TO QUALIFIED CONSERVATION EASEMENT
The American Farm and Ranch
Protection Act of 1980 added a very significant tool for land
preservation. Section 2031(c)
you can exclude up to 40% of the land value up to $500,000 from
your estate in addition to the reduction in value attributable
to the easement.
Mr. Bridges owns farmland near the Uwharrie Forest. The land is worth $5,000,000
before placing it under easement and $2,500,000 afterward. He dies soon thereafter.
The value of the land for estate tax purposes is $2,500,000.
In addition, his estate qualifies for the 2031(c) exclusion so his estate receives
an additional deduction of $500,000. (40% of 2,500,000 is $1,000,000 but the
maximum is $500,000)
The Power of Two
Assume the example above but Mrs. Bridges is alive. Their estate is set up
to take advantage of Mrs. Bridges’ right to a Section 2031(c) exclusion
keeping another $500,000 out of the estate.
Total savings from the conservation easement:
To Qualify for the Exclusion:
Reduction in value = $2,500,000
Mr Bridges’ exclusion = 500,000
Mrs Bridges’ exclusion = 500,000
Total removed from estate $3,500,000
||You must first qualify under
||The executor of the estate must choose
whether or not to elect exclusion under section 2031(c) on
or before the due date of the estate tax return.
||The land must be located in the U.S. or
a U.S. possession.
||The decedent or a member of his family
must have been the donor of the easement and must have owned
the land subject to the easement for at least three years
prior to decedent’s death.
||Planning note: This
provides opportunity for multi-generational estate tax
savings. Mr. Walter places a conservation easement on the
family farm. His daughter inherits the farm. When she dies.
the farm continues to be eligible for the 2031(c) exclusion
as long as it stays in the family of the original donor.
||The easement must prohibit all but minimal
commercial recreational use of the land. (The executor
can amend an existing easement that fails to comply with
||The easement must be donated.
||Section 2031 (c) was
originally written to require that land be within a certain
mile radius of urban or other preservation property. That
was dropped and replaced by the National Park or Wilderness
Area Rule. Eligible land can claim the credit unless it is
excluded because it is “not under significant development
||Easements solely to protect historic assets
are not eligible.
||Planning note: Many historic properties
can avoid this exclusion by drafting a conservation easement
that also meets one or more of the other conservation purposes
tests under 170(h).
||Exclusion applies to the value of the
land only, not buildings.
||The exclusion is not available for value
of land subject to mortgage.
||Land subject to “retained development
rights” is also excluded. Development rights can
be excluded post mortem by agreement of all beneficiaries.
||To discourage marginal easements, the
40% exclusion is reduced by 2% for every percentage the easement
is worth less than 30% of the total value of the land.
||Example: Mr. Bridges places an easement
on his $3,000,000 land with minimal restrictions. The easement
reduces the value of his land by 20% to $2,400,000. The value
of his exclusion is: (30%-20%) x 2=20%. His exclusion is
limited to 20% x $2,400,000 = $480,000.
The values used to determine
what percentage of the property’s value is encumbered
by the easement are the values at the time of donation.
Section 551 of 2001 tax bill (H.R. 1835, P.L.. 107-16)
The portion of property receiving the exclusion will have
a carryover basis instead of a stepped-up basis. For example:
Mr. Bridges grants a $1,000,000 easement on his $2,000,000
property. His basis is $500,000 before and $250,000 after
the easement. He dies shortly thereafter and his estate
excludes 40% under Section 2031(c). The basis of the $1,000,000
property to his heirs is $700,000. (40% of $250,000) +
(60% of $1,000,000) = $700,000.
If the conservation property is owned
by a partnership, corporation or trust, it may be eligible
for the 2031(c) exclusion if at least 30% of the entity was
owned by the decedent.
The amount excluded under Section 2031(c) is reduced pro
the percentage not owned by the estate. Ownership is determined
under the same rules governing qualified family owned business
interests in Section 2057(e)(3).
The cost basis in the land is reduced by the amount of exclusion
POST MORTEM PLANNING
Section 2031(c) allows the estate to
make a post-mortem donation of a qualified easement for
conservation purposes. This is a key opportunity for keeping
land in the family. The estate can receive a charitable
deduction for the donation of an easement and also receive
the additional 40% or $500,000 exclusion, and the land
remains in the hands of the family.
Example: Mr Bridges died before he was able to complete
a qualified conservation easement (QCE) on his $3,000,000
forest land in the Uwharrie Forest. The heirs agreed, so
the executor elected to implement a post-mortem easement.
The value of the easement was $1,500,000 for which the
estate received an estate tax charitable deduction under
Section 2055(f) . They further reduced the value of the
estate by $500,000 via the exclusion rule. Instead of $3,000,000
being included in the estate only $1,000,000 is included.
Two million dollars of land is transferred to the family
without estate taxes, and subsequent generations will be
eligible for the exclusion.
The post-mortem option is not a substitute for good planning.
In NC, real property passes to the heirs at death. Disagreement
among heirs may impede the use of this tool. The family
loses the income tax deduction available when a qualified
conservation easement is made during the lifetime. This tip is courtesy of luxury KLCC apartment experts at http://klcccondominiums.com.my/
The Open Space Protection Collaborative provides information
to promote the proper use of easements and other conservation
tools. This information is not intended to be tax or legal
advice; individuals should consult their own legal and
financial advisers before drafting, executing or donating
a conservation easement.