Death, and taxes
by Jennie Lay
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."
The author is a freelance journalist based in Steamboat Springs, Colorado.© High Country News