Archive » May 4, 2006
By Gary A. Bartick
BACK TO THE LAND
We all know the United States is a land of unique and spectacular beauty. Many landowners would like to see this beauty protected but are either unwilling or unable to donate their property outright to a conservation organization. Fortunately, qualified conservation easements allow landowners not only to preserve the beauty and historical significance of their property indefinitely, but also allow them to retain ownership and secure significant tax and estate planning benefits for themselves and their heirs.
A conservation easement is a legal agreement between a landowner and a qualified nonprofit organization or government entity that permanently restricts the use and development of real property. These restrictions can take many forms, depending on the property and the owner's philanthropic preferences. For example, an easement on agricultural land might allow owners and their heirs to continue farming the property, while restricting nonagricultural development. In contrast, an easement on property with rare wildlife might prohibit future development entirely and even require the property be opened for public use.
Conservation easements can either be donated or sold to a qualified organization. In some cases federal money may be available to purchase easements, although such funds have been less plentiful recently. These funds come from a variety of programs and agencies, including the Land and Water Conservation Fund, the Farm and Ranch Land Conservation Program and even, on occasion, the Department of Defense.
States and local communities also provide funding to purchase easements through innovative programs designed to help foster conservation. Maryland, for example, has adopted a bifurcated system in which state agencies buy conservation easements using lump-sum payments, while many local agencies use annuity-like deferred payments spread out over several years.
Not all easements qualify for preferential tax treatment under federal and state law. Only easements meeting the following three criteria qualify for such treatment: easement must be permanent, must be granted to a qualified entity and must be to promote conservation.
Must Be Permanent
Easements with a limited duration do not qualify for favorable tax treatment regardless of restrictions. And while the easement itself can be transferred, the transfer cannot disrupt or alter the easement's original conservation purpose.
The easement must be granted to a qualified entity. These include publicly supported charitable organizations, government units and support organizations controlled by government entities or qualified charities. These entities range from large national organizations like The Nature Conservancy to smaller local and state groups like the Southeast Alaska Land Trust and the Montana Land Reliance. Moreover, while some organizations will consider any type of conservation easement, others like the Rocky Mountain Elk Foundation and the Civil War Preservation Trust are more narrowly focused on specific types that fall within their conservation mandate.
The primary purpose of the donation must be to promote conservation. This broad requirement can be satisfied in many ways, including preserving land for recreation or educational purposes or preserving natural ecosystems or historic sites.
If a conservation easement satisfies these requirements, the donor may be entitled to tax and financial benefits. For example, under Internal Revenue Code section 170(h) the donation of a conservation easement constitutes a charitable gift. As a result, the donor is entitled to a federal tax deduction equal to the easement's value. This deduction is capped at 30% of the donor's annual adjusted gross income. Amounts above this can be carried forward for five years and applied to future tax obligations.
If the easement was sold to a nonprofit or government entity rather than donated outright, the donor may still be entitled to a deduction. Easements are often sold at prices well below their true market value, reflecting the donor's philanthropic wishes and the buyer's budgetary constraints. The difference between the sale price and the true value can constitute a charitable donation under section 170(h).
Landowners can also recognize a material estate tax benefit by granting a charitable easement on their property. Individuals can currently exclude up to $2 million from their taxable estate when they die, with any excess subject to tax rates as high as 46%. By encumbering property with a conservation easement, a landowner can significantly reduce its market value, thereby shrinking or even eliminating future estate taxes. In many cases, using conservation easements can ease the need to sell all or part of the land when the landowner dies.
Also, because land encumbered with a conservation easement is less valuable than similar unencumbered land, granting an easement can significantly reduce the landowner's future property tax liability. Depending on the scope of the easement and the property's development potential, this can result in a significant tax savings for the landowner and his or her heirs.
Finally, in addition to federal and local tax benefits, landowners in Colorado, Virginia and South Carolina can also receive state tax credits equal to all or a portion of the donated easement's market value. Because these credits are transferable and reduce their owner's tax bill dollar for dollar, they create some unique retirement and estate planning opportunities.
Partly because of their generous tax benefits, conservation easements have become a popular planning tool in many parts of the country. Conservation specialists estimate more than 17,000 properties have been encumbered with conservation easements, accounting for more than 5 million acres of preserved land.
Watch for the Watchdogs
It is not surprising that these tax benefits have also enticed some landowners to push the envelope too far. Often these donors submit inflated appraisals to generate outsized tax write-offs or “donate” easements on property already subject to development restrictions or without true conservation value.
In an attempt to curb abuses, Congress is considering several proposals that would limit the availability of tax benefits for conservation easements. Moreover, the Treasury Department and the IRS have issued tough statements warning of increased scrutiny and harsh sanctions for willful legal violations. In certain cases penalties are not only aimed at the offending donor, but also at the organization that received the easement grant.
There has been an unprecedented level of attention paid to conservation easements by the IRS recently. In particular, you have to be on guard for potential valuation abuses, since there are a lot of assumptions that go into valuing a conservation easement for tax purposes. Still, these easements can allow landowners to transfer property more efficiently to heirs and ensure that the land will retain its beauty and ecological balance for future generations. Add in the landowner's potential tax benefits, and it's easy to see why they can be a powerful estate planning tool.
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