver's seat and own the farmland, manage the farmland, whether or not they're actively farming. They may have a relationships with their renters farmland renters, so making an estate gift allows someone to continue in that capacity and also to continue to receive rental income for the land during their lifetime, which can be a very nice stream of income during retirement. Now there's a third option that is a hybrid and a neat combination of those two, and that is a present donation with a reserved life estate or reserved life's use of the property. So someone makes a present donation, they get the tax advantages of making the donation during their lifetime, but with the reserved life estate and reserved life's use, they continue to be able to receive the rental income, They continue to be able to choose the renters and make management decisions about the farm during their lifetime or as long as they care to. And that's a key point because lots of people who are planning smart and taking care of their affairs want to get all of want to

9:07 take care of their affairs now and know that if anything happens to them felt wise or life circumstances wise, they have a plan in place for taking care of the farm when they're not able to, and so a present gift with a reserved life estate is a really nice solution for those people who are still healthy, still excited about visiting the land, but understand that there may come a time when in short order they don't want to be of energy farm land anymore. Then we have all the paperwork in place and the plans in place for that land then to be the responsibility in the American Farmland Trust when people are looking at do I gift it? Now? Do I gift it as part of my estate plan? Do I do the retaining the life estate I gather? That obviously involves text planning, and then I'm assuming that they would be working with their tax advisors in conjunction with your organization to see which of those fits as in their overall planning exactly. Someone should always have their own legal advice and tax planning advice when they're considering a donation of this sort.

10:16 Now that being said, we are really happy to work with those advisors because this is kind of a unique donation, and specifically we want to make sure that someone's tax advisors are aware of the specific tax benefits that arise with the donation of farmland. So that's something that we're happy to do to sort of point attorneys and advisors towards the relevant parts of the tax code and the relevant statutes in state law and federal law that they would look to in order to give give you, as you know, or that individual farmland owner good advice looking at it from an a state standpoint, and federal estate tax is obvious they sometimes come into playing all of this and the federal state tax exemption.

11:03 I'm just curious in your situation with the folks that you've been working with. The current federal estate tax is scheduled a sunset in the first of twenty twenty six. That's going to make a dramatic change if it happens to the federal state tax exemption going from around thirteen million dollars a person to around six And I know part of our conversation with clients now is to start planning for if that happens, because they can take advantage of the thirteen million dollars now for a single person through gifting, and it doesn't impact them if it happened to go down to the six and twenty twenty six. I'm curious if that's part of the conversation that you're having right now with any of your folks that you're working with about what might be around the corner with federal state taxes. It's definitely a consideration, and that's where getting that advice from your advisor, you know, an individual's advisor, is really important. So that's one of the factors. But I never want to rush people on a decision because farmland often has such emotional weight in someone's life. It's different than you know, a savings bond or something like that. Often there are family ties to the land, and so we really want people to make a decision on the timeline that is right for them. That being said, you do want to make decisions so you have the peace of mind. And what I find almost invariably is

12:37 that when I'm working with someone who decides to make a donation of their farm and we sign those papers, an American Farmland Trust says we will always make sure that this stays a farm, and furthermore, will incorporate the conservation measures that are important to you. We're going to make sure that the land is farmed well, that it's not abused, that the tops of those are going to run off into the stream. When we sign on the divotted line and give that promise, it's like a weight is lifted off of people's shoulders and they know that their land is secure in the future, even after they're gone. So in that sense, I do encourage people don't delay, you know, like, let's get that weight off your shoulder so that you can walk into your retirement and your golden years knowing that you've done right by the land.

13:33 A much of the paperwork I gather than you're able to prepare then I'm assuming it's working with the tax advisor and the attorney. Any tweaks or whatever need to be made, but you basically already have the primary documents. That's right. Yeah, because this is something this is really what we do as American farmland interest is right and enforce agricultural conservation easements. We have a good a team of attorneys on staff that can tailor those standard documents for the situation that's right for the individual. As I understand it, it's that agricultural conservation easement that's really being used to protect the farm from being turned into for example, housing development, commercial site, etc. That's kind of what that easement is accomplishing if I've got that understanding correct exactly. A lot of people don't realize that there's a way to ensure that farmland stays farmland, and I think it grieves a lot of people to think that their land would be turned into a subdivision or a parking lot or something like that. But a lot of people think, well, I guess there's nothing that I can do beyond my lifetime, and so it is a great delight that I get to tell people, Yes, you can use a tool called an agricultural conservation easement to dictate how the land is used or more importantly not used in the future. Lots of people are familiar, for example, with a utility easement or selling mineral

15:05 rights, and an agricultural conservation is easement is the same way. So just like if you were to sell your mineral rights beneath the ground, you still have all of the rights to use the land above ground on the surface. And with an agricultural conservation easement, if you separate the right to develop the land, you forego the ability to ever develop that land in the future. But a private landowner still has all of the other rights that are pertinent to land ownership. You still have the right to farm the land, rented out, sell it everything. And so in some ways people feel like, boy, that's not much to give up, because I didn't want to developed anyway, you know. So that's the way that we can make that promise.

15:52 And an American Frontland Trust visits the land every year for as long as any in per opportuity, as long as any of us can imagine, to make sure that that promise is being upheld. We're going to be looking after the land forever. But agricultural conservation easement, can it be used for things other things like preserving soil and water conservation practices something along those line, great question. We increasingly are adding some basic conservation measures in easements or agreements that are adjacent to easements. So knowing that forever is a long time, we don't want to get too prescriptive, but we absolutely will write an easement and develop an easement that, for example, preserves a wooded area or a wetland area, a grass waterway, make sure that there are stream setbacks that are respected if there's a stream on the property, and frequently just have as part of the easement that there needs to be a soil and water conservation plan in place on the land. That's really important because, especially for a farm owner who has really worked hard to build up the conservation practices, it is hard to think about someone coming in and undoing that good conservation work that you work so hard to put in place. So we work with people as much as possible

17:25 to make sure that their farmland protection arrangement honors the work that they've done and what they hope to see. What's the if you will, ideal age or stage of life for someone to start taking these steps and they want to protect their farmland if they're interested in doing that great question. There are a couple of windows sort of points in someone's life where this is a great opportunity to think about what's going to happen next with the farmland. One is at the point of retirement, because that's an ideal time when you're thinking about transitioning from having an earned income stream to income coming from other sources. Farmland can be a rental. Income from farmland can be a very nice source of income in retirement, and your tax situation is likely to change at the time of retirement, so that's one really ideal point to think about what's going to happen next with the land to make sure that the income that you might be hoping to receive from the land is in place and that you're getting most tax advantage out of that asset. Another ideal time to think about your plans for your land is at that magic age of seventy two or seventy two and a half when required minimum distributions start need to be taken from any of your retirement account That is a time when you're going to have some additional taxable income if you're withdrawing

18:57 those required minimum distributions from your retirement accounts, and so having a donation of farmland concurrent with receiving those distributions can be a nice way to offset the taxes from those requirementium distributions. And the third aspect that I do encourage people to think about is how long term care planning fits into the picture. So, like we talked about earlier, we want to make sure that any significant donation of this sort is well before you anticipate that you would need a long term care If your plan for long term care involves Medicaid or medical assistance, you want to do that do a significant donation sooner rather than later to get past the five year look back window. So far, what we've been talking about is farmland. I guess I'm curious. Can someone donate other types of real estate to the American Farmland Trust. Yes, we would accept donations of a house or some other kind of real estate, a vacation home. Now, we wouldn't promise to protect that as farmland, of course, because it's not farmland in the first place. But the nice thing about an organization like ours is that we have these real estate attorneys on staff, and so we're perhaps different than some organizations in that regard in that we are prepared to receive donations of real estate or real property. Well, obviously, the point of donating to other real estate, I'm assuming is American Farmland Trust would turn around,

20:32 sell it, turn into cash to help use as part of your operations. That would be the idea I assume, right. That's right, And so what's kind of neat to think about is that if I'm someone who cares a lot about farmland protection, but I don't happen to own a farm myself, I could donate my home to American Farmland Trust. Knowing that the proceeds from a subsequent sale of that home go to farmland protection. So I don't have to be a farmland owner to use my assets to protect farmland. That's a pretty neat opportunity that anyone who owns real estate has. When we receive donations of farmland, I should mention that the typical process is that we protect the land with an agricultural conservation easement and then sell that land to the next generation of farmers. Our view is that farmland really is best managed by someone who lives there, someone who is directly farming the land, rather than a nonprofit organization headquartered somewhere else. So we generally are oriented towards having farmland into private hands. Our ownership period really is simply to do that work of protecting it with the easement, and then we're going to put it back into the hands of a private farmer. I also, likewise, client might not be farmers, but they might have investment stocks, bonds, retirement plans, whatever,

22:06 and they as well those sorts of contributions could be made to the American Farmland Trust. That's right. One of the things that we're seeing increasingly is generous donors donating their required minimum distributions from their retirement accounts to American Farmland Trust. That's such a nice solution because it prevents someone from incurring the taxes that they would otherwise incur if they were to receive the cash from their retirement accunts. For lots of people, that's turned out to be a really nice way to support organizations whose missions they care a lot about. We're always honored to be able to use donations like that to do our conservation and farmland protection work.

22:52 Another question that comes to my mind for people, let's say that want to include both gifts to their children and gifts to charitable organizations in their estate plan. I know many estate planners in that situation would advise them, for tax reasons, to give gifts of real estate to their children and then give cash to the charities. From conversations Karat you and I have had before, you questioned that conventional wisdom of going at it in that way, Why yes, this is the point where I'm really going to buck that conventional with them and say something different than what a lot of people would hear. Like you said, a lot of attorneys or tax professionals would advise someone give the land to your kids and give the cash to a nonprofit organization. And the reason is that your children will receive stepped up basis on something like real estate, so they won't encounter as many estate taxes on land as they might with cash.

23:55 However, I also talk with a lot of parents and a lot out of children who realize that the children don't have the same passion for owning farmland as their parents do. A gift of farmland is only a gift if the children feel like it is. Land is different than any other kind of asset because it is valuable, it generates income, and it can be sold for income. But it also comes with responsibilities like property taxes, like insurance, like finding a good renter to operate the land if you're not going to be a farmer yourself, and those are responsibilities that not all airs are interested in taking on. So it may feel more like a gift to have cash without strings attached than to suddenly become an owner of farmland, maybe in a different state than one than a child or an air is living in. I also think that there's an important responsibility for conservation than anyone who owns farmland bears, So we want to make sure that whoever is going to own that farmland is really prepared to do right by the land. So that's why I invite people to really think carefully and talk with your family. Talk with your children about whether they want to own farmland, and if not, then think about making the farmland as a charitable non donation and some other assets to your heirs that they

25:30 can use as the English. The other problem I see it from kind of go along with what they're saying is in the event many clients have multiple children, if you make multiple children owners of the farmland, that also complicates everything because you can now have multiple children who don't have an interest in the farmland who now own it and have to figure out what to do with it. Absolutely, cash or stock is infinitely divisible between multiple owners. Land is not, and you risk fracturing the farmland and dividing it into parcels that really aren't usable, or you risk having to know saddling your airs with tough conversations about what to do with the land in the event that they don't agree. And that's a very real prospect that you know one or two children want to sell the other one doesn't and now they're at loggerheads. So that's not the legacy that you want to leave to your heirs. Tara, thanks again for joining us for today's program. Shortly, I will be providing contact information for the American Farmland Trust for any of the listeners who would be interesting and having further conversation about what an agricultural conservation easeman is and how they might be able to use it to protect their farmland. Tara, thanks again for joining us for

27:02 today's program. Shortly, I will be providing contact information for the American Farmland Trust for any of the listeners who would be interesting in having further conversation about what an agricultural conservation easement is and how they might be able to use it to protect their farmland. Well, that's going to be it for today's show, but please remember that Amanda and I would be honored to have the opportunity to help you protect your loved ones by putting together your estate plan, amending a plan that you already have, or assisting you in settling estate. For more information on how to contact us and arrange an appointment, simply visit LAWPC dot com. There you will find links that will allow you to set up in person or virtual consultations. Also, we have our legal store where you can actually order individual documents online. And as always, though, if you have a comment about the program, a topic that you'd like to have me discuss, questions that you'd like to have answered, please please send me an email Tom at Tuesday with Toom dot com. We invite you to please follow us on Facebook. Invite your family and friends to follow us. That would

28:34 be Tuesday with Tom and as always, the office handle on Facebook is Doyle Law PC. Remember two. Program is available on Apple Podcasts, Spotify, Google Podcast, iHeartRadio, Spreaker, probably anywhere that you regularly listen to podcast you will find Tuesday with Tom and you can always ask your smart speaker to play Tuesday with Tom as well. Thank you again for spending some of your time with us today and as always, I hope that you have an awesome day and an awesome week in Michigan. Stay safe. Tuesday with Tom has been brought to you by the estate planning attorneys at Doyle Law PC. To learn how we can help you with your estate plan or with settling a loved ones estate, please call us today at five one seven three two three seven three six six. That's five one seven, three two three seven three six six