The donation of a conservation easement by a landowner can be an effective means to reduce estate taxes on lands. Section 2055(f) of the Internal Revenue Code (I.R.C.) allows donations of qualifying easements to a public charity such as a land trust to be deducted from the taxable value of an estate.

Section 508 of Public Law 105-34 (the Taxpayer Relief Act of 1997) created another benefit for donations of easements, I.R.C. section 2031(c). yes".  This benefit can reduce the taxable value of an estate an additional amount, up to $500,000. This section of the code can be confusing because of the way it is worded. But it does work, and the IRS has confirmed its operation in letter rulings and in practice. Taken together, 2055(f) and 2031(c) create a powerful incentive for conservation which no one who owns land with public value for open space, agricultural preservation, wildlife habitat or recreation should ignore.

Section 6007(g) of the Internal Revenue Service Reform Act (H.R. 2676), signed into law on July 22, 1998, extended these benefits in a new way.  Under this provision, when a landowner dies without having donated a conservation easement, his or her heirs may be allowed to elect to donate a conservation easement on the inherited lands and get these estate tax benefits post-mortem.

Getting this post-mortem option requires qualifying for the 2031(c) benefit, and this requires some attention to detail. These provisions have requirements beyond those that qualify conservation easements for income tax deductions under I.R.C. 170(h). 

I.R.C. 2031(c)

Under I.R.C. 2031(c), the percentage of the value of a piece of land that can be excluded from an estate is reduced below 40% when the easement itself is worth less than 30% of the total value of the land. Retained development rights are fully subject to estate tax, but payment of the tax can be deferred for up to two years.

What land qualifies?

As passed in 1997, IRC 2031(c) applied only to certain geographic areas near metropolitan statistical areas, national parks, federally-designated Wilderness Areas, or Urban National Forests (a designation of the U.S. Forest Service). But section 551 of the tax bill enacted in 2001 (H.R. 1835, P.L 107-16) eliminates those restrictions, making property anywhere in the United States eligible. That law also makes it clear that the values to be used to determine what percentage of the property’s value is encumbered by the easement are the values at the time of donation.

The land must have been owned by the decedent or a member of his family for three years prior to death. Property subject to a mortgage is eligible for the 1997 exclusion only to the extent of the net equity in the property. The value of structures cannot be counted in any way in applying these provisions -- only the value of the land. 

Generally, the value of rights retained to use the land for commercial purposes cannot be excluded from the taxable estate. However, the value of retained rights that are “subordinate to and directly supportive of the use of land as a farm” may be excluded. Such uses include timber cultivation and harvest.

What easements qualify?

To qualify for these benefits, easements must first qualify for a deduction under section 170(h) of the I.R.C.  They must be perpetual conservation easements, donated to a public charity such as a land trust, or to a governmental entity.  The easement must protect outdoor recreation or education resources, wildlife habitat, or open space “for the scenic enjoyment of the general public or in fulfillment of a clearly delineated public conservation policy.”  Easements solely for the purpose of historic preservation qualify under section 170(h), but they do not qualify for the benefits of IRC 2031(c). 

To qualify for IRC 2031(c), an easement must also prohibit all but “de minimus” commercial recreational activities. The authors of the provision, however, did specify in the legislative history of the 1997 bill that they did not intend hunting or fishing to be considered “commercial recreational activities.”

Who claims the benefit?

IRC 2031(c) can be the result of a conservation easement donated in a will or prior to death. But where it is the heirs who are making the donation, the executor must make an irrevocable election to take these benefits. Such an election can be made only if the easement is placed on the land by the executor or beneficiaries before the filing of estate taxes -- generally nine months from the death of the decedent. Land excluded from estate tax under this provision will receive a carryover basis rather than a stepped-up basis for purposes of calculating any gain on a subsequent sale.

When will these provisions go into effect?

All of these provisions are now in effect.

When will we know more?

The Internal Revenue Service will eventually write regulations interpreting these new provisions, and providing further guidance to those seeking to use them. But it will probably be several years before such regulations are issued.

What else should I know?

             The existence of the post-mortem option is no substitute for good estate planning by a landowner. The power of an executor to make a post-mortem donation of an easement may be limited by state probate law¹, and a disagreement among heirs could easily frustrate the use of these provisions to preserve family lands from development. In addition, good estate planning by a landowner can yield substantial additional benefits including income tax deductions under I.R.C. section 170(h), which are not allowed in cases where estate tax benefits are taken for easement donations made post-mortem.

             Landowners should always consult a qualified attorney in dealing with the particulars of their own situation.

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ABOUT ORANGE COUNTY WHERE THE MAJORITY OF OUR CLIENTS ARE:

Orange County is a county in Southern California, United States. Its county seat is Santa Ana. According to the 2000 Census, its population was 2,846,289, making it the second most populous county in the state of California, and the fifth most populous in the United States. The state of California estimates its population as of 2007 to be 3,098,121 people, dropping its rank to third, behind San Diego County. Thirty-four incorporated cities are located in Orange County; the newest is Aliso Viejo.

Unlike many other large centers of population in the United States, Orange County uses its county name as its source of identification whereas other places in the country are identified by the large city that is closest to them. This is because there is no defined center to Orange County like there is in other areas which have one distinct large city. Five Orange County cities have populations exceeding 170,000 while no cities in the county have populations surpassing 360,000. Seven of these cities are among the 200 largest cities in the United States.

Orange County is also famous as a tourist destination, as the county is home to such attractions as Disneyland and Knott's Berry Farm, as well as sandy beaches for swimming and surfing, yacht harbors for sailing and pleasure boating, and extensive area devoted to parks and open space for golf, tennis, hiking, kayaking, cycling, skateboarding, and other outdoor recreation. It is at the center of Southern California's Tech Coast, with Irvine being the primary business hub.

The average price of a home in Orange County is $541,000. Orange County is the home of a vast number of major industries and service organizations. As an integral part of the second largest market in America, this highly diversified region has become a Mecca for talented individuals in virtually every field imaginable. Indeed the colorful pageant of human history continues to unfold here; for perhaps in no other place on earth is there an environment more conducive to innovative thinking, creativity and growth than this exciting, sun bathed valley stretching between the mountains and the sea in Orange County.

Orange County was Created March 11 1889, from part of Los Angeles County, and, according to tradition, so named because of the flourishing orange culture. Orange, however, was and is a commonplace name in the United States, used originally in honor of the Prince of Orange, son-in-law of King George II of England.

Incorporated: March 11, 1889 Legislative Districts: * Congressional: 38th-40th, 42nd & 43 * California Senate: 31st-33rd, 35th & 37 * California Assembly: 58th, 64th, 67th, 69th, 72nd & 74 County Seat: Santa Ana County Information: Robert E. Thomas Hall of Administration 10 Civic Center Plaza, 3rd Floor, Santa Ana 92701 Telephone: (714)834-2345 Fax: (714)834-3098 County Government Website: http://www.oc.ca.gov