Alan S. Moore / L’Observateur / June 14, 2000

Are you aware that growth in the market value of farmland, ranches, and undeveloped land has pushed many an acreage-rich, but cash-poor estates into a very difficult tax situation? The need to raise sufficient funds to satisfy federal estate taxes may compel your heirs to sell land to a commercial developer, regardless of your family’s desire to preserve property in its present condition and use.

Fortunately, substantial tax incentives are allowed when using a qualified “conservation easement” that will block the commercial exploitation of your property.

Retain Ownership and Substantial Rights of Use

A conservation easement allows you to voluntarily donate a perpetual restriction on the use of your land for conservation purposes. However, youand your heirs retain the ownership of your land, as well as substantial rights to its use, including limited development rights. In additions, you and yourheirs also remain entirely free to sell, lease, or mortgage the restricted property to any party.

Your donation agreement with a qualified conservation organization, such as a land trust, will define the specific rights you retain. With agricultural uses,for example, you might include the ability to repair, expand, and replace your buildings, fences, etc. – even to harvest timber.

Tax Advantages

When you grant a perpetual easement benefiting a qualified conservation organization and meeting all the tax law’s other requirements, part of the restricted property’s value becomes excludable from the value of your gross estate. In addition, the change in the property’s market value, resulting fromthe restricted use, becomes deductible from income -within the normal limitations on charitable deductions.

How Much Is Excludable?

For estate-tax purposes, the size of a conservation easement exclusion depends on the year of death and on the reduction in land value. Themaximum exclusion is $300,000 for the year 2000. This amount will rise to$400,000 in 2001 and $500,000 in 2002 and afterwards. However, theexclusion cannot exceed 40% of the property’s value. In addition, to qualifyfor the full amount, the easement must reduce the property’s overall value (less the value of any structures and retained development rights) by 30% or more. Smaller reductions result in smaller exclusions.You may donate a qualified conservation easement during your lifetime, or – assuming your will authorizes it – your executor or personal representative may donate the easement after your death. Also, the exclusion’s estate-taxbenefit attaches to the land, not the donor. Therefore, the exclusion will beavailable each time a new heir within your family inherits the land.

Sample Exclusion

Assume a qualified conservation easement has reduced the value of your family’s farm from $3 million to $2 million. If you die in 2002, 40% of the $2million would be $800,000. But your executor or personal representativewould be able to exclude only $500,000 (the maximum exclusion allowable in 2002) from your gross estate. Donating the easement would avoid up to$275,000 in estate tax at current rates.

On the Other Hand Granting a conservation easement does have a tax downside. Anyconservation easement property excluded from your gross estate will be inherited by your heirs with a carryover basis. Without the easement, themore advantageous step-up in basis to current market value would apply.

The lower basis resulting from the easement will cause higher tax if the property is eventually sold.

To determine whether a conservation easement would be a worthwhile strategy for you, please consult a Tax and Legal advisor.

ALAN S. MOORE is a financial advisor of Legg Mason Wood Walker, Inc., adiversified securities brokerage and financial services firm that is a member of the New York Stock Exchange, Inc. He writes this column every Wednesdayin L’Observateur.

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