A conservation easement is a legal agreement between a landowner and an eligible organization that restricts the future activities on the land (usually forever) in order to protect its conservation value. In theory, this opportunity exists for any landowner with any property of conservation value. In practice, however, this is a sophisticated technique for landowners who meet a very specific profile. But first, why would any landowner ever think about entering into a legal agreement that restricts future use?…There are two primary reasons:
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Let’s examine when a family forestland owner should consider a conservation easement. The typical situation in which a conservation easement is called for, involves an owner with a desire to maintain the natural integrity of the existing timberland, but faces the prospect of significant estate taxes at his death. Estate taxes are imposed on transfers of assets, and can be very costly. Without some relief, the heirs may be forced to sell the property to pay the estate taxes and transfer costs. One potential solution is to enter into a conservation easement with an eligible non-profit organization or public entity, which limits (in perpetuity) the use of the property. The landowner can reserve certain property rights of his choosing (i.e. to harvest timber in a sustainable manner, to hunt, or to farm) while limiting development of the property (or portions of the property). The easement transfers to subsequent landowners, even if the property is sold at a later date. It effectively limits the potential uses of the timberland – forever. This can be a “downside” of conservation easements. However, the downside can also be the “upside”. By limiting the use of the property, the market value of the timberland is forever reduced. The reduction in market value reduces the estate tax value, which in turn reduces the estate tax due. Therefore, it may allow the property to be retained in the family rather than sold at the death of the current owner. Conservation easements often generate up to a 20% reduction (or more in some cases) in value of the timberland.
A conservation easements can be donated to an eligible organization, or it can be “sold” to that organization. If donated (or sold at a below-market value), the landowner will receive an income tax deduction for the present value of the donation to the charity. IRS guidelines are somewhat involved, so a timberland owner would be well-advised to consult a qualified accountant to fully calculate the tax impact. Additionally, since conservation easements are agreements in perpetuity, great care should be taken to craft a legal document that accurately reflects the vision of the owner (i.e. timber harvesting, agricultural uses, or carbon sequestration). A competent estate planning attorney is invaluable in this process.
Another situation which may indicate the use of a conservation easement, is when the primary objective of the current landowner is to preserve the timberland forever by prohibiting development. Regardless of estate tax due, or the ability to pay the taxes, if the owner’s focus is to protect the integrity of the property across future generations and/ or owners, a conservation easement should be considered. Since a timberland owner is essentially hiring a conservation organization to police the future activities on the property, there are some important factors that need to be carefully considered by anyone who is contemplating such a permanent action:
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It is forever. Generally it cannot be changed if the family’s objectives change
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It does not necessarily keep the property in the family. If a future generation wishes to sell the property, it can do so
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The easement holder (conservation organization) has a legal responsibility to make sure the easement is followed. Therefore, all management of the property is overseen by the holder. A landowner needs to be very comfortable with the management and focus of the conservation organization, before entering into a perpetual agreement.
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There are a limited number of qualified land trust organizations that are available to an owner in any given state or region.
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Not every eligible organization will be interested in a particular property. These organizations have limited budgets and resources. In addition, they may have a specific conservation focus (i.e. a certain geographic area). They have to be selective in which properties they make perpetual commitments to oversee
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Small properties may not generate much interest from organizations, unless there is a unique circumstance (i.e. endangered species or unique habitat present)
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Landowners may wish to do their own due diligence on the eligible organization. Since the organization is promising to supervise the management of the property, and enforce the specific provisions in the easement, a timberland owner will want to make reasonably sure that they are partnering with an organization that has the requisite resources (i.e. vision, management, structure, financing, etc.) to fulfill the obligation across several generations.
Conservation easements are not for everyone. However, in certain family situations, they could be a perfect answer. They can reduce estate taxes, they can generate current tax benefits, and they can provide peace of mind to timberland owners concerned about misuse or development. If used appropriately, a conservation easement is an extremely effective and powerful tool for those interested in the long term stewardship of their forestland.
( Go to the next article "Liquidity . . . Liquidity" )
