Estate Planning for Farmers and Ranchers
Estate Planning for Farmers and Ranchers Estate Tax Incentives for Land Conservation
Keeping Land in the Family For some families, one of the major advantages of donating a conservation
easement is that it helps pass land on to the next generation, by reducing estate taxes. Estate taxes can lead to the land being broken
up or sold off, even when families want to keep the land intact. Estate taxes can make it especially challenging for families to hold
on to working farm, ranch, and forest land.
Changes
to the tax code that were made permanent in 2014 raised the
threshold for estate taxes from $1 million to $5 million (indexed to
inflation). As of 2015, estates of $5.1 million or more are subject
to estate taxes of 40%. Farm and ranch estates are four times as
likely as other estates to be subject to estate taxes, putting some
of the nation’s most productive agricultural land at heightened
risk of subdivision and development.
Estate
tax incentives for land conservation give families the option to
reduce their estate taxes by protecting their land, which conveys
public benefit while easing the transition of land from one
generation to the next.
How
Conservation Easements Can Lower Estate Taxes
A
conservation easement can reduce estate taxes in two ways:
It
reduces the value of the estate to be taxed. A
conservation easement lowers the property value — and,
correspondingly, estate taxes. In some cases, a conservation
easement may drop the value of the estate below the threshold for
estate taxes altogether.
Heirs
can exclude 40% of the value of land under conservation easement
from estate taxes. Section
2031(c) of the Internal Revenue Code provides an estate tax
exclusion of up to 40% of the encumbered value of land (but not
improvements) protected by a “qualified conservation
easement.” That exclusion is capped at $500,000. The cap is
lower if the easement reduced the land’s value by less than
30% at the time it was donated. To qualify, the easement must serve
one or more of the conservation purposes recognized in Section
170(h) of the tax code. It must limit commercial recreational use to
a minimum and it cannot qualify soley for the purpose of historic
preservation. Only members of the original easement donor’s
family, including spouses and descendants, can claim this
exclusion.
Conservation
Decisions in Estate Planning
Families
can benefit from these estate tax advantages if the landowner donates
an easement during life, or by will, or if the heirs donate a
posthumous easement. However, if the easement is donated by will or
posthumously, the family foregoes the opportunity for an income tax
deduction.
Landowners
should note that conservation easements must meet specific criteria
to qualify for tax benefits and that the tax implications of their
decision will depend on their specific circumstances. Anyone
considering a conservation easement is advised to consult with
independent, qualified financial and tax advisors.
Improving
Estate Tax Policy
The
Alliance’s policy advocacy led to the creation of the first
estate tax incentives for land conservation in 1997. The Alliance
continues working to improve estate tax laws so that they provide
opportunities for conservation, rather than forcing families to sell
their land, which often leads to development.
One
major issue is that property values have gone up significantly since
1997, making the $500,000 cap on the estate tax exclusion
increasingly inadequate. Farmland values, in particular, have more
than doubled. In many cases, the estate taxes on working farms,
ranches, and forests come to many millions of dollars — so a
half-million dollar exclusion isn’t enough to keep the land in
the family.