Could your estate benefit from a conservation easement? A conservation easement limits the amount of development that can be done on land. For the property owner, gifting or selling an easement can provide certain financial and business advantages. An easement can also benefit the larger community by conserving the property’s scenic and natural attributes, and ensuring that the property is preserved for open space, agricultural or passive recreational uses.
Conservation easements can be used as both an estate planning and an estate administration tool. Easements can provide a means for reducing the value of your estate and avoiding or minimizing estate taxes. However, granting an easement as part of your estate planning requires a thorough understanding of your projected estate, net worth and family’s goals.
Who should consider using conservation easements in their estate plan?
Generally, conservation easements benefit estates larger than the federal unified credit (presently $5.45 million), which face federal estate taxes at a maximum rate of 40%. For individuals in New York, estates over $4,187,500 (current limit) may want to consider easements for the same reason.
Conservation easements are particularly valuable for the estate of individuals who have most of their value tied up in property, such as a farm. Proper planning can help protect against a situation where heirs are forced to sell valuable income-producing property to come up with money to pay estate taxes. An easement can reduce or eliminate estate taxes and allow for heirs to continue to own and operate the income-producing property.
However, individuals with estates that are not subject to estate taxes and own “undeveloped” property also find conservation easements a useful tool. Easements are often donated to charitable organizations and provide the property owner a way to give back to the public with significant financial benefit in the form of a charitable income tax deduction and continued use of the land. Property restricted by an easement is also subject to reduced property taxes as a result of having a lower assessed value.
How do conservation easements benefit an estate?
If you gift/sell a conservation easement, the value of the land decreases in most cases because the right to develop the property is restricted. This in turn reduces the gross estate. For example, Farmer has a gross estate of $6 million, including a farm valued at $3 million. After gifting an easement worth $2 million, the value of the farm is reduced to $1 million and the total estate is reduced to $4 million. This reduces the size of the Farmer’s estate below the $5.45 million unified federal credit, eliminating estate taxes and preserving the farm for Farmer’s family.
The executor/administrator of an estate can further reduce estate taxes by choosing to take an additional deduction on the Federal and State Estate Tax Returns for a qualified conservation easement. This deduction can reduce the size of an estate by up to an additional $500,000. The executor/administrator should consult with an experienced attorney and weigh the pros and cons of taking this additional deduction. If this deduction is taken, your heirs do not receive a “step-up” in the tax basis of the property and as a result, exposure to capital gains tax in the event they sell the property. This is important if the value of the property has increased significantly since it was purchased.
Even if you do not transfer an easement during your life as part of your estate planning, it can be done after your death. Your executor can grant an easement and can take the applicable deduction to reduce taxes.
What are some limitations?
A conservation easement does not always reduce the value of property significantly. For example, there are certain neighborhoods in New York which are established farming communities where development may already be significantly restricted by zoning, or where conservation is voluntarily undertaken by property owners in the neighborhood, such that a large, “undeveloped” property is desirable and marketable even with development restrictions. In this case, an easement may not reduce the value of the property significantly, reducing the tax benefits of the granting an easement.
In some cases, easements can be less restrictive and allow some development on the property. This reduces the value of the easement and the tax benefit. However, it may be more beneficial for your particular estate, depending on the character and value of retained development rights, their impact on the marketability of the property, your family’s plans and other factors.
Deciding whether a conservation easement is right for you involves a detailed analysis of many factors. In determining whether an easement qualifies for an estate tax deduction, the IRS regulates the specific terms of an easement and to whom the easement can be gifted or sold (usually a charitable organization) so it is important to consult with an attorney. In addition, an attorney in conjunction with an appraiser can help plan the best way to structure the easement to provide the greatest value to your estate.
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This post does not constitute legal advice or establish an attorney-client relationship.