Estate tax incentives for land conservation

For some families, one of the major advantages of donating a conservation easement is that it helps pass land on to the next generation, by reducing estate taxes. Estate taxes can lead to the land being broken up or sold off, even when families want to keep the land intact. Estate taxes can make it especially challenging for families to hold on to working farm, ranch and forest land.

Recent changes in the tax code have put the vast majority of landowners out of reach of the estate tax. The 2017 Tax Cut and Jobs Act raised the size of estates exempt from estate tax to $10 million, indexed for inflation. The indexing means that exemption changes each year. In 2022, the first $12.06 million of a person’s estate is not taxed ($22.8 million for a married couple).

For very large estates, donating a conservation easement can be an important way to reduce the value of the estate’s landholdings. Because the current high exemption levels are set to expire in 2026, when the exemption will drop to $5 million per estate, estate planning may become critical for many more families that is now the case. In such an event, the use of conservation easements will become an even more important planning tool for land-owning families.

A conservation easement can reduce estate taxes in two ways:

1. It reduces the value of the estate to be taxed. A conservation easement lowers the property value — and, correspondingly, estate taxes. In some cases, a conservation easement may drop the value of the estate below the threshold for estate taxes altogether.

2. Heirs can exclude 40% of the value of land under conservation easement from estate taxes. Section 2031(c) of the Internal Revenue Code provides an estate tax exclusion of up to 40% of the encumbered value of land (but not improvements) protected by a “qualified conservation easement.” Unfortunately, that exclusion is capped at $500,000. The cap is lower if the easement reduced the land’s value by less than 30% at the time it was donated. To qualify, the easement must serve one or more of the conservation purposes recognized in Section 170(h) of the tax code. It must limit commercial recreational use to a minimum and it cannot qualify solely for the purpose of historic preservation. Only members of the original easement donor’s family, including spouses and descendants, can claim this exclusion. The exclusion also applies to land held in the form of a partnership (including a limited liability company, corporation, or trust, provided that the decedent owned at least thirty percent of the entity.

3. The exclusion must be elected. A decedent’s executor or personal representative must formally elect to claim the exclusion; it is not automatic.

Families can benefit from these estate tax advantages if the landowner donates an easement during life, by will or if the heirs donate a posthumous easement (which section 2031(c) allows, but can be complicated by state inheritance laws). However, if the easement is donated by will or posthumously, the family foregoes the opportunity for an income tax deduction.

Landowners should note that conservation easements must meet specific criteria to qualify for tax benefits and that the tax implications of their decision will depend on their specific circumstances. Anyone considering a conservation easement is advised to consult with independent, qualified financial and tax advisors.

By reducing the value of land, conservation easements also facilitate the use of other estate planning tools. This is particularly true of gifts. One of the most important means of shifting valuable land from one generation to the next is by gift. Federal law allows an annual exclusion from the gift tax. In 2022 the exclusion amount is $16,000 per donor per donee.

By reducing the value of land, a conservation easement allows more land to pass, tax free, to the next generation. For example, a husband and wife with two children can make tax-free gifts to their children using the annual exclusion in the amount of $64,000 each year. If they own a farm valued at $10,000 per acre and donate a conservation easement on it which reduces the value to $5,000 per acre, they can transfer twice as many acres to their children each year than would be possible without the conservation easement.

Because conservation easements restrict the number of parcels into which land may be divided, to take advantage of the annual gifting strategy described above, land should be transferred to a family limited partnership or limited liability company. This allows annual transfers to be made through the gifting of membership interests in the partnership or limited liability company without the need to actually divide the land and transfer acreage.

The Alliance’s policy advocacy led to the creation of the first estate tax incentives for land conservation in 1997. The Alliance continues working to improve estate tax laws so that they provide opportunities for conservation, rather than forcing families to sell their land, which often leads to development.

One major issue is that property values have gone up significantly since 1997, making the $500,000 cap on the estate tax exclusion increasingly inadequate. In many cases, the estate taxes on working farms, ranch may not be i enough to keep the land in the family. This will be particularly true if the current exclusion reverts to the $5 million per estate level programmed to occur in 2026. The Alliance supports policy solutions that include raising the cap or excluding working farm, ranch and forest lands from estate taxes altogether, as long as they remain in the family and in production.

The Alliance supports policy solutions that include raising the cap or excluding working farm, ranch and forest lands from estate taxes altogether, as long as they remain in the family and in production.