Andrew.
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Joined: 27 Nov 2007
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 Posted: Fri Aug 29, 2008 12:05 pm Post subject: Runaway land values, taxes to force farmers off land? |
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Runaway land values and/or taxes to force them off farm land?
| Quote: | Death, and taxes
In Western communities with runaway land values, even estate planning can't
keep the farm in the family
News - From the August 11, 2008 issue of High Country News
http://www.hcn.org/issues/40.15/death-and-taxes?utm_source=wcn1&utm_me dium=e
mail
STEAMBOAT SPRINGS, COLORADO
Diane Holly's cattle ranch lies six miles west of this cowboy-friendly ski
town in the mountains of northwest Colorado. During her 52 years, she's seen the trip to town shrink by a full four miles. Steamboat Springs is sprawling
westward, filling the valley with high-end developments, haphazard
ranchettes and a few lagging attempts at affordable-housing subdivisions.
Fittingly known as the Overlook Ranch, Holly's 1886 homestead property
borders the Yampa River, encompassing 1,800 acres of lush hay meadows and
prime grazing land. Its healthy elk herds support lucrative private hunts in
the fall. This is land she hopes to see her three children work one day. But
during the past decade, as properties like this have become coveted acreage
for second homes and private recreational retreats, area ranchland prices
have more than quadrupled. As a result, ranch inheritors who want to keep
their land in the family often must come up with hundreds of thousands -- or
even millions -- of dollars in estate taxes. Many heirs have little choice
but to sell.
"The bottom line is, the land values are so high and they keep going up. The
IRS doesn't care if you want it for cows or condos,‚" says Marsha
Daughenbaugh, executive director of the Community Agriculture Alliance and a
third-generation rancher near Steamboat Springs. Like Holly, Daughenbaugh
hopes to pass her 1,400-acre Rocking C Bar Ranch on to the next generation.
The two women are emblematic of Western landowners frustrated by an estate
planning process that is constantly playing catch-up with the real estate
market.
In places like Steamboat Springs, Aspen and Jackson Hole, where ranchland,
recreation and conservation all come at a premium, sharply rising land
values put ranch owners in a bind. Estate planning is complex,
time-consuming and geared toward a rancher's reasonable prediction of her
land's value when she dies -- but accurately predicting future values in
booming real estate markets is nearly impossible. "A number of people have
re-bought the ranch in the money they have spent in lawyers, CPAs and all
those other experts,‚" says Daughenbaugh.
When Holly's mother died in 1983, the family's then-2,000-acre ranch was
appraised at $800,000. Nine years later, when Holly's 34-year-old brother
died and she became the sole heir, the value was upped to $1.2 million.
Around the same time, Holly's father was turning down generous buyout offers
from out-of-towners who wanted a private hunting preserve. Her dad was
committed to keeping the land in the family and in agriculture, she says,
and he was confident his estate plan, and the ranch, was secure.
In the mid-1990s, her dad retired in Arizona and Holly took over the ranch.
She watched land prices continue to rise and worried that the family might
still have tax issues to resolve. Then, in 1997, en route to Steamboat for
Christmas and some updated estate planning, Holly's father died in a car
accident. The ranch's new valuation came in at $2.3 million, and Holly had
the standard nine months to come up with the estate tax -- $400,000. Her
sole source of income was the ranch, which she says cleared $28,000 a year.
"You can't settle an estate like this in nine months,‚" says Holly. To raise
the money, she tried to turn part of the property into a "land preservation
subdivision,‚" a limited number of clustered homes dominated by open space.
When that effort failed, "I essentially had a fire sale,‚" she says. "I had
to sell off the most beautiful, emotional parcel -- my river bottom.‚"
Luckily for Holly, a neighbor coveted those 200 acres for fishing access. He
bought the land, put a conservation easement on it, and leased the property
back to Holly for grazing. The Overlook Ranch was down to about 1,800 acres,
but she'd kept her family's land in agriculture. She'd certainly known
ranchers who'd had to make worse trade-offs.
Tragically, two years later, Holly's husband committed suicide. The ranch,
now 10 percent smaller, was valued 28 percent higher, at $3.2 million. And
in the nine years since then, the skyrocketing land values in the area make
that look tame. Two hundred and forty-five acres of neighboring agricultural
land sold last year for $3 million, or more than $12,000 per acre. At that
rate (which is far from top-end in the area), Holly's land now clocks in at
a cool $22 million.
"It's so grandiose. It's so unbelievable. I can't even wrap my brain around
it. My kids would owe $4 million if I died tomorrow,‚" Holly says. "Now I
understand why Aspen ranchers and Vail ranchers had to sell out.‚"
The estate tax, a federal tax imposed on the value of everything that an
individual owns at the time of death, was instituted in 1916. Estate tax
proponents, including billionaires Warren Buffett and Bill Gates, say it's
an essential component of a progressive tax system that redistributes
immense wealth to the society at large. Opponents, who began calling it the
"death tax‚" in the 1990s, include landowning farmers and ranchers who say
it's fundamentally unfair to the families who earned the wealth and
discourages small businesses.
In the estate tax's current incarnation, the Economic Growth and Tax Relief
Reconciliation Act of 2001, up to $2 million of an estate's worth is exempt
from tax, while the remainder is taxed at 45 percent. Next year, the
exemption jumps to $3.5 million. During 2010, the estate tax will be
repealed for one year. Every rancher, estate planner and land conservation
professional interviewed for this story said the same thing: That's the year
that everyone is hoping to die.
Unless Congress comes up with another plan, estate taxes revert to 2001
levels in 2011 -- a $1 million exemption, plus a 55 percent tax rate on the
estate's value beyond that. A political hot potato, estate tax reform will
doubtless be left for debate until after the November elections. For the
record, Republican presidential nominee John McCain is calling for a $5
million exemption ($10 million per couple, with any unused exemption value
transferable to a spouse after death) with a tax rate of 15 percent.
Democratic nominee Barack Obama proposes a permanent hold on the 2009 rates,
with a $3.5 million exemption ($7 million per couple, with spouse
transferability) and a 45 percent tax rate.
Neither candidate's exemption is likely to help landowners in high-value
resort areas like Steamboat Springs or Aspen. "Three million to five million
dollars is not a price point that would make a difference here,‚" says
Martha Cochran, executive director of the Aspen Valley Land Trust. She
offers a jaw-dropping example: A 1,400-acre Pitkin County ranch, with a
conservation easement that removed development rights in perpetuity,
recently sold for $37 million.
Conservation easements have long helped landowners reduce the value of their
property while preserving the agricultural, ecological or open-space
qualities of their land. But despite the extra $500,000 estate-tax exemption
available for such easements, they might not be enough to solve the problem
for farms and ranches in high-dollar communities.
"There will be a time when conservation easement lands will be worth the
same or more as unconserved land because they are so rare. There is a
certain clientele of people with ungodly amounts of money who are willing to
pay,‚" says Todd Hagenbuch, a fourth-generation rancher on his family's
Green Creek Ranch near Steamboat Springs and vice-president of the Rocky
Mountain Farmers Union. The union does not want to do away with the estate
tax, but does support raising the exemption limit. Still, "the problem in
our area is that the limits would have to be so high,‚" Hagenbuch says. "Any
limit is still going to be surpassed in these high mountain valleys.‚"
Up until now, problems for farmers and ranchers (who are rarely the
deep-pocketed Rockefellers that the estate tax was intended to target)
usually arose when a family hadn't done sufficient planning to reduce an
estate's value and thus limit the amount of tax they would owe. Now that
some open land is so expensive, estate taxes dig deep into the wallets of
even the Rockefeller types in resort communities.
Although wealthy landowners might have a few more options to avoid selling
their land, the estate-planning choices are essentially the same, says Brad
Tafoya, a Durango, Colo.-based estate planner. Generally, those choices
include a combination of conservation easements, a family limited
partnership that transfers the ranch value to the next generation over many
years, and life insurance structured to help pay the estate taxes, says
Tafoya.
Green Creek Ranch, bordered by the exclusive Lake Catamount subdivision, is
a testament to such planning: Hagenbuch says his mom and her two siblings,
now in their 60s, expect to pay no estate taxes when they inherit the ranch.
The working ranch has conservation easements, and Hagenbuch says that the
transfer of wealth from Elaine Gay, the family's 90-year old matriarch, has
already occurred. But given that 77 unimproved acres next door sold in July
for more than $64,000 an acre, the next generation still likely has its work
cut out.
And many landowners are running out of ideas. There's talk in the
land-conservation community about "sweetening the pot for conservation
easement land owners,‚" says Mike Beam, a founder of the Partnership of
Rangeland Trusts, an association created to conserve working agricultural
properties. Proposals in Washington, D.C., include further extending the
$500,000 conservation easement exemption benefit, or exempting family-owned
farms and ranches from the estate tax altogether. Sen. Ken Salazar, D-Colo.,
sponsored the Family Farm and Ranch Act of 2007, which would grant an estate
tax exemption for farms and ranches that stay in the family and continue
agricultural operations after the original estate-holder passes away. The
bipartisan effort was referred to the Senate Finance Committee a year ago
but has yet to see major action.
Holly, who has planned and re-planned her estate through the years, is happy
just to stay and work her Overlook Ranch. In hopes of keeping the ranch
intact and in the family, she's using all the recommended estate planning
avenues except a conservation easement -- an option she worries might be too
restrictive to her heirs, since land values are "only going to continue to
rise, and we know it,‚" she says. She's saving an easement as a last resort.
"It's to the point where I have no estate planning tools any more,‚" Holly
says. "I don't want to liquidate. I want to live and die here on my 1,800
acres.‚"
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