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articles & updates | article
What Do The Changes in the Federal Tax Laws Mean for Private Land Conservation?
by Stephen J. Small, Esq.
Background
Earlier this year, Congress passed a major tax bill. Although the bill was widely portrayed as a big tax cut, many of the tax reduction provisions will not take effect this year but will be phased in over the coming decade.
While it was being considered, and shortly after it passed, the new bill was also hailed as "repealing the estate tax." Now we know the bill did not do that at all.
New Estate Tax Rules
Under the new estate tax rules, in the year 2010 the estate tax is repealed and in the year 2011 it comes right back again! How much simpler could things be??!! But let's back up a bit.
Under the "old" estate and gift tax rules that were in effect prior to the new law, every individual could give to others during lifetime or leave to others by will $675,000. This threshold amount was in addition to any charitable gifts and assets given or willed to a spouse. Under the old law, that so-called "unified credit" or "exemption equivalent" amount was scheduled to rise, gradually, to $1,000,000 by the year 2006.
Under the new law, for estate tax purposes that amount is scheduled to increase as follows:
- to $1,000,000 in 2002
- to $1,500,000 in 2004
- to $2,000,000 in 2006
- to $3,500,000 in 2009
In addition, over the same period the highest estate tax rates are also scheduled to drop, generally from 50% to 45%. Then, miracle of miracles, in the year 2010 the estate tax is repealed but only for one year! If you die in 2010 there is no estate tax. If you die in 2011, the threshold goes back to $1,000,000 and every penny over that is subject to estate tax!!
Having a "permanent" estate tax system in place that repeals the estate tax for one year is inconceivable. It is my best guess that Congress will make changes to these new rules sooner rather than later. The tax system is completely "in play" at this point. I do not know a tax advisor anywhere who does not expect the new rules to be changed.
What we have now is this: Every person across the country for whom estate planning is an issue now faces a period of uncertainty. Whether you are a landowner or not, you now have absolutely no idea what the estate tax rules will be in three or five or ten years.
I think we are going to continue to have an estate tax. I think we can expect to see the estate tax threshold set at between $1,500,000 and $2,500,000. I think that real estate values will continue to go up over the long term and the value of other assets will continue to go up over the long term, so what seems like a "higher" estate tax threshold this year may not seem so high in 2005 or 2010.
I have always suggested that there are two different aspects to estate planning.
The first one is this. Your estate plan has to be right, your documents have to be right, you have to be aware of the current law and the current value of your assets, in case you die this year. This means staying informed, staying current, paying attention to your affairs.
But there is a second part to estate planning, and that is to make certain that whatever you do to get it right if you die this year does not prevent you from doing what you want, carrying out your medium and long term goals, if you live out your actuarial life expectancy, which could be twenty, or thirty, or forty more years.
If estate planning is an issue for you, whether or not you are a landowner, here is my advice. You need to stay current with the tax rules. You need to stay current with the value of your assets and your estate. You need to work with a competent experienced advisor who understands how to do good estate planning work in an environment where the rules are unclear. You need to have an estate plan that works if you die within the next twelve months and you should review that plan in its entirety every year, at least until the confusion over the estate tax rules is resolved. You need to pay attention!
Many landowners donate conservation easements with no regard whatsoever for the tax benefits. Many landowners are highly motivated by the income tax deduction for conservation easement donations. I do not think the new tax bill will have any effect at all on these conservation easement donations.
However, if you are wondering whether to consider a conservation easement as an important part of your estate planning, the new law may cause you to think twice, or more, and may cause you to hesitate, or delay, or simply reject the idea. There is no simple answer to this question, but I have made this observation many times. Most people who donate conservation easements do so for three reasons: they love their land; they love their land; they love their land. If you care about your land, a conservation easement is the best tool we have for protecting that land and preserving it.
New Income Tax Rules
There isn't much to say here about the relevant changes to the income tax rules under the new tax bill, and that is very good news indeed. In a nutshell, under the new law income tax rates are scheduled to drop over the next five years. For example, the prior 28% income tax rate dropped to 27% on July 1, goes to 26% in 2004, and goes to 25% in 2006. The highest income tax rate of 39.6% dropped to 38.6% on July 1 and falls to 37.6% in 2004 and 35% in 2006. The "bottom line" is that the income tax deduction for conservation easement donations, for outright gifts of land, for so-called "bargain sales," for that matter for all charitable donations, is still intact. The income tax deduction will continue to act as a major incentive for all kinds of charitable giving.
It is important to note that legislation is now pending in Congress that would provide some very significant new income tax incentives for private land conservation. The gist of most of the proposals is to make available to landowners greater income tax savings from gifts of easements or sales of land or easements to government or non-profit purchasers. In the current environment it is difficult to predict what additional tax legislation, if any, Congress might pass this year, but many of these proposals have in fact been under active consideration.
The "Bottom Line"
You need to know the rules. You need to know what your choices are. If you care about your land, you can't just do nothing. If you care about your land, you need to do the planning that is right for you and your family.
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