A key difference between the two investments is that the income generated from a vineyard counts as income for tax purposes, while the income derived from selling timber generally counts as a capital gain. And if you are actively engaged in the management of the timberland (which is not a full-time job), you can also deduct operating costs against your ordinary income (depending on the passive income rules). "In effect," Binkley notes, "your after-tax returns can be higher than your pretax returns."
In the past, U.S. and European patriarchs in their old age harvested or bought cut-over land and planted new trees or vines in order to pass wealth to future generations. In this way, the land was passed when the value was low. It's still not unusual for different vine rows to be split among the progeny in Bordeaux, France, says Neil Campbell, founder and CEO of Carlsbad, Calif.-based FUTR Family Management LLC, a financial advisory firm that specializes in intergenerational wealth transfer.
Campbell believes that by planning for several generations and matching the lifetime cash-flow requirements of different family members to the assets and liabilities of timber and/or vineyards, families can earn another 0.5% per year compounded. "You know how long it takes the trees [or vines] to grow," he says. "Just as with fixed income, you can plot out an income stream over time based on the age of the trees [or vines] and when you choose to cut them."
Preserving Family Lands-and U.S. Forestland
To a certain extent, ecologists bristle at such notions. "The global economy is a wholly owned subsidiary of the environment," Ecotrust founder Spencer Beebe says, quoting former U.S. Sen. Gaylord Nelson, founder of Earth Day-not the other way around.
As this suggests, green forestry is about working with the land-and making sure that what you do is within the capability of the land. That means clear-cutting can be biologically appropriate-but not for all forest types and certainly not for all species, says Clint Bentz, a partner at Boldt, Carlisle & Smith, an accounting firm in Salem, Ore., and managing partner at Blue Den Ranch LLC, a 700-acre tree farm. "It is 60 to 80 years between planting and harvest for the trees in the Pacific Northwest and in the inland/Midwest," he says. "That's four to six generations of people. So cutting the trees down every generation doesn't make sense biologically."
The challenge, of course, is passing the family wealth in the form of land when there is little or negative cash flow. In California's wine country, these assets can be worth tens or even hundreds of millions of dollars, Zepponi says.
And much of the U.S. forestland owned by families was acquired after World War II-much of it by blue-collar workers. "These people don't think of themselves as rich, but you don't necessarily have to be a big landowner to have assets of $10 million or more," says Mary Sisock, who directs the Ties to the Land Initiative, a program at Oregon State University that helps with land succession.
The first question to ask in determining the value of land is its "highest and best use"-not what's on it, says Stephen J. Small, a Newton, Mass.-based attorney specializing in the preservation of family land and conservation. For most timberland in the U.S., he says, the "highest and best use" is development-not timberland. That means appraised value is development value-period.
According to Small, one of the first tools in the toolbox for passing family farms, ranches or forests is the conservation easement-something he wrote the income tax regulations for at the IRS more than 30 years ago. In effect, this limits the ability to develop the land in perpetuity by reserving the right to do some timber cutting, farming or ranching while protecting conservation values.
Here's how it works: The landowner maintains ownership of the land, but donates the easement to a "qualified conservation owner"-usually a land trust (though it can be a government agency). The landowner receives charitable deductions on her income tax return for an amount equal to the value of the easement (the development rights) for a period of up to six years. This can reduce the value of the land by at least 30%-and up to 90% in some cases, depending on where it is.
Some families don't want to tie their kids' hands with an easement, he says, but he emphasizes that it is a good multigenerational planning tool. "I've had some clients who want to put a conservation easement on the property so future generations don't fight about selling the land for top dollar," he says.