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Estate Planning - Part I
Conservation Easements: What Are They & Are They Right For You?

I am going to make a prediction that I can guarantee will come true.  At some point in the future, you will die.  While this statement may be blunt and not something you want to consider, death is a fact of life.

As landowners, we have two possible paths to follow leading to our last hike of life.  One: we can ignore the inevitable and accept the fact that the government will receive the majority of our estate in taxes.  Two: we can plan ahead to insure that our heirs benefit from our foresight and our hard work.  This second path, Estate Planning, is an integral part of active land management.

Estate planning is looking to the future and planning appropriately to insure there are no surprises.  Over the next few newsletters, the various options associated with estate planning will be briefly described.  These options include conservation easements, trusts, and gifts to name just a few.  All of these options have the ability to limit the amount of inheritance taxes due at the time of your death, which in some cases will allow heirs to continue your tradition of active land management.

Over the past few years, conservation easements have become a popular method used by landowners to conserve their land, receive favorable tax treatment, and reduce estate taxes at the time of their death.  This article will briefly describe conservation easements and the potential consequences of them.  Due to the complexity of easements and their tax implications, this article should only be used as a beginner's guide to the process.  Additional information should be obtained from your forester, your accountant, your attorney, and the potential holder of the easement.

With landownership comes an inherent bundle of rights.  While these rights might be altered or limited by local ordinances or zoning laws, the basic right is still available.  For example, with landownership comes the right to build a house.  The house built must meet the local zoning regulations, but the basic right is still available.

A conservation easement is basically an agreement whereby the landowner transfers some of his/her rights to a conservation organization or public agency.  The landowner still owns the land but gives up the opportunity to exercise the specific rights to a second party.

The obvious question is Why would anyone want to transfer some of their rights?  For most people it is for one or a combination of all of the following:

• The potential for favorable tax treatment.
• The lowering of the value of their estate.
• Insuring the conservation of their land

In order to be considered for favorable tax treatments, there are a number of tests which must be satisfied.  These tests include, but are not limited to,

• The easement must be perpetual.
• Made to a qualified organization.
• Made for conservation purposes.

There are also tests as to the land's location which must be satisfied.  If all of these tests are satisfied, there is a strong potential for significant tax savings.

Income Taxes:  The donation of development rights through a conservation easement may be considered a charitable gift, which may be deductible for state and federal income taxes purposes.  For federal income tax purposes, the general rule is that the donor can only deduct the value of the conservation easement up to 30% of the donor's income for the year of the gift.  Any amount of the gift remaining after the first year can be carried forward and deducted against income for the following five years using that 30% of yearly income rule each year.

Estate Taxes:  Due to the fact that the value of the property has been reduced because of the removal of the "rights" that go with the property, the estate or inheritance taxes may be lower at the time of the owner's death.  State and federal estate or inheritance taxes are frightening.  While it takes a significant value amount to cause the tax rules to take effect, once they do the amount of money owed can be staggering.  In many cases, the high state and federal estate taxes forces the heirs to sell some or all of the land in order to pay these taxes.

Long Term Land Conservation:  The landowner gives up these rights in perpetuity.  The conservation easement stays with the land regardless of who owns the land, and the organization who holds the easement is responsible for monitoring the land to insure that the restrictions have not been violated.

Is a conservation easement right for you?  Only you can answer that question, but I can provide you with the same advice I provide my clients when the subject comes up -- do your homework.  Conservation easements are certainly legitimate options, but there may be other options to achieve your goals.  Before committing to an easement, make sure you fully understand all of your options.

If you conclude that a conservation easement is right for you, shop around to a number of organizations which hold easements.  Many of them specialize in specific types of property, and because the easement is in perpetuity, it is vital that the easement meets your goals.

Once you select an organization, do not simply assume that it is "their way or the highway".  Be prepared to negotiate the easement just like you would negotiate the disposal of any other asset.  If the terms are not acceptable, be prepared to walk away.  This is especially true when it comes to issues related to forestry practices.  Many easements place a blanket ban on clearcutting.  Is this appropriate for your particular property?  Will this policy be appropriate in perpetuity?

I have had the opportunity to manage a number of tracts which had conservation easements.  In almost all cases, there has been very little effect on the way the land is managed, and in some cases it has actually proven to be useful.  However, in one case a problem arose due to the wording of the conservation easement.

The proposed management activity was to conduct an intense shelterwood harvest in order to encourage oak regeneration.  The conservation organization raised a concern due to the fact that the wording in the conservation easement stated that the forest "will remain in its natural state".  The problem was worked out with a number of phone conversations and site visits, but this example demonstrates the need for details in the wording of the easement as well as understanding the attitude of the organization which holds the easement.

Conservation easements provide the potential for short term tax benefits as well as significant long term tax and land conservation benefits.  While they may appear to be complex, they should not be considered intimidating and should be explored as part of your active land management process.  If you do your homework, and enlist the assistance of your forester, accountant, attorney, and land conservation organization, you should be able to wade through all the "what ifs" and determine whether or not a conservation easement is appropriate for you.  Your nearest NEFCo forester is ready to assist you in the process of exploring conservation easements.

- Tony Lamberton
Manchester Center Manager