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An Important Tax Incentive for Landowners
by Stephen J. Small, Esq.
In 1997, for the first time in more than a decade, Congress added to the law significant new tax incentives for voluntary land protection by private landowners. Let's start with a few important observations.
- Every single conservation easement must now take into account the provisions of the new law as part of the planning process.
- Every single family lands situation must now take into account the provisions of the new law as part of the planning process.
- Many conservation easements that have already been recorded should now be reviewed because of the provisions of the new law.
- The new law will make planning immediately after the death of many
landowners complex, difficult, expensive, possibly highly beneficial, and absolutely necessary.
- With proper comprehensive planning, owners of important land can protect that land and save many more estate tax dollars than was possible under the old law.
Background
In mid-1997, President Clinton signed into law the Taxpayer Relief Act of 1997. The commentary on that legislation generally focused on the cut in the capital gains rate to 20%, education and retirement-saving incentives, and lower estate tax rates for individuals and some family-owned businesses.
For landowners and land trusts, however, there is more news and good news. The new legislation also included a modified version of The American Farm and Ranch Protection Act, an important new tax incentive for landowners.
The original version of The American Farm and Ranch Protection Act was first introduced in Congress in 1990 by Senator John Chafee and Congressman Richard Schulze. The proposal originated with the Piedmont Environmental Council ("PEC"), based in northern Virginia. Some PEC supporters and representatives became convinced of the need for additional tax code incentives for land protection and came up with the following simple, direct proposal for relief: land subject to a conservation easement under Section 170(h) of the tax code should be totally exempt from estate tax. That was essentially the provision introduced by Senator Chafee and Congressman Schulze in 1990. Over the next several years, as the federal legislative process moved forward, the proposal became more complex and less comprehensive. However, it remains an important new incentive for private, voluntary land conservation that landowners, their advisors, and land trusts must become familiar with.
An Example
Sue is 65 and a widow. Sue owns Diamond Farm, five hundred acres that the family bought many decades ago for $50 an acre. It has saddened the family over the years to see other farms in the area sold off and subdivided; condos now sprout where meadows used to grow. It gives them a real sense of satisfaction to know that they have been able to keep Diamond Farm intact.
Diamond Farm is prime agricultural land on the urban fringe. Even though Sue doesn't feel like she is rich, because of increasing development pressure in the area Diamond Farm is now worth $1,700,000. Sue has not been able to save much money, but with small inheritances she has about $200,000 in cash and stocks
Sue has an estate valued at $1,900,000. In every single state, the combined federal and state estate tax on an estate of that size is more than $500,000. It is absolutely clear that if Sue doesn't do any planning Diamond Farm will have to be sold to pay the estate tax.
Sue can put a conservation easement on Diamond Farm permitting continuing agricultural use but generally prohibiting other commercial or industrial uses or further residential development; assume that such an easement would lower the value of Diamond Farm to $675,000. But let's also assume that Sue would like to preserve some additional value for her children; she decides to reserve the right to create three additional house lots under the terms of the easement. Assume that such an easement reduces the value of Diamond Farm to $800,000. The value of Sue's estate is now $1,000,000 (Diamond Farm at $800,000 and $200,000 in other assets), and the total estate tax bill drops to $143,750. If Sue and the family want to keep Diamond Farm intact, this is certainly a better result. Is it enough?
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