Conservation Easements –
An Estate Planning Tool
Conservation easements can help with estate and succession planning in several ways:
- Reducing estate taxes
- Keeping family land intact for subsequent generations
- Passing values and a commitment to the land down to future owners
Many rural landowners with larger tracts of land are subject to estate taxes on the value of their land. With a conservation easement, a landowner chooses to limit the development potential and thus the value of their land. As a result, conservation easements can be a valuable tool for reducing estate taxes.
The IRS considers the “highest and best use” (i.e., maximally developed) value of the land in calculations of the total value of an estate. When the owner(s) of the land pass away, if the value of the land and other assets exceed the inheritance tax (i.e., the “estate tax”) threshold, their heirs will be faced with a 40% tax on the value of the estate that exceeds the threshold.
For many, this creates a painful dilemma. Because there is not enough money to pay the tax bill, they must sell part or all of the land. In many cases, this means the loss of cherished places where their family conducted agricultural operations, cared for water and wildlife, held family weddings and holidays, and hunted, swam and fished for years or even generations before. A conservation easement provides a viable option for those looking to keep the land intact and healthy.
By choosing to limit future development potential with a conservation easement, a landowner can reduce the taxable value of their land and estate. Those seeking to keep their land intact or pass it down to future generations have no intention to develop the property, so this is a way to reduce taxable property value from which they don’t benefit. Also, the IRS provides an estate tax exclusion for the remaining value of the land subject to a conservation easement, up to 40% of the encumbered value or $500,000, whichever is less. Furthermore, in exceptional cases, a conservation easement may reduce the value of the estate below the inheritance tax threshold, eliminating estate taxes altogether.
The reduction in property value can also yield income tax benefits for many landowners as well. In short, a conservation easement may mean the difference between keeping the land intact and selling it to the highest bidder.
Before engaging in a conservation easement transaction, landowners are advised to discuss with their estate or trust attorney and tax advisor whether a conservation easement might be of help. More information on the income tax benefits, contact Hill Country Conservancy