Estate Planner May-Jun 1999
A conservation easement is one of the qualified conservation contributions treated as a charitable deduction for income tax purposes. These contributions give an interest in real property to a qualified organization exclusively for conservation purposes. Under recent legislation, conservation easements can also qualify for a new estate tax exclusion.
Conservation easements can take many forms, including:
- A limitation on the property’s use,
- A limitation on the number of building sites on an undeveloped real estate parcel,
- A prohibition against depleting the land’s natural resources, such as timber, and
- A prohibition against fishing or hunting.
Conservation easements must be entered into between the owner of the real estate and a “qualified organization.” A qualified organization is one committed to conservation purposes with the resources to enforce the easement. The Internal Revenue Code (IRC) permits many conservation purposes including:
- Preservation of land for outdoor recreation or education of the general public,
- Protection of a natural habitat, preservation of open space for scenic enjoyment, and
- Historical preservation.
Conservation easements have been made significantly more attractive for estate planning purposes because of the newly available 40% exclusion of up to $200,000 in 1999. This maximum exclusion amount increases $100,000 per year until it reaches $500,000 in 2002.
Qualifying for the Exclusion
To be eligible for the new exclusion, the land must be subject to a qualified conservation easement. Historical easements are not excludable. In addition, the qualified conservation easement must prohibit more than just a de minimis use for commercial recreation. The land owner, or a family member, must also meet a three-year holding period requirement.
To qualify for the estate tax exclusion, the land subject to the conservation easement must be located within:
- 25 miles of a metropolitan area,
- 25 miles of a national park or wilderness area, or
- 10 miles of an urban national forest.
It is important to note that the conservation easement may even be placed on the property after the donor’s death by the executor or estate. For the exclusion to be available in this case, the executor must make an irrevocable election for the conservation easement on or before the due date of the federal estate tax return.
Calculating the Exclusion Amount
The amount of the exclusion is computed on the property’s reduced value rather than its value before the easement. Be careful when obtaining an appraisal of the easement’s value. Have the property professionally valued both before and after granting the easement. And note that special rules apply if the land is subject to debt or if you retain development rights. (See “Retained Development Rights,” below.)
The 40% exclusion amount is reduced by 2% for each 1% by which the easement’s value is less than 30% of the land’s value. Thus, the estate tax exclusion is reduced if the easement’s value is between 30% and 10% of the land’s value. No exclusion is available if the easement’s value is less than 10% of the land’s value. This ensures that the easement will benefit the public. Note that the land will not receive a stepped-up basis to the extent of the exclusion on the donor’s death. For example, if a conservation easement donated during life reduced the value of land from $1 million to $600,000 and the donor died in the year 2000, then the donor’s executor could exclude $240,000, which is 40% of the $600,000 value. If the donor died in 1999, the exclusion would be capped at $200,000.
The popularity of conservation easements as an estate planning tool is increasing because of the additional estate tax benefits provided by recent tax legislation. Significant tax savings may be available. We would be glad to discuss whether a conservation easement is right for your estate planning objectives.
Retained Development Rights
Special rules apply if the land is subject to debt or if you retain development rights. Retained development rights are defined as the right “to use the land for a commercial purpose not directly related to and supportive of the use of the land as a farm for farming purposes.” Maintaining your residence on the property and normal farming practices are not considered retained development rights. But retaining the right to sell the land for future development or build houses would be considered retained development rights. Retained development rights are an asset of your estate and subject to estate tax, but your beneficiaries or heirs can agree to extinguish retained development rights within nine months of your death and avoid the tax.