One of the biggest advantages of donating a conservation easement is that it can significantly reduce your estate tax burden and keep land in the family.
Reducing estate taxes through a conservation easement
The federal estate tax rate in 2019 is set at 40% for estates valued at over $11.4 million. Since estate taxes are high, heirs to significant land often need to sell part or all of the property to pay these taxes. This can be particularly challenging to families that own and/or operate ranches, farms, vineyards and forest land. A conservation easement can reduce that estate tax burden by reducing the value of the land and excluding a percentage of the land’s value from the donor’s taxable estate.
Reducing the value of the land
As noted in our post on the federal income tax benefits of conservation easements, after donating an easement a property will usually decrease in value. With a conservation easement, the property is worth only its preserved value as subject to the easement restrictions – that value no longer includes the land’s potential development value. This alone is likely to bring a donor’s estate to an amount below the estate tax threshold.
Excluding 40% of the value of the land from the donor’s taxable estate
26 U.S. Code § 2055(f) authorizes an estate tax deduction for the value of a qualifying conservation easement donated to a land trust or other public charity. Under 26 U.S. Code § 2031(c), 40% of the land value of a property subject to a conservation easement may be excluded from the owner’s estate on the donor’s estate tax return, up to a maximum of $500,000. This cap is reduced by two percentage points for each percentage (or fraction thereof) of the value of the easement if the donation of the easement reduced the value of the land by less than 30%.
To qualify for the exclusion, the easement must serve a “conservation purpose” as defined in 26 U.S. Code §170(h)(4)(a). For example:
- The land is preserved for use as an outdoor recreation area or for education of the general public,
The easement protects the natural habitat of fish, wildlife, or plants (or a similar ecosystem),
- The easement preserves open space (including farmland and forest land) that will yield a significant public benefit and is for the scenic enjoyment of the general public, or is established pursuant to a clearly delineated Federal, State, or local governmental conservation policy, OR
- The easement preserves an historically important land area or a certified historic structure.
Note that only members of the donor’s family can claim this exclusion, and the land must have been owned by the donor and/or their family for three years prior to the donor’s death.
Posthumous conservation easements
Conservation easements may be donated during a landowner’s lifetime, via a will, or posthumously by the owner’s heirs after the donor’s death. If the heirs decide to make a post-mortem donation and obtain the estate tax benefits noted above, the easement must qualify for the deduction under section 170(h) and 2031(c), and the executor must make this (irrevocable) election before the estate tax filing deadline (generally 9 months after the date of the owner’s death). Note that in this case, any land excluded from the estate will receive a carryover basis rather than a stepped-up basis, which will clearly affect gains on any future sale.
California estate planning attorneys
There is no substitute for good estate planning, particularly for owners of significant property. For guidance on conservation easements and other estate planning tools, contact the San Francisco office of Moskowitz, LLP today.
Warning: Note that the government has significantly increased enforcement actions for conservation easement transactions, and coordinated audits are being conducted throughout the various examination divisions of the IRS. We advise taxpayers to be cautious of promoters assembling syndicated conservation easements, in which investors in partnerships and other pass-through entities are offered charitable contribution deductions in amounts that significantly exceed the amount invested. To learn more about the IRS crackdown on fraudulent conservation easements, see Notice 2017-10.