How Estate Taxes and Conservation Easements are Linked

By: Amos S. Eno
Posted on:08/23/2012 Updated:08/24/2012

The implications of pending federal budget and tax decisions in Congress

This is a continuation of our discussion with Steve Small about conservation easements and tax deductions.

Estate taxes and conservation easements are intimately linked because a donated easement lowers the value of a property.  This can result in reduced or even eliminated estate or inheritance taxes at both the federal and state levels.

Steve Small, an expert in conservation easements and their tax implications, explains:  “This year, assets in a decedent’s estate worth up to $5 million in value can avoid federal estate taxes.  Tax legislation is often written for a period of time and then it expires.  If Congress doesn’t change this particular code, the maximum nontaxable estate value goes down to $1million in 2013.  Everyone thinks that Congress will not let that happen, but it’s also impossible to predict.” 

Although governed by a separate piece of legislation, the estate tax issue is to a degree tied up with Bush era tax cuts.  Given the current economic climate and associated budget declines, I asked Steve what he thought should be priorities for easement and estate tax guidelines.  What, in his opinion, needs to happen and what would be a worst case scenario?

Hard to long-term plan if the tax code keeps changing

“My advice to landowners is if you care about your land, you can’t just do nothing.  If you do nothing, some day there’s a chance it will be paved over or subdivided and sold off.  You have to do some planning.  There are other planning tools, but the principal tool in the landowner toolbox for preserving your land is the conservation easement.  It’s the best thing we have today and gives landowners their best shot at seeing that their land stays intact.  

“That being said, there is a lot of uncertainty from year to year surrounding land value and taxes.  Congress could extend increased income tax deductions for easements without a sunset date.  The Land Trust Alliance has been pushing for years to make these incentives permanent.  It’s hard to do long-term planning if the tax code keeps changing.

There is absolutely no simple painless solution

“The flip side is there’s currently lots of talk on tightening up the tax code by trading off deductions for lower tax rates, or limiting the ability of higher income landowners to take deductions for mortgage interest and charitable gifts.  However, many studies have shown that the level of charitable contributions relies to a significant extent on deductibility.  If Congress cuts back on deductibility, then charities everywhere are going to be hurt.  This is an issue that goes beyond land conservation.  

“This is just one of many issues in this huge, national debate we are having concerning taxes and spending,” continues Steve.  “There is absolutely no simple painless solution.  The tax code should be simpler and it should be fairer, but unfortunately the two don’t go together.  You can’t simplify without creating some unfairness.  A perfect example is the extra personal exemptions provided to the blind.  

Simple and fair or fair and complicated?

“The tax code can be simple and unfair or fair and complicated.  Many deductions were created to make things more fair, and a lot were based on politics to favor a particular industry or business.   

“The system has not always operated on what’s best for the country - and what’s best for the country depends on your perspective.  I would like to see more landowners become aware of the opportunity for conservation easements, and I would like to see more land trusts and other organizations do more effective outreach.  It’s fine with me if a landowner says ‘this doesn’t interest me’; my point is that far too many don’t know they have these choices.  I truly believe the Syms clothing company motto that ‘an educated consumer is the best customer.’”