Sometimes the family owns the land and they want to keep it as is. They do not want to develop the land. They want the family to continue to grow it as they have done for generations.
In the appropriate circumstances, a charitable conservation easement can be a useful tool to help achieve this goal. The grantor must be willing to place the easement on the property in perpetuity. The easement prohibits development but allows prior use, such as cultivation. There are many requirements to navigate. The charitable income tax deduction is spelled out in IRC Section 170(h)(5)(a). If the land is eligible, the discount is on the difference in the value of the land before the easement and the value of the land subject to the easement. (There may also be an estate tax exemption available under Section 2031(c) in addition to the reduced value of the property.)
Let’s look at an example:
The Smith family came from Europe to the United States three generations ago. They settled on a farm. They have been growing crops and raising livestock on the land ever since. Bob Smith is the current owner of Smith Farm. He’s been waking up for years. Things have really changed since he was a boy. The farm was a two hour drive from a major city. After new highway and suburban expansions, the farm is now surrounded by homes on three sides and is adjacent to a state park on the fourth side.
As a farm, his land is worth about $1 million. Due to development pressures, the land will now sell for $2 million. Bob wants to keep the land in the family.
Assuming the land qualifies, if Bob places a conservation easement on the land, he and his family can continue to farm as they have done for three generations. They could not develop the land. In return, they will receive a charitable discount in exchange for a $1 million cut. As with other charitable deductions, it will be subject to limitations based on Bob’s income, but the surplus can be carried over for five years. Once the land is subject to easements, its fair market value will be lower in his estate at his death. He may even lower his property taxes, although that depends on his local tax authority.
Perhaps Bob’s biggest benefit is that his children won’t push him to develop the Earth anymore!
A savings easement can be a great way to achieve your goals while also reaping the tax benefits. Here is more information. However, be sure to avoid the promoters who push the abusive transactions stipulated by the IRS in Notice 2017-10.
Estate planning is much more than just documentation. It also comes down to the knowledge and experience of the attorney making the plan.
Stephen C. Hartnett, JD, LLM
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128