On
Death, Taxes
& Conservation Easements
by J. Ross Pilling II
Taxing
authorities (IRS, State, County, Municipal, School) value
and assess real estate based on its maximum development potential
under zoning; that is, its "highest and best use."
It is not necessary to have these taxing authorities proscribe
the future of family owned properties. There are tax incentives
available to reduce the development value of a property, secure
current income tax deductions, reduce estate taxes and abate
property taxes as well.
Land values have increased so dramatically in recent decades
that families are being compelled to sell significant properties
for development in order to pay death taxes. Family real estate
holdings frequently have substantial financial value and may
compose one of the most significant estate assets. They are
often located in desirable vacation or recreation areas that
have significant environmental resources, unique features,
or scenic views.
Upon the death of an owner, the property passes into a taxable
estate, resulting in significant death taxes becoming due.
The estate can be taxed at rates of up to 60 percent by the
Federal government and may be taxed at the state level as
well. These taxes are due and payable within nine months of
the death. Without appropriate planning, the family will either
have to liquidate other assets, incur significant debt or
sell the property. If they sell, they may not be able to wait
for the best offer, will probably sell at a deep discount
in the market and will have little or no say in the quality
of development that will take place on the property.
Family issues are also frequently at play in planning for
a significant asset such as a large piece of land. Family
lands provide a focus or sense of identity and may evoke strong
memories. Added to the grief over the recent death of a senior
family member, grappling with emotional as well as financial
values attached to cherished family lands can make decision
making doubly difficult. The time to develop a consensus view
of how to obtain marketable or liquid assets to pay the estate
taxes is during the estate planning process, not in estate
settlement. Clearly an ounce of prevention in good estate
planning is worth the cure for the potential emotional, psychological
as well as financial problems.
One method
of ensuring the ultimate disposition of a property is to place
part or all of it under a conservation easement. A conservation
easement is a recorded legal agreement between a property
owner and a qualified non-profit conservation organization
which permanently restricts the type, amount and location
of future development. The Internal Revenue Code permits income
and estate tax charitable contribution deductions for grants
of conservation easements over certain real estate. There
are, of course, a number of stipulations required for the
deductions to be eligible. The easement must be a perpetual
interest in the land to insure that the property will be protected
forever regardless of future ownership. The interest must
be granted to a qualified recipient who will be dedicated
to enforcing the easement, usually a non-profit land trust
but can also be a governmental entity. (The recipient frequently
will ask for a cash endowment to pay for the discharge of
its fiduciary obligations to monitor the easement). To qualify,
a conservation easement must satisfy one or more of the following
purposes:
-
preservation
of land areas for recreation or education of the general public
- protection
of a significant habitat or ecosystem including buffer zones
- preservation
of open space, either pursuant to a clearly delineated governmental
policy and (which) will yield a significant public benefit
or
- for
the scenic enjoyment of the general public.
These
last two purposes are most often pertinent in family owned
property situations. Scenic enjoyment means that the public
has visual but not necessarily physical access. The family
property can remain as private property so long as it can
be seen from public roads, trails or from other public land
or water. A clearly delineated policy is one defined by State,
County or local government which promotes protection of open
space such as family land through private means. These policies
are becoming increasingly prevalent with the diminution of
public funds to acquire open space.
The first step in making a gift of a conservation easement
is finding a qualified recipient willing to accept the easement
terms contemplated. A land plan of the property is then prepared
to inventory sensitive resources such as floodplains, wetlands,
steep slopes, valuable habitat, scenic views, or prime agricultural
or sylvicultural lands. This process will also show lands
suitable for development or house sites should the family
require liquidity or additional family residences. Once a
family consensus plan of the long-term conservation development
vision is translated to paper, a qualified appraiser must
be engaged to value the property.
continue
