Asset and Wealth Protection

a blog by attorneys for individuals and businesses

Income Tax Benefits of Donating Conservation Easements

An owner of significant property can give up one or more of their rights in their property for conservation purposes, while still retaining ownership over the rest of their rights. Giving up a right in property (land or buildings) to a qualifying organization such as a land trust creates an "easement" which not only delivers a public benefit, but also provides the landowner with substantial tax savings.

Federal Income Tax Benefits

Donating conservation easements provides the following federal tax benefits, as set forth in 26 U.S. Code § 170:

  • The value of the donation of a conservation easement is considered a charitable deduction for income tax purposes. The deduction is limited to 50% of the donor’s adjusted gross income (AGI) that year. Any excess amount may be carried over for up to 15 years, subject to the same AGI limitation.
  • If the donor is in the business of farming and ranching, they may deduct up to 100% of their AGI, also with a 15-year carryover period.
  • Deductions may be utilized by individuals and members of qualifying pass-through entities, including S-corporations, partnerships and LLCs. They are not, however, available to publicly traded companies.

Note that the IRS has been cracking down on historic easements, particularly donations of easements on historic homes which are already subject to restrictions under local ordinances.

Filing Requirements

The IRS requires the submission of Form 8283 with a timely filed federal income tax return in the year in which the conservation easement is donated. The landowner should be careful to select a land trust or other qualifying organization that is accredited or otherwise in good standing, and that files its annual Form 990.

State Tax Credits

In addition to federal income tax benefits, 15 states also offer state tax credits for donations of conservation easements: Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Iowa, Maryland, Massachusetts, Mississippi, New Mexico, New York, North Carolina, South Carolina and Virginia. The tax credits vary from state to state, but generally range from 15-30%. There is no state income tax in Florida, but land in that state subject to a conservation easement is exempt from all state property tax.

California’s Natural Heritage Preservation Tax Credit Program of 2000 provides state tax credits amounting to 55% of the appraised fair market value of any donation of qualifying land or water rights, with a 15-year carryover period. The purpose of this tax program is to protect wildlife habitats, parks and other open spaces, agricultural land and water, and archaeological resources. Note that the tax credit period in California expires on June 30, 2020 – in addition to completion of the transaction, certain formalities must be met before that date, including the submission of a joint application to the Wildlife Conservation Board with the donee of the conservation easement, appraisal of the property, and a public hearing.

Conservation easement advisors

The highly experienced tax attorneys at Moskowitz, LLP are here to help you protect your assets and continue to build for the future. To learn more about how a conservation easement can work for your benefit, contact our San Francisco office today.

Conservation Easements

The protagonist of the film The Descendants is the trustee of a family trust that since the 1860s has owned a 25,000 acre parcel of pristine Hawai’ian land on Kauai Island. The land is the last remaining asset of a family legacy, the proceeds of which have been distributed – and subsequently squandered by many of the heirs. The trust is due to expire on account of the Rule against Perpetuities and most of the descendants are in favor of selling the property to a developer for hundreds of millions of dollars. The trustee has his misgivings, stating "If I sign this document, it’s something that we were supposed to protect that’s gone forever."

Today, there are a number of options available to owners of significant property. A growing number of those who wish to protect their land or buildings for future generations are setting up conservation easements on all or part of their property.

What is a conservation easement?

A conservation easement is a permanent agreement between a property owner and a land trust, government agency, tribe, or other qualified organization, that ensures that the owner’s property will be used for the owner’s conservation goals, whatever they may be. The idea is that the owner not only owns their property, but also the rights associated with it – this includes the right to build on the property, subdivide it, the right to maintain it as a farm or vineyard, to extract minerals or oil from the ground, to allow animals to graze on it... or to simply leave it as is.

The benefits of conservation easements

Conservation easements have multiple benefits:

  • They are powerful estate planning tools capable of keeping land in the family indefinitely
  • They are permanent, meaning that all future owners of the property are obligated to use the property as stated in the original agreement (note that in some cases, amendments may be made if necessary)
  • They allow landowners to continue using their land
  • They permit landowners to sell the land, exchange it for other property, or leave it to their heirs
  • They can result in significant public benefits, including protecting landscapes and wildlife, and maintaining traditional uses of the land
  • They can also result in significant income and estate tax savings

Many easements limit commercial and other non-agricultural uses of the property, but this is not an absolute requirement.

Tax attorneys in San Francisco

The estate planning and tax attorneys at Moskowitz, LLP can help you maximize the estate and asset protections available under the law and minimize the tax consequences of your property acquisitions and holdings.

See our upcoming posts on federal and state tax benefits of conservation easement donations, 1031 exchange rules regarding easement properties, and how conservation easements can be used as a powerful estate planning tool.

Estate Planning for the Non-Citizen Spouse

Most couples in which one partner is a non-U.S. citizen can create an estate plan much like all others – they can hold property in joint form, inherit from each other via a will or trust, be named beneficiaries of their spouse’s life insurance and retirement accounts, and serve as each other’s executors.

Estate taxes are also not a consideration so long as the estate is below the federal estate tax threshold for an individual ($5,450,000 in 2016). However, if the estate is above that amount and one spouse is not a U.S. citizen, the unlimited marital deduction - which allows an individual to transfer up to the entirety of their estate to their spouse free from estate tax - will not apply, unless the assets are placed in a Qualified Domestic Trust (QDOT).

The QDOT

The reason for denying non-U.S. citizen spouses the benefit of the unlimited marital deduction is to prevent non-citizens from leaving the U.S. with large sums of money and never paying U.S. estate taxes on that amount. If the first spouse to die is the U.S. citizen, a QDOT will permit the non-citizen spouse to use the income and any needed principal for the rest of their life.

If the trustee of a QDOT makes a distribution of principal to the surviving spouse, the amount of that distribution will be subject to estate tax unless payments are made due to an “immediate and heavy financial need” (health, maintenance, education, or support of the non-citizen spouse or his/her legal dependents). Estate taxes will be due on any amount remaining in the QDOT after the non-citizen spouse passes away.

QDOT Requirements

A QDOT should contain all assets that exceed the federal estate tax exemption amount. To qualify, the trust must meet certain requirements:

  • At least one trustee must be a U.S. citizen or a domestic corporation (trust company or bank)
  • If the assets in the QDOT exceed $2 million, one of the trustees must be a U.S. bank or an individual who has posted a bond or a letter of credit to the IRS equal to 65% of the value of the assets in the trust
  • If the assets in the QDOT are under $2 million, a U.S. bank need not be trustee and an individual trustee need not post bond so long as foreign real estate comprises no more than 35% of the trust’s assets
  • The executor/trustee must elect to treat the trust as a QDOT on the U.S. citizen-spouse’s estate tax return
  • The QDOT must provide that all income is to be distributed to the surviving non-citizen spouse

Other Considerations

For couples hesitant about creating a QDOT, other estate planning options exist to reduce estate taxes, such as an Irrevocable Life Insurance Trust or other irrevocable trust. In addition, keep in mind that if the non-citizen spouse obtains citizenship before the federal estate tax return deadline, the unlimited marital deduction will become available to them (however, in that case they will be subject to income tax on their worldwide income).

Consult an experienced estate planning attorney at Moskowitz, LLP to create an estate plan that meets your specific needs.