Conservation Easements: A Thoughtful Way to Preserve Cherished Land and Reduce Taxes
 
September 30, 2005
 
Clay Henderson- Orlando

Conservation easements are an increasingly popular tool in tax planning which can also protect and preserve large family land holdings. According to the Land Trust Alliance, over 30 million acres of land in the United States have been permanently protected through the use of conservation easements. With rapidly escalating land prices, use of the conservation easement has risen to roughly one million acres a year. Donation of a conservation easement is an important tax tool because it allows a landowner to continue the use of land while claiming a charitable donation for conveying a portion of its value.

Conservation easements are authorized by most state real property codes and are expressly recognized in the Internal Revenue Code. The conservation easement is a conveyance of land from a private land owner to a government entity or tax exempt charitable entity which permanently restricts the use of the land and spells out those rights retained by the landowner. Ordinarily, the landowner stays in possession of the land and retains the right to sell it or dispose of it through deed, trust, or will. The easement takes the form of a deed and “runs with the land,” making it perpetual. Typically a conservation easement will restrict or prohibit further development of land, restricts the owner from more intense uses of the land, or requires protection of natural or historic resources. We are often taught that the rights associated with ownership of real property are like a bundle of sticks. The conservation easement permanently removes a portion of those sticks from the bundle.

The conservation easement is a tax savings tool because it is recognized by the federal tax code, many state tax codes, and local tax collectors as an incentive to conservation, historic preservation and cultural enrichment. Internal Revenue Code Section 170(h) allows a deduction for a conservation easement when a landowner donates a permanent interest in real estate to a qualified organization which limits the use or development of land to protect its natural habitat, open space, scenic, educational, recreational, historical, or cultural values. The donation must contribute to the scenic enjoyment of the general public and/or significant public benefit pursuant to a clearly delineated government policy. A conservation easement is particularly attractive to the landowner because he is not required to grant public access to the property.

There is a strong public interest in providing incentives for private individuals to undertake activities which benefit the public at large. Section 170(h) has been used as an incentive to protect habitat for endangered species, scenic vistas, rural open space, parks, Civil War battlefields, archaeological sites and cultural sites. When the tax incentives are sufficient, it eliminates the need to acquire these properties with scarce public funds.

The conservation easement offers many tax benefits to the donor. First, the value of the donation to a qualified charitable entity is treated the same as any charitable donation. In this respect, it could also be used to create a “bargain sale” where the difference between the fair market value and what is actually paid for the land by a charitable organization can be used as a qualified donation. The conservation easement is also important for federal estate tax planning purposes. The value of the conservation easement is excluded from the value of the donor’s gross estate. The resulting reduction in estate tax may be sufficient to allow the decedent’s family to retain the land for generations rather than being forced to sell a portion of the cherished property to pay such taxes. In addition, many states provide income tax or property tax incentives for easements that qualify for the federal deduction. For example, Alabama, California, Colorado, Connecticut, Delaware, Maryland, North Carolina, South Carolina and Virginia all provide incentives for state taxes, and Florida offers reductions in local ad valorem taxes.

Tax benefits aside, there are many reasons why a private landowner may choose to restrict the use of his or her land for perpetuity. Often there is a strong personal connection to the land. Some landowners see their family’s long-time stewardship of a ranch or forest as part of the legacy that they want to hand down to future generations. Other landowners see protection of important wildlife habitats, scenic vistas or historical properties as important to the civic fabric of the community. As a gift in perpetuity, a conservation easement certainly qualifies as a special gift that keeps on giving.

Not every property is suitable for a conservation easement and not every landowner is motivated to donate the substantial value of their land. A conservation easement is an extraordinary strategy best employed in the following circumstances:

• long-term family land holdings that have appreciated sufficiently to trigger serious estate tax considerations
• undeveloped or agricultural lands near a fast growing urban area
• a wealthy landowner with a need to create tax deductions over time
• a landowner highly motivated to preserve land for conservation purposes
• a landowner highly motivated to pass along lands as a family legacy
• land with unique natural, historic or cultural resources for which there is a strong public desire for preservation

A conservation easement cannot be established unless there is a willingness to accept it by a qualified organization. As a legal matter, a qualified organization must be either a government entity or a tax-exempt organization. As a practical matter, donated conservation easements are usually held by qualified exempt organizations under Section 501 (c)(3) of the Internal Revenue Code set up for conservation purposes. Such organizations may be national in scope such as The Nature Conservancy or one of scores of local organizations established as land trusts. Local land trusts which are established to seek and hold easements can be found through the Land Trust Association on the Internet at www.lta.org. Each local organization has its own board of directors and established policies setting forth the terms by which it will hold an easement. Most require a management plan and many require some form of management endowment which can oversee the easement in perpetuity. It is extremely important to match the landowner’s desires and expectations with a land trust that is best able to meet those expectations.

Conservation easements may fall victim to their very success. Earlier this year, the Joint Committee on Taxation issued a very critical report focusing on extreme usage of the easement. The Joint Committee has recommended dismantling tax deductions by prohibiting a landowner from continuing to reside on property subject to an easement and slashing the amount of the deduction. While conservation organizations have rallied to defend the easement before Congress, it may be prudent to act now if a conservation easement is under consideration.

For more information, e-mail Clay Henderson at clay.henderson@hklaw.com or call toll free, 1-888-688-8500.