LandCAN

The Importance of Land Trusts to Forestry

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Almost everyone in forestry has heard of land trusts since they have become a common fixture especially in areas that are rapidly urbanizing. But the unfortunate perception of many forest and farm owners is that land trusts are not to be trusted because their real purpose is to steal private property and pull lands out of production. Nothing could be further from the truth, but critics rely on false ‘private property’ threats to turn land owners away from land trusts even before owners understand how they work. A forest owner who knows how land trusts operate is more inclined to protect lands from development than owners who know little about this highly innovated to protect forest lands from development.

 

Consider the following scenario:
A husband and wife with two children own a 200-acre tract of highly productive timber land. The parents leave the land to their children, but divide it into two parcels. One child decides to continue managing forests in the tradition of her parents, the other sub-divides his tract into four parcels, selling three and keeping one.

The exact same pattern of ownership takes place over three subsequent generations – even among families that buy the sub-divided parcels; each married couple has two children, one keeps his inheritance intact, the other sub-divides four ways keeping one of the sub-divisions for himself.

After three generations (i.e., the ‘great grandchildren of the original couple), how much forest land is still in the original family? How many tracts are there in total (among all families) and how big is the largest tract?

The spawn of the original husband and wife will still own about 48 acres in eight tracts that range in size from 0.4 to 25 acres. The rest of the land has been divided into 117 other tracts, the largest of which is 12.5 acres, and the smallest 0.4 acres. The original property owned by two people is now owned by 250 different people (125 couples), only eight of whom can claim any connection to the original family. Over the course of about 120 years – less than a ‘rotation’ for most northern hardwoods – a productive forest is ‘parcelized’ into housing lots, and fine old-growth timber becomes landscape trees and tethers for the family dog. What a waste of good timber land.

If the original couple had been inclined to keep the land intact and still provide for their children, is there a way they could have created a bequest for their heirs without having to sub-divide the land? Absolutely; but the only way to ensure that subsequent generations do not sub-divide the land is to give or sell an ‘easement’ to a local land trust. Aside from assurances that the land will never be sub-divided, if the easement is for ‘conservation purposes,’ there are lucrative tax benefits, as well.

Almost everyone in forestry has heard of land trusts since they have become a common fixture especially in areas that are rapidly urbanizing. But the unfortunate perception of many forest and farm owners is that land trusts are not to be trusted because their real purpose is to steal private property and pull lands out of production. Nothing could be further from the truth, but critics rely on false ‘private property’ threats to turn land owners away from land trusts even before owners understand how they work. A forest owner who knows how land trusts operate is more inclined to protect lands from development than owners who know little about this highly innovated to protect forest lands from development.

A common goal of land trusts is to keep important lands intact for a variety of purposes; to protect significant wildlife habitats, to avoid overdevelopment of an area, or to maintain a working landscape. The premise of their existence is that parcelization of land leads to fragmentation of purpose. It is the process by which land trusts are able to protect lands that has created confusion and distrust on the part of land owners, a process that is not as obscure as critics make it seem.

Trusts evolved under English Common law as a way to separate the legal and beneficial interests in property. It involves three parties: a trustee, who holds and protects the legal interests; the trustor (or ‘settlor’ in some states), who provides assets for the trust; and the ‘beneficiary’ who, as the name implies, has a beneficial interest in the assets of the trust. When an asset is held in trust, the trustee makes all the decisions, but the benefit of those decisions go to the beneficiary.

Trusts have been a very common way for wealthy families to pass assets to children or grandchildren before the kids are mature enough to make their own investment decisions. Another common form of trust is known as a ‘Unified Credit Trust’ that a married couple can use to shelter assets from estate taxation. In this type of trust, the three parties mentioned above are all assumed by the husband and wife: they are at once the ‘trustors,’ the ‘trustees,’ and the ‘beneficiaries.’ In fact, it is this ability for the parties of a trust to be held in the hands of a single person that is one of the primary benefits of using trusts.

Although the practice of putting land in trust has been known ever since the concept of trusts evolved hundreds of years ago, land trusts as we know them today are not that old. In the early 1970’s, the steep trajectory of parcelization was becoming increasingly apparent, especially in the eastern states. large tracts of land were destined to become smaller, and accessible, usually productive, lands were being converted into non-productive uses at an alarming rate. It was in this climate that the popular concept of >land trusts= evolved as a way to separate the legal and beneficial interests in real property. land is a capital asset with one huge difference from other forms of capital: you can’t move it around. When you acquire land, you obtain rights associated with the use of that land, also know as the “bundle of rights.” Real property law in the U.S. recognizes a broad, inclusive interpretation of rights. Essentially, you can do almost anything on your land so long as it does not have a negative impact on your neighbors, or on society as a whole.

The most common method of separating the bundle of rights is through “easements”. An easement grants rights to land without actually owning the land. For example, if a neighbor needs to cross a corner of your property to gain access to one of his stands, he will most likely request that you grant him an easement to do so. The easement is recorded with the titles to both properties and is usually permanent. So granting (by gift or sale) an easement from your property is not something to be taken lightly.

An “easement for conservation purposes,” which almost always includes a transfer of development rights, is arguably the most important tool to keep productive farm and forest lands intact. Over the past thirty years, hundreds of mostly local, private, non-profit conservation organizations have emerged to protect farm and forest lands from development. According to the land Trust Alliance (www.lta.org), there are more than 1,200 land trusts in the U.S. and the number is growing daily. More than 6.2 million acres have been protected from development, but this is just a drop in the bucket in comparison to the many millions of acres at risk.

The process to protect land usually begins with the current owner, but sometimes the land trust will contact an owner if there is some significant value the trust wants to protect. The trust will usually ask the owner to ‘donate’ an easement, but in some instances the trust may offer to purchase. A donated easement for conservation purposes constitutes a ‘gift’ under IRS rules, and depending on the value of the gift it can offset income from other sources for up to 16 years; a huge benefit for most taxpayers. This recent change that increases the amount of the deduction and the time over which the deduction can used is set to expire at the end of 2007.

The exact nature of an easement depends on the interests of the current owner, and it is usually negotiated with the trust. So, for instance, if the owner wants to spell out the conditions for managing forest stands, or for protecting special habitats, or maintaining vistas, the easement articulates these values. land trusts like to keep things as simple as possible, but they are usually also flexible. Keep in mind, though, the more complicated the easement, the more ‘expensive’ the donation. This may sound like a contradiction of terms, but the fact is that the land trust will request an ‘endowment’ from the current owner to pay the legal costs of developing and protecting the easement in perpetuity. The size and timing of the endowment is usually tailored to the client; if the landowner is not wealthy, the trust may request a ‘remainder’ interest in the landowner’s estate to fund the endowment.

If the owner wants to set aside a portion of his land for future generations to build on, no problem; but it will cost more to set this up, and the owner is expected to foot the bill. Almost any reasonable conditions are acceptable, provided there is an easy and cost-effective way to enforce the condition and the current owner is willing to pay the cost of creating an easement. land trusts will usually handle all of the legal paper work, have the land appraised (for tax purposes), and make sure that all documents are properly executed and recorded. When it is done, virtually nothing changes, including your property taxes. you would expect the taxes to go down since you have given up a huge share of the taxable value of your asset, but such is not the case. local taxing authorities will still tax the land as though it is being held in inventory for development, and land trusts do not pay property taxes on the easements it owns, for good reason: it has made promises to protect the easements in perpetuity and these promises represent liabilities not assets. The next property owner may have more success arguing for a lower appraisal, but conservation of forest and farm lands is not known to ever lower property taxes that are based on fair market value.

If the current owner decides to sell land instead of leaving it to children, no problem. Generally, the owner has agreed to contact the land trust in the event of a sale, and a local land trust enforcement official is one of the first ‘neighbors’ the prospective buyer will meet. The land trust will review conditions of the easement with a prospective buyer, most of whom are usually not intimidated by the conditions. In fact, there are some instances where ‘protected’ land is worth more to a buyer than unprotected land, because the hassle and expense of setting up the easement was borne by a former owner. The trust will also schedule annual or semi-annual visits to make sure the new owner is towing the line.

If an owner wants to sell some timber – and the forest management plan says it’s time – a sale is scheduled. The land trust may take a more active role in the sale than most private owners would prefer, but it is the trust’s prerogative and its responsibility. Income from the sale, however, belongs to the current land owner.

What happens if the local land trust dissolves? State laws require land trusts to have ‘successor’ agreements with other land trusts so that if one folds, its responsibilities are picked up by another trust. An owner who decides to work with a local land trust will want to explore the successor agreements to be sure his easements are protected in perpetuity.

The one argument I have heard about land trusts that holds some merit is the long-term impact of a conservation easement on asset value. When a current owner gives or sells an easement that excludes the right to ever develop the land, most of the fair market value of the land is disposed of in the transaction. The ‘consideration’ for this transaction is whatever the trust is willing to pay, or – more likely – the income tax deductions allowed for a ‘charitable contribution.’ In most circumstances the consideration is but a fraction of what the owner could have received if he had sold land to the highest bidder, bearing in mind that the highest bidder could care less about the timber or wildlife habitats.

Woodland owners who protect lands by giving or selling easements to land trusts are less concerned about financial gain than maintaining and protecting the intrinsic value of land and the integrity of forest ecosystems. They are banking on the fact that one day these values will be far more important than money, and chances are in their favor.

McEvoy, T.J. 2002. The Importance of Land Trusts to Forestry. Forest Products Equipment Journal. May Issue, pp 26- 27(2). [Updated to Fall 2006.]

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