Wednesday, December 2, 2020

The Pooled Timber Income Fund: A New Conservation and Estate Planning Tool

 Todd Rodman

The New England Forestry Foundation has created a new vehicle for land conservation called the Pooled Timber Income Fund (PTIF).  The PTIF offers landowners the opportunity to permanently protect


their forest lands while receiving tax benefits, lifetime income and protecting working woodlands.

Since its founding in Boston in 1944, the New England Forestry Foundation has pursued innovative programs to advance conservation and forestry throughout New England. In partnership with land owners, NEFF has conserved more than 1.1 million acres of land, including one out of every three acres of forest protected in New England since 1999. Today, NEFF continues this conservation work through innovative conservation tools like the PTIF.

The PTIF is a new application of a well-established planned giving tool, but with some key differences. In a traditional pooled income fund, donors contribute cash or other assets to a charity, the charity invests the assets, and the income after expenses is distributed to the donors until their death, at which point the assets belong to the charity. In this planned giving vehicle, donors receive both lifetime income and a charitable tax deduction at the time of the initial donation. 

With NEFF’s PTIF, an owner’s interests in its forestlands are bifurcated, with a fee interest in the land donated to NEFF, and the timber growing on that land separately conveyed to the PTIF. In exchange, the landowner receives units in the fund equal to the value of its timber donation.  The fund then manages the timber in accordance with NEFF’s green-certified, Exemplary Forestry Management. This type of forestry balances income generation with the long-term health of forests. As with any traditional pooled income fund, donors receive both an initial charitable tax deduction and lifetime income.  However, with the PTIF, fund participants have the significant added benefit of participating in an investment that actively combats climate change. The PTIF uses Exemplary Forestry Management on all of its properties, leading to older, more diverse forests with a mix of tree age classes. Research suggests that this type of forest management makes the forests more resilient to climate change. This results in faster timber growth with a higher volume of wood than a typical forest, which increases the benefit to society due to the forests’ action in removing damaging carbon dioxide pollution from the atmosphere.

In addition to contributing to these climate benefits, the donor receives lifetime annual income generated from timber harvests on all of the land in the PTIF. The income is distributed based on the number units assigned at the time of donation. Using data from Massachusetts-based forests owned by NEFF, the projected rate of return before expenses on timber donations to the PTIF should range between 1.5 percent and 2.5 percent of the timber value per year. If the Pooled Timber Income Fund were to operate at a loss in any year, there would be no distributions to beneficiaries, but also no liability to cover those losses on the part of beneficiaries. Shares cannot be sold or transferred other than to successor beneficiaries named at the time of the donation. Because timber is harvested in most years from one or more of the pooled properties, each member of the fund is likely to receive a more consistent stream of income than they would if they managed their own land. There is also a reduced risk of loss from weather, insects, or other hazards, and reduced risk regarding timber prices due to the greater diversity of timber types and stand ages likely to be present in the fund.

Participants in the PTIF are eligible for a number of potential tax benefits (i.e., income, property and estate taxes), the value of which will depend on personal circumstances. Landowners donating to the PTIF may be able to claim a charitable tax deduction on their federal income tax returns for both the donation of the land to NEFF and the donation of the timber to the PTIF. The value of the donation to the PTIF is calculated from the timber value reduced by the expected income until the land passes on to NEFF. These deductions can be taken in the year of contribution and up to five succeeding years, subject to income-based limits on deductions. After enrolling in the PTIF, the landowner is no longer responsible for further property taxes on the woodland because NEFF will pay property taxes on the property while it is enrolled in the PTIF.

On the death of the landowner’s beneficiaries, the landowner’s shares are transferred to NEFF and the associated lands would merge back into the woodlands in NEFF’s portfolio of Community Forests.  NEFF owns and manages more than 140 properties totaling almost 30,000 acres across New England for the benefit of all New Englanders. These permanently protected Community Forests provide wildlife habitat and sustainably harvested wood, and because they are also free and open to the public, they can be enjoyed by visitors of all ages.

Though NEFF’s Pooled Timber Income Fund was designed as a vehicle for private forest landowners to donate forest land for conservation - cash or securities can also be donated to the PTIF. Cash and security donations entitle the donor to units in the PTIF based on market value of the asset given. In any case where cash or securities are donated, the PTIF will hold those funds in interest bearing accounts or diversified equity investments while seeking timber purchase opportunities.

 

Whether a donor is contributing timber or cash, the PTIF is a great tool to assist with future planning while advancing forest conservation throughout New England. This tool is unique in its ability to provide donors with both financial and conservation benefits. By supporting the PTIF you can help preserve the landscape of New England, protect forest wildlife habitat and ecosystems, and combat climate change.

A member of REBA’s land use and zoning section, Todd Rodman is a partner at the Worcester firm of Seder & Chandler LLP.   He has developed a broad ranging practice representing many aspects of the real estate industry. Todd represents individuals, real estate development companies, pension funds, REIT's, financial institutions, non-profits and others in connection with the acquisition, development, sale, leasing, management, permitting, construction and financing of commercial and residential properties.  Todd can be contacted at Trodman@sederlaw.com.

 

For more information about the program please contact conservation project manager, Sophie Traficonte at straficonte@newenglandforestry.org.

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