A.                 A conservation easement is a conveyance by deed of certain interests in real estate by the landowner to a qualified organization or agency that permanently restricts and proscribes commercial and industrial development and limits certain other uses of the land, including residential development, to protect open space and natural resources. Conservation, agricultural and historic preservation easements, or restrictions, are authorized by NH RSA 477: 45-47.

 

1.      The advantages of a conservation easement to a family can include:

 

a.                   It leaves the property in the ownership of the landowner, who may continue to live on it, sell it or pass it on to heirs, as well as to reap economic benefits through forestry and agricultural uses.

 

b.                  It can significantly lower estate taxes—sometimes making the difference between heirs being able to keep land in the family and their needing to sell it.

 

c.                   It assures that the property will remain undeveloped, reduces the temptation of future generations (and their spouses) from selling the land, and thus can reduce the potential for family tension or disagreement developing the land.

 

d.                  A conservation easement deed can be a flexible document, and can be written to meet the particular needs of the landowner’s family while protecting the property’s resources.

 

e.                   It is permanent, and remains in force when the land changes hands.

 

f.                    The donation of an easement may result in a federal income tax deduction.

 

B.                 Property with significant conservation or historic preservation values can be protected by an easement, including forestland, farms and agricultural lands, lake and river front properties, wetlands, wildlife and endangered species habitat, and scenic areas.

A conservation easement can be granted to:

 

1.         A public agency, such as:

 

a.                   Federal – US Forest Service, U.S. Fish & Wildlife Service

 

b.                  State – Dept. of Resources and Economic Development, N.H. Fish & Game

 

c.                   Local municipality – most often through the Conservation Commission

 

2.         A private nonprofit land trust, such as:

 

a.                   National – The Nature Conservancy, American Farmland Trust

 

b.                  Statewide – Society for the Protection of N.H. Forests, New Hampshire Audubon

 

c.         Regional – Ammonoosuc Conservation Trust, Monadnock Conservancy, Upper Valley Land Trust, Southeast Land Trust of New Hampshire

 

d.         Local – Squam Lakes Conservation Society

 

A.        A conservation easement will be a tool for family real estate where the property includes significant acreage that can be protected as open space, significant natural resource value or endangered species habitat, significant scenic values, working forest land, or other attribute the protection of which will provide a “public benefit”, as will be discussed in greater detail in this outline. It is may be a tool for cottages with adjoining undeveloped land (even as small as an acre or two), but is generally not an appropriate tool for small lakeshore lots, or other properties without excess acreage.

 

B.                 The conservation easement provides open space and natural resource protection, and generally prohibits commercial uses except for forestry and agriculture.

 

C.                 The economic value of the land may bear no relation to the “value” of the land to the family: The cottage and land along the Lake is still the “rustic camp”, and not considered an asset valued at its potential “retail” market price, to those who have used and loved it for three generations; the working forest or farm might have greater economic value as a commercial development.

 

D.                 The economic value of the land may cause estate and wealth transfer tax problems to the matriarch and patriarch. The classic problem has been the “forced” sale of the family property to pay the estate tax. The conservation easement can reduce the economic value of the property and not affect the way the property is actually used by family members.

 

E.                  By eliminating the right to further subdivide or to commercially develop the property, the grant of a conservation easement may eliminate temptations and reduce possible sources of friction among members of future generations.

 

F.                  From a tax standpoint, the gift (or bargain sale) of an easement can result in a significant income tax charitable contribution deduction, and lead to significant estate tax savings. These issues are discussed in greater detail later in this outline.

 

 

 

A.                 In order to take a charitable income tax deduction, the taxpayer/easement donor must meet some technical requirements of the Income Tax Code. The Internal Revenue Service is scrutinizing deductions for easement gifts closely, and the rules must be closely followed and respected.  The Service has been successful challenging the charitable contribution deduction on administrative and technical oversights so it is critical that the landowner/taxpayer follow the rules! 

 

B.                 A conservation easement is valued by a “qualified appraisal”, a term described in detail in Treasury Regulation 1.170A-13(c). Not all appraisers are trained to value conservation easements in the detail required to meet the IRS standards.

 

C.                 The appraiser will conduct a detailed examination of the characteristics of the land (including the size and topography of the parcel, access, local land use regulation and market conditions) in order to value the land.

 

D.                 The appraisal report generally values the land both before and after the easement is granted to determine the value of the easement.

 

E.                  The appraiser should also take into account the particular terms of the easement deed, and must also consider any enhancement of value to other property of the landowner or members of the landowner’s family.

 

F.                  IRS Form 8283, signed by the appraiser, and by the donee organization, is filed with the donor’s income tax return for the year of the gift. It requires that the landowner complete a “separate statement” that, among other things, recites the conservation purposes protected by the conservation easement.  It is also recommended that the donor file with the Form 8283 a copy of the recorded conservation easement deed, and a complete copy of the entire appraisal report (if the easement is valued in excess of $500,000, a complete copy of the appraisal report must be filed with the tax return).

 

G.                 The landowner donor must obtain a "contemporaneous written acknowledgment" from the holder of the easement that acknowledges the gift and indicates whether any “goods or services” were provided by the easement holder in return for the gift. A copy of this letter should be filed with the tax return as well.

 

A.        If the real estate is enrolled in current use at the time an easement is granted, there will be little, if any, additional local property tax relief obtained from the grant of the easement, as the current use rates would apply to the land restricted by the easement.

 

B.                 Parcels that may not qualify for current use may qualify for favorable property tax under RSA 79-B. This section allows a “conservation restriction assessment” for parcels subject to permanent conservation restrictions that are less than 10 acres, the current use minimum. In addition, this section protects the landowner against possible adverse changes in the current use statute that might diminish the tax advantages offered by current use.

 

A.        Generally, an income tax deduction for the charitable contribution of real estate is available only if the taxpayer/landowner contributes or transfers his or her entire interest in a parcel of real estate (IRC §170(f)(3)). One exception to this rule is the gift of a conservation easement that meets the qualifications of §170(h) the Code and the related Treasury Regulations. The amount of this deduction has changed in recent years, as a major new tax incentive for the charitable contribution of a conservation easement has become a part of the code on a repeated, temporary basis. The Tax Relief Act enacted in December, 2010 reinstated this provision for easements granted in 2010 and those granted through December 31, 2011.  After that date, without further Congressional action, the rules for the charitable contribution deduction for gifts of easements reverts to the “traditional” pre-incentive rules discussed in section 3 below.

 

1.         IRC §170(h) allows a charitable contribution deduction for the gift of a “qualified conservation contribution”, which is defined as the gift of:

 

a.         “a qualified real property interest” to

 

b.         “a qualified organization”, exclusively for

 

c.         “conservation purposes”

 

d.         The gift must be in perpetuity. IRC §170(h)(5)(A)

 

2.                  Treasury Department Regulations 1.170 A-14 define and describe each of these three requirements in detail.

 

a.         A “qualified real property interest” includes a conservation easement as allowed by and defined in RSA 477:45-47, granted in perpetuity.  It also includes the gift of a remainder interest in the property, while the landowner reserves a life estate.

 

b.         “Conservation purpose” is specifically defined to include these categories of resources that may be protected by the easement:

 

(i)                  Provides outdoor recreation or educational use for the general public;

 

(ii)                Protects a relatively natural habitat of fish, wildlife, plants, or similar ecosystem;

 

(iii)               Preserves open space (including farmland and forestland) where such preservation:

 

a.             Provides for the scenic enjoyment of the general public or is pursuant to a clearly delineated federal, state or local governmental conservation policy, and

 

b.            Yields a significant public benefit;

 

(iv)       Preserves a historically important land area or a certified historic structure.

           

c.                   While an easement must provide a public benefit, it need not require public access to the property to qualify.

 

d.         A “qualified organization” includes government agencies such as those identified above, as well as certain tax-exempt non-profit organizations that are dedicated to, and have the capability to provide long-term stewardship of the land.

 

3.         The “traditional” charitable deduction limitations:   The amount of the income tax deduction available to the landowner taxpayer is limited to a percentage of his or her adjusted gross income. The incentives available for easement gifts made through 12/31/2011 change the statements in italics.  

 

a.         Because the gift of a conservation easement is a gift of capital property, the charitable contribution deduction is usually limited to 30 per cent of the taxpayer’s adjusted gross income. Unused amounts may be carried over for a maximum of five years after the year of the gift. Therefore, the taxpayer has up to six years to take advantage of the value of the easement as a tax deduction.

 

b.        The landowner may elect, however, to take a deduction of 50 per cent of the adjusted gross income, but may claim as a deduction an amount no greater than the tax basis of the property. This election may be advantageous if the value of the land has not appreciated greatly since acquired by the landowner, or if the landowner is in poor health and may not want to stretch out the carry over for an additional five years.

 

c.         If the landowner has owned the property for less than one year, the charitable contribution deduction is limited to the tax basis and the 50 per cent rule applies.

 

4.         The special incentives that are in effect until December 31, 2011 are as follows:

a.         For easements granted in 2010 and 2011, the December, 2010 Tax Relief Act re-enacted incentives that had been in effect for the previous four years.

b.          The changes to the traditional rules by theses incentives:

·                     Raise the maximum deduction a donor can take for donating a conservation easement from 30% of their adjusted gross income (AGI) in any year to 50%;

·                     Allow qualifying farmers and ranchers to deduct up to 100% of their AGI; and

·                     Extends the carry-forward period for a donor to take tax deductions for a voluntary conservation agreement from 5 to 15 years.

c.         This provision would be effective for easement donations, and for the gift portion of bargain sales, made prior to December 31, 2011.  After that date, the law will revert back to previous provisions, unless and until Congress extends the provisions.

d.         In 2007, the bill which allowed these incentives for 2008 and 2009 also included new standards for easement appraisers and appraisals, and increased penalties that can be assessed against both appraisers and taxpayers for over-stated appraisal values and thus overstated deductions. These compliance provisions will not expire.

5.         Other specific requirements for an income tax deduction:

·                    Baseline. If the easement is a tax deductible gift, and if the donor retains rights in the property that, once exercised, could impair the conservation values of that property, the IRS holds the donor responsible for providing sufficient baseline data “to establish the condition of the property at the time of the gift.” (See Treas. Reg. Section 1.170A-14(g)(5)(i).) As a practical matter, however, the easement holder is best able to ensure that all the information necessary to manage and enforce the easement is assembled and organized in an easily referenced format. The regulations further require an easement donor to provide the donee with documentation of the property’s condition prior to the time of the gift. This is generally a wise approach for all easements, whether or not a tax-deduction is sought. 

 

·                    Subordination. In order for a donated easement to qualify for an income tax deduction, IRS regulations require that when a landowner contributes mortgaged property to a qualified organization, the mortgagee must subordinate its rights in the property to the organization’s right to enforce the conservation purposes of the gift in perpetuity. (See Treas. Reg. Section 1.170A-14(g)(2).) 

 

·                    Ability of holder to enforce and defend. If a donor claims a tax deduction for an easement, the IRS requires that the easement holder plan for the costs of monitoring and enforcement. The regulations state that an “eligible donee” of tax-deductible conservation easements “must…have a commitment to protect the conservation purposes of the donations, and have the resources to enforce the restrictions” of the easements. (See Treas. Reg. Section 1.170A-14(c)(1).) Although the regulations say that donees “need not set aside funds to enforce the restrictions that are the subject of the contribution,” most easement holders believe that the most important resource for enforcing easement restrictions is cash in the bank.

 

·                    Mineral rights. IRS regulations require that a conservation easement must prohibit surface mining for it to be considered a tax-deductible donation. If a third party owns the mineral rights to a property, the regulations specify that a deduction for an easement donation will only be allowed if:

 

Ownership of the surface estate was separated from ownership of the mineral interests before June 13, 1976, and remains so separated up to and including the time of the gift; and 

 

The probability of surface mining occurring on the property is “so remote as to be negligible.”      (See Treas. Reg. Section 1.170A-14(g)(4).)

 

 

 

A.       The Federal wealth transfer (estate and gift) tax scheme taxes the transfer of wealth for less than full consideration. It is essentially a "unified" tax structure, and it applies to gift transfers during lifetime and transfer at death by a Will or Trust. The estate tax has been the subject of much political discussion, and uncertainty, in recent years, and as of December, 2010, the Tax Relief Act set the law for the next two years – to December 31, 2012.  (Note this date is a year after the income tax rules discussed in the prior section).  

 

1.      The Applicable Exclusion Amount for Estate Tax, which allows the transfer at death of a certain amount of assets free of tax, is set at $5,000,000 until December 31, 2012, with an estate tax rate of 35% for assets in excess of that amount.

 

2.      The lifetime exclusion for Gift Tax is also set at $5,000,000 for, again with a 35% rate for gifts in excess of that amount also for gifts made before December 31, 2012.

 

3.      The Annual Gift Tax Exclusion allows a person to make gifts to any number of recipients each year free of tax consequence. Since 2009, the amount of the exclusion has been $13,000. A married couple may transfer $26,000 to each donee (gift recipient) annually, regardless of which spouse holds title to the gifted asset ("split gifts"). Annual exclusion gifts are in addition to the amount protected by the lifetime gift tax credit.  

 

4.       If an individual makes gifts during lifetime in excess of the annual exclusion, the gifts are not immediately taxable, but are credited against the available gift and estate tax credit. The use of the credit is cumulative, and once the limitation is exceeded, the gifts are subject to tax. If, for example, a person has made taxable gifts of $450,000 during her life, no tax is due, but her estate tax exclusion would be reduced by that amount. Thus if this person died in 2011, she would have $4,550,000 available as a credit against her estate ($5,000,000 - $450,000 = $4,550,000). 

 

5.      Unless and until Congress acts to change the law, the Estate Tax Exclusion and the lifetime Gift Tax Exclusion will return to $1 million on January 1, 2013, and the highest rate will return to 55%. 

 

6.        The unlimited Marital Deduction, which allows unlimited gifts and transfers between spouses during lifetime and at death free of estate and gift tax.  Thus at the death of the first spouse to die no tax is imposed if the entire estate is left to the surviving spouse, regardless of the amount. The marital deduction may not result in avoidance of the tax altogether, but only the deferral of the payment of tax that will be due upon the death of the second spouse to die.

 

7.      The 2010 Tax Relief Act also introduced a new concept: “portability” of the estate tax exclusion between spouses. If the first spouse to die has an estate of $1,500,000, the unused $3,500,000 of the estate tax credit is available to the surviving spouse, who can add this to his or her own $5,000,000 exemption, thus providing the assets with a value of $8,500,000 free of estate tax. Once again, this provision is only in effect for 2011 and 2012, but it is possible that Congress will extend this concept.   It essentially provides for a total exclusion from estate tax of $10,000,000 for a married couple.  (As a side note, the mechanics of how this will be implemented, and what tax returns will be required, is uncertain.)

 

8.      Without “portability”, estate planning for a married couple has often involved the use of trusts to protect the credit amount of the first spouse to die.  Because of the uncertain future of portability – and of the $5,000,000 exemption amount, many married couples are choosing to use the traditional planning devices.

 

9.      The Charitable Deduction, which allows unlimited gifts to qualifying charitable organizations and institutions free of estate and gift taxes.  An outright gift of real estate to a land trust (during life or at death) qualifies for the deduction, and thus passes free of any transfer tax obligation. It is important to note that the requirements for an income tax deduction for a qualifying conservation contribution discussed in Section V A 1 and 2 above do not apply to an outright gift of land.

 

 

A.        Internal Revenue Code Section 2031(c) excludes from estate tax up to 40% of the value of land subject to an easement. As with any section of the Code, however, there are special rules and qualifications that apply, and not every conservation easement qualifies for the additional tax relief. 

 

B.         The maximum amount of the exclusion is $500,000. The actual tax savings depends on the estate tax rate; for an estate taxed at the 35% level, the tax savings is $175,000.  Also, the amount of the exclusion will be reduced from 40% by a formula if the value of the easement does not reduce the value of the land by at least 30%.

 

C.        Another important feature of the new law is that the executor of a landowner's estate may grant a conservation easement after the landowner dies and still qualify for reduced land valuation in the estate and the additional exclusion. This is referred to as a "post-mortem easement".

 

D.        The law also imposes special qualifications for the new tax exclusion:

                       

            1. Easement requirements: The easement deed must preclude all but a minimum use for commercial recreational activity. Certain development rights must be specifically accounted for in the tax calculation. A historic preservation easement does not qualify for the exclusion or the post-mortem easement.

 

            2. Ownership requirements: The easement must have been granted by the decedent or a member of the decedent's family, and the decedent must have owned the property for at least three years prior to date of death.

 

E.        The impact of this provision and the availability of the exclusion and the post-mortem easement can be dramatic. However, all of the heirs must consent to the easement transaction, and potential income tax benefits are lost, so for many landowners concerned about the protection of their property, the better course of action remains an easement granted during lifetime.