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.