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Donating Land

Tax Implications | Donating a Remainder Interest | Donating Land by Will | Donating a Property to Generate Conservation Funds | Donating Undivided Interests | Donations that Establish a Life Income

Kayakers in Williams Preserve
Donating land is an excellent option for landowners who want the public to enjoy the scenic and ecological qualities of their land. Photo by Chris Hamilton

 

By donating land for conservation, you can help to ensure that future generations will enjoy a place you have cherished. It’s especially appropriate for a conservation organization to own land with recreational potential or fragile habitat.

Donating land may be attractive to landowners who:

  • treasure their property and want to see it preserved for the common good;
  • own property they no longer wish to use;
  • own highly appreciated property, the sale of which would prompt a high capital gains tax;
  • own substantial real estate holdings and wish to reduce property and estate tax burdens;
  • recognize that greater expertise is needed to protect and manage the land; or
  • have no heirs willing or able to protect the land’s conservation values.

Outright donations of conservation land offer several advantages. They are simple transactions that provide maximum income and estate tax benefits (while avoiding capital gains tax), and they transfer ownership and management responsibilities to a nonprofit organization or government entity. Most important, they ensure the land’s permanent protection.

Property not suited to long-term conservation ownership may still be donated to a land trust. If the donor is willing, the organization can then resell the property (protected by an easement, if warranted) and use the proceeds to benefit its conservation programs (see “Donating a Property to Generate Conservation Funds”).

Land donations for permanent conservation ownership can accomplish many different objectives but must always offer a genuine public benefit. Not all proposed donations meet this test. The value of property gifts over $5,000 must be substantiated by a qualified appraisal to be eligible for a charitable gift deduction on income taxes.

Tax Implications

By donating land, you can make a generous gift without necessarily making a large financial sacrifice. If your land has appreciated greatly since you acquired it, you could incur a high capital gains tax. Your profit might be further reduced by a realtor’s commission.

Donating land to a charitable organization or government agency entitles you to claim an income tax deduction equal to the land’s current fair market value (within tax code limitations, as noted in chapter 6). A land donation eliminates your property tax burden and removes the property value from your estate, reducing the risk that high estate taxes could force a sale by your heirs.

Before making their gift, donors should discuss with the recipient organization how their land will be managed. Most land trusts will do their best to accommodate the donor’s wishes (while retaining the right to make management decisions as circumstances change). To provide an extra guarantee that the land will be cared for according to your wishes, you can donate a conservation easement on the property to one organization, then donate the land to another (both gifts are considered deductible).

Before accepting any donated easement or property, a land trust must consider the long-term ownership and management costs and may ask for a stewardship contribution. The property may have fields to be mown, trails to be built, or other ongoing maintenance and insurance burdens. Many tax-exempt conservation organizations choose to make annual payments to the town in lieu of taxes, which adds to management costs.

Beach Plum Farm
A generous land donation secured the future of Ogunquit’s Beach Plum Farm, a rare green oasis in the midst of spreading development. photo: © Bill Silliker, Jr.

 

Donating Land

Like many beach towns, Ogunquit has changed markedly over the last half-century—becoming part of a bustling, sprawling commercial zone that stretches from Kittery to Portland. Joseph Littlefield, a long-time Ogunquit resident, recalls that village life today is “nothing like it was. When I was a kid, I’d go down to the beach every day, dig clams from the river, and steam them for dinner. You had the beach to yourself back then.”

Littlefield inherited a prominent farm in Ogunquit village that his uncle, Roby Littlefield, had farmed for more than 60 years. The 22-acre property, Beach Plum Farm, offers the last remaining ocean vistas from Route One in town. “My uncle wanted to keep the land as it is,” Joseph says. A well respected civic leader, Roby Littlefield had served as a state legislator and publisher of the town’s newspaper. He also had led a community effort to purchase shorefront land in 1923, creating Ogunquit Public Beach.

When Roby Littlefield passed on in 1988, just shy of his hundredth birthday, his nephew decided to preserve Beach Plum Farm as a treasured community resource. He donated the property to Great Works Regional Land Trust (GWRLT). The farm offers a quiet haven for people and wildlife: a local farmer still works its fields and many area families enjoy the property’s community gardens. “By preserving an important piece of the town’s past,” GWRLT’s Tin Smith says, “the Littlefields made a meaningful gift to the community’s future.”

Donating a Remainder Interest

Donations of farms, residences or conserved lands can be structured so as to allow you and other named persons (called life tenants) to continue enjoying the land during your and their lifetimes. Under such an arrangement (called a gift of a remainder interest subject to a reserved life estate), you assume full responsibility for taxes and maintenance during your life. Then when the life tenants die or release their life interests, the land trust assumes full title to the property. This technique is appropriate both for land that you want to see protected and for farms and residences without conservation value (that could be sold to fund land protection work).

A gift of a remainder interest in a farm, residence or conservation-restricted property generally is eligible for the charitable gift income tax deduction. This deduction is determined by subtracting the value of the landowner’s reserved life interest from the fair market value of the donated property, based on Internal Revenue Service (IRS) actuarial tables. The more life tenants there are, and the younger they are, the lower the value of the remainder interest donated (and, hence, the smaller the deduction).

If you plan to donate a remainder interest for conservation purposes, you can assure the land’s protection by donating a conservation easement on the land to one organization before donating the remainder interest to a second. An alternative would be to make the gift subject to conservation restrictions that require the remainder donee to transfer or impose a conservation easement when they take title (called a conservation remainder). Either way, the income tax deduction will be roughly equivalent, depending on the restrictions.

Joy MacDonald and Bob Strain
Through the gift of a remainder interest, landowners can enjoy their property while knowing that their land will go to a land conservation organization and support its work. Photo: Ciona Ulbrich

 

Donating a Remainder Interest

Joy MacDonald and Bob Strain wanted to protect the wild character of their 16-acre seasonal residence on Swans Island. Joy purchased the property more than 50 years ago from a man who made it clear that he was selling it only because he trusted her to take care of it. “I’ve always felt very lucky to be here,” she reflects, “and wanted to ensure that it wasn’t destroyed and that people could walk across the land year-round to enjoy sunset views by the water.”

MacDonald and Strain decided to combine two conservation techniques, giving Maine Coast Heritage Trust both a conservation easement and a gift of a remainder interest in their personal residence. The easement precludes further development (beyond the small existing cottage) and guarantees continued traditional use of the beach and shorefront. The reserved life estate enables MacDonald and Strain to enjoy the property throughout their lives while providing for MCHT to assume fee title thereafter. The easement will be transferred to Acadia National Park before MCHT takes fee title, and the Trust can decide then whether to convert the property into a preserve or sell it to fund other conservation work. Either way, the land will remain protected.

Combining techniques enabled MacDonald and Strain to qualify for two charitable gift deductions (one for the easement gift and one based on the present value of full but deferred ownership under the restricted remainder interest) in two separate tax years. More valuable still is the assurance that their cherished property will be well cared for through the ages: “this will be our legacy,” Bob Strain observes. “People will come by and it will be unchanged.”

Donating Land by Will

Some landowners prefer to continue holding land during their lifetimes, transferring it to a land trust or government agency by will (commonly referred to as a bequest but more correctly termed a devise or a donation by devise).

Before writing a devise into your will, make sure the chosen recipient is willing and able to receive the gift. Because organizational priorities and objectives can change, it’s best to name an alternate recipient qualified to accept charitable gifts (whose agreement should also be secured) in case the primary organization cannot accept the gift at your death. Your will can also specify conditions that would prompt the land’s transfer to another qualified charity should the primary recipient fail to use the land as specified.

Inquire about the organization’s monetary needs for owning and maintaining the property: in addition to the gift of title, you may want to consider a cash contribution to help assure the property’s long-term stewardship.

With a donation by will, there are no income tax benefits and you are responsible for property taxes during your lifetime, but the land will not be taxed as part of your estate.

Belted Galloways at Aldermere Farm
Using three consecutive conservation easements and a donation, Albert and Marion Chatfield protected their spectacular saltwater farm in Rockport. © SARA GRAY

 

Donating Land by Will

For half a century, Albert H. Chatfield, Jr. and his wife Marion lived and worked at Aldermere Farm, a 136-acre collage of fields and woods bordering Penobscot Bay. In 1953, the Chatfields acquired several Belted Galloway cattle from Scotland, establishing what is now the oldest continuously operated “Beltie” herd in the United States. Their farm, with its open vistas and handsome cows, soon became a scenic landmark in midcoast Maine. Nano Chatfield describes her grandfather Albert as “a man ahead of his time, a real visionary who acted as a landscape architect.”

Albert and Marion Chatfield were among the first landowners in Maine to grant conservation easements that prevented future subdivision or development of their property. Maine Coast Heritage Trust helped to facilitate three easements on their farm in the 1970s and 1980s, working with the easement holder—the Maine Department of Inland Fisheries and Wildlife. Through that process, Mr. Chatfield gained a better understanding of the Trust’s mission and work.

Following Mrs. Chatfield’s demise in 1993, Mr. Chatfield asked MCHT to consider taking ownership of the property upon his death. He committed to provide a generous endowment to help the Trust manage the farm over time. After careful deliberation, MCHT indicated its willingness to accept this generous gift and great responsibility.

On June 14, 1999, at the age of 99, Mr. Chatfield passed away at his Rockport home. In his will he devised Aldermere Farm to MCHT with the existing conservation easements and additional restrictions for its future use. The Trust now owns and operates Aldermere Farm, maintaining the Chatfields’ legacy of careful stewardship.

Donating a Property to Generate Conservation Funds

You can help generate needed funds for conservation work by donating a property that a land trust or other qualified charitable organization can resell. If the property has conservation merit, the organization can place an easement on it before reselling it. This approach protects the land, keeping it in private ownership and on tax rolls, while allowing the land trust to use proceeds from the sale for further conservation. Before the deed is transferred, clearly establish whether the organization intends to protect and resell the land or retain it. Tax regulations require that you deed the land unrestricted, however, if you are to enjoy income tax benefits for the land’s full unrestricted value.

Land must have significant scenic, ecological or cultural value to be appropriate for conservation. Properties that do not meet this criteria—for example, a commercial building, a residence without significant open space, or a building lot—still can be donated to a land trust that would then sell or trade the property to help fund its conservation work. The donor may take a charitable deduction for the property’s full fair market value (as determined by a qualified appraisal).

Donating Undivided Interest

To take full advantage of the charitable deduction from a large gift, you may choose to divide a single donation into several smaller ones—donating a series of fractional portions (called undivided interests) over several years. This method permits landowners to tailor the size and number of charitable deductions to amounts that they can use in succeeding years. Each subsequent donation, though, requires an updated appraisal, and the calculations involved can become complex due to tax code limits (see chapter 6). In addition, fractional interests are often worth less than their proportional share since they are less marketable by themselves.

The donee organization, being a co-owner with others, cannot protect the land until owning it in entirety. Undivided interests can become a liability for the organization if the land transfers unexpectedly and the donee must share title with potentially incompatible owners or face partition. Therefore, the organization may ask for an enforceable pledge agreement that commits you to donate any remaining undivided interest by a specific date or at death. Until the donee receives full ownership, you are expected to pay property taxes and keep the property maintained and insured. An alternative to giving undivided interests is to divide the land itself and make sequential gifts of full ownership in portions of the land. This approach has drawbacks but can be worthwhile with large properties, parts of which could stand alone as a preserve.

IMPORTANT NOTE

Gifts of conservation easements, gifts of lands, charitable gift annuities, charitable remainder trusts and many other techniques described in this book are irrevocable. Please consult with a financial advisor and an attorney to make sure that you are choosing the right course.

It may be helpful to build consensus among family members early in your conservation planning process (see Appendix B for further guidance). Within Maine, whenever a landowner donates land or sells it to a charity for a bargain price, everyone who owns a deeded interest in the land (including spouses, even if they are not named on the deed) must sign a deed to release their rights.

Donations that Establish a Life Income

Some charitable donations provide donors with regular income payments for several years or for life, as well as offering a one-time income tax deduction. These “life income gifts” are ideal for those who donate highly appreciated property (such as land), and who want to supplement their income. Among various life income gifts, two work particularly well for donations of residential or commercial property. The charitable gift annuity and charitable remainder trust are not land protection tools in themselves, but are included here because they provide income and tax benefits for the donor and a financial boost to the receiving organization.

Grandmother and grandchild
Charitable gift annuities can increase retirement income while making a significant contribution to land conservation work. Photo: © Sara Gray

 

Example of a Charitable Gift Annuity

A land trust supporter in her mid-seventies wants to help a community campaign to buy a meadow where local residents enjoy walking and picnicking. She would like to donate a small rental property, worth $76,000, but she still needs the income it provides. The property pays an annual net return of $2,800 (a 3.7 percent return on investment).

The donor and land trust decide to use a charitable gift annuity. The supporter donates her property to the land trust; in return, the trust pays her $5,320 per year for life and sells the property to help fund that commitment. The donor pays no capital gains tax when the property sells. In addition, the donor receives a tax deduction equal to 59.2 percent of the property’s value (or $45,450).

Gift: $76,000
Federal Income Tax Savings (approximate): $12,559
Annual Income (89% increase): $5,320

This technique allows the donor to boost her annual income and receive more than $12,000 in annual tax savings (which if not fully used can be carried forward for up to five years). With the rental property proceeds, the land trust is better able to acquire a valued community resource.

(Adapted from Vermont Land Trust’s Planned Giving Workbook)

Charitable Gift Annuity

A charitable gift annuity is part gift and part annuity contract. It is the simplest life income gift available. Using a short contract, the donor agrees to transfer property to a nonprofit organization, and the charity agrees to make regular annuity payments to the donor or a designated beneficiary for life. The payments are fixed over the life of the annuity, usually ranging from 6.5 to 8.5 percent of the property’s value. Gift annuities can be funded with an asset worth $5,000 or more.

Generally, the annuity is funded by selling the donated land (after placing conservation restrictions on it, if warranted). Land trusts can acquire important conservation land in this manner: the annuity becomes a form of installment purchase with the donor entitled to a charitable income tax deduction (based on the donated land’s value less the expected value of the annuity payments, determined from IRS actuarial tables). The capital gains tax is lower than in a fair market value sale and can be spread over the term of the donor’s actuarial life expectancy.

You can donate a conservation easement to one land trust while granting the land itself to a second organization (in return for a charitable gift annuity). Or you can grant unrestricted land to an organization that will set up a gift annuity and place the land under easement before selling it. In either case, the organization may sell the easement-protected property to generate the income needed for annuity payments. Any surplus proceeds, after the annuity obligation expires, support the organization’s conservation work.

Charitable Remainder Trust

The charitable remainder trust (CRT), while not in itself a land protection tool, can be combined with a conservation easement to preserve land and provide lifetime financial benefits for the donor. The CRT is most advantageous for those who hold highly appreciated property that they no longer wish to own. It allows the donor to convert a low-yielding asset into an income generating asset while benefiting a charity (such as a land trust) and avoiding a capital gains tax on the sale. The landowner establishes a CRT and then gives her property to it. The CRT then sells the property and invests the proceeds to fund guaranteed annual income payments for a set period of years or for the lifetime of the landowner and named beneficiaries. At the end of that term, the Trust pays out the remaining invested funds to the charity.

With a CRT, the donor/landowner gets both guaranteed income and a current income tax deduction for the eventual gift to the charity (based on the asset’s value less the expected value of annual income payments). Net income for the landowner and any named beneficiaries may actually be greater than from a private sale since the capital gains tax is avoided. Unlike the charitable gift annuity which is limited to two beneficiaries, the CRT permits any number of beneficiaries (although greater numbers of beneficiaries result in a lower charitable deduction).

CRTs can provide important financial support for nonprofit organizations, enhancing their work beyond the beneficiaries’ lifetimes. They can also be used in conjunction with conservation easements if the easement is completed before the property is given to the CRT (which is not permitted to donate an easement or land because it would lower payments to beneficiaries). If a land trust would like to own the property as a preserve but cannot pay its full value, the landowner can donate a partial interest in the property to the land trust prior to establishing the CRT, and then the CRT can offer the remaining partial interest for sale. The land trust is the most likely buyer, but it is critical that the sale not be arranged before the CRT is set up. Proceeds from the sale of the remaining partial interest will fund the CRT, and the land trust can own the land for a bargain price.

The initial gift for a CRT must be quite large (more than $50,000) due to administrative costs. Most trusts are administered by a financial institution, although they may be managed by an individual (even the donor). The advice of a tax attorney or financial planner is essential when considering these kinds of gifts, given their complexity.