Bob and Sylvia put together a family compound where they gathered their children and grandchildren for visits and special occasions. They loved watching their grandchildren grow up learning to hike and fish and to appreciate the remoteness, the sunsets, the wilderness, and their time together. As the years advanced, they wondered what they could do to hold the compound together after their deaths, so that future generations of their offspring and the public would develop an appreciation for wilderness. Bob and Sylvia wanted to conserve the property in its natural state and worried that disagreements among future generations would result in the property’s being subdivided and sold off for development lots, which was already happening to surrounding large properties.
After much consultation with their counsel and family (to confirm that they also shared the same values and visions for the property), they decided to donate a conservation easement to a conservation trust that specialized in preserving the wildness of areas like theirs. The donation took the form of a recorded deed that gave away in perpetuity all development rights to the two hundred acres of forest surrounding their lodge. Under the terms of the easement, no owner of the land could develop the property into lots, deforest it, industrialize it or turn it into a factory farm. The existing rustic lodge and surrounding buildings would survive and could be maintained but no further structures could be built. Bob and Sylvia (and their children) liked the idea of the next generation gathering for family events at the lodge and enjoying the unspoiled forest around them.
Bob and Sylvia also enjoyed a substantial tax benefit. The donation of the conservation easement generated a sizable charitable-contribution deduction from their federal income tax liability. An appraiser determined that the property before the donation of the easement was worth $1 million dollars, because it was a prime location for subdivision into vacation lots. After the donation, the appraiser found, the property was only worth $500,000, because no developer would bid on the property for subdivision. The diminution of value – $500,000 – qualified as a charitable contribution and a deduction of up to 50% of their adjusted gross income, with a carry forward for any excess.
For Bob and Sylvia, the diminution in value also help relieve some of their anxiety about federal estate taxes. With their other assets, Bob and Sylvia’s estates were in excess of the current federal exemptions for a couple in 2013 of $10,500,000, and certainly would generate estate taxes. Most of their other assets were illiquid as well and they were worried about what property would be sold to pay estate taxes. They particularly worried that their children might opt to sell off the lodge and the property for taxes. The reduction in value of the land around the lodge helped to reduce Bob and Sylvia’s collective assets and thus reduced their anticipated federal estate taxes.
Conservation-minded landowners might consider whether Bob and Sylvia’s plan could work for them. Here are some things to think about:
First, a conservation easement only makes sense for landowners and their family who cherish the opportunity to conserve the natural state of the property. Landowners who want to use the easement solely as a tax dodge usually are unsuccessful in obtaining the tax benefit. That is because the easement must genuinely advance conservation of nature, and the landowner must give away more than less conservation-minded landowners are comfortable giving.
Second, the conservation easement must be perpetual. Future generations will have to honor the limitations or face legal liability from the conservation trust to whom the development rights were deeded. Bob and Sylvia wanted the wilderness preserved. Others might not want to “put a dead hand on the throttle.”
Third, Bob and Sylvia selected a solid appraiser who had done that kind of appraisal before and did his work to support the deduction. He didn’t “swing for the fence” with his calculation but applied solid, defensible assumptions and calculations. Greedy appraisals can lose the tax advantages of a donation.
Fourth, Bob and Sylvia gave the easement to a conservation trust with a strong reputation for conserving nature. It had thousands of members, had achieved accreditation, and was committed to annual inspections of the property to make sure the conservation easement was being respected.
Fifth, Bob and Sylvia budgeted for costs. The conservation trust expected to receive a “stewardship fee” to cover its side of the bargain. (After all, the conservation trust was signing up for a perpetuity of inspections of the property and lawsuits against future owners’ possible violations of the easement.) The lawyers and appraiser also cost money. To Bob and Sylvia, the costs were justified, given their family and conservation goals.
Conservation easements don’t work for everyone. But for landowners like Bob and Sylvia with a strong conservation ethic and a desire to preserve naturalness for future generations, such easements can make sense and provide substantial tax advantages.