Conservation easements can generate both income tax and estate tax reductionsWritten by Christy Martinez
Of using conservation easements in conjunction with estate planning, Jackson attorney Tim Lindstrom says they work for certain people, but not for everybody.
“Conservation easements are a tool to ensure that your ranch remains available for ranching purposes in the future, for your family and for their children, and, presuming we’ll have an estate tax in 2011, it is one of the simplest and most straightforward ways to avoid tax that exists,” says Lindstrom.
“For ranchers, who have the majority of their assets tied up in land, which is not very liquid these days, the estate tax is like a train coming toward a thin brick wall – it’ll blow that ranch apart,” he adds.
Lindstrom reviews the estate tax situation, where in 2009 a $3.5 million exemption existed, and the first dollar over that was taxed at 45 percent. “Currently we have no estate tax, and in 2011, if Congress does nothing, the tax automatically reverts to 2000 levels, which was a $1 million exclusion and a 55 percent tax rate on the first dollar over $1 million,” he explains.
“Under the 2009 rules, in a simple estate plan a husband and wife could pass $7 million tax-free to their children. That covers a whole lot of territory, but not necessarily everybody, and in 2011, if we go back to 2000 rules, there are a whole lot of people who will be affected. If you want to keep your land in your family, and it is valuable to you, you need to start planning to deal with that,” he states.
According to Lindstrom, there are two benefits to including a conservation easement in an estate plan.
“If you make a contribution of an easement, or sell it for less than fair market value, or a bargain sale, you get a federal income tax deduction. Currently that deduction allows you to deduct the value of the easement against 30 percent of your adjusted gross income, and carry the balance for up to five years,” he says. “There is a provision pending in Congress that would reinstate the rule that existed in 2009. It allows everyone who donates a conservation easement to deduct the value against 50 percent of their adjusted gross income and carry the balance forward for 15 years. And, if more than 50 percent of their gross income is from the business of farming and ranching, they can write that deduction off against 100 percent of their income.”
He says that applies even if, the year after the donation, a person begins making all their money from stocks and bonds. “They still get to write off that deduction against 100 percent of their income,” he says.
Lindstrom says the second advantage to conservation easements is estate tax reduction.
“A conservation easement removes value from an estate. Easements are great, and the best tool for land preservation we’ve come up with, because they’re private, voluntary and non-regulatory,” he says, but adds, “From a tax standpoint, they work only in situations where the land placed in the easement has development potential. The value of the easement is a function of the highest and best use of the land. If your land has development potential and you don’t want to use it, and your children don’t want to use that potential, or you don’t want them to use that potential, you can remove it.”
Lindstrom says the amount of value removed from an estate is a function of how the easement is written. “If you don’t want to cash in on that value, eliminating it from your estate will generate tax benefits and get rid of an asset that will very likely force the sale of that land for estate tax,” he says.
“There are two tax benefits that result – the estate is reduced by the value of the easement, and the remaining value of the land is eligible for exclusion up to 40 percent of its value, which is currently capped at $500,000,” continues Lindstrom. “For a husband and wife, with a simple plan, that’s $1 million they can exclude. So, you remove the development value from your estate, and you get a 40 percent write-off with balance of the land’s value, up to $500,000.”
Lindstrom notes that one of the interesting provisions in the federal tax code allows a rancher’s children to retroactively take advantage of conservation easement estate tax benefits.
“If a rancher has not done anything, and the children are confronted with an estate that’s taxable, and land they don’t want to sell to pay estate taxes, they have nine months from the landowner’s death to contribute a conservatopm easement,” he explains. “And that easement has a retroactive affect on estate taxes. They can’t get the income tax deduction, but it is a way in which children can save the ranch if they act quickly after their parents’ death.”
He adds it’s not atypical to find a 60 percent reduction in the value of an estate with a conservation easement.
“Taking that value you don’t have a use for out of the estate allows all the other estate planning tools to work much better,” says Lindstrom.