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Are you property rich and cash poor and faced with rising real estate taxes? Or do you own a highly-appreciated piece of land that you want to keep in your family but are worried that your heirs will have to sell it to pay death taxes? A conservation easement, accomplished by a donation or a sale to a nonprofit organization or government agency, might be able to help you solve those problems. In addition, you could get an immediate federal income tax deduction and help the environment as well.
A conservation easement is a permanent deed restriction on certain uses for your property in order to protect its conservation value. For example, restrictions could include limitations on the right to build, subdivide, or cut down trees on land that contains rare wildlife. You could, however, still use the property, sell it, or pass it on to heirs.
When you establish a conservation easement, the value of your property will decrease and it may be harder to sell since its use will be restricted for future owners. The amount of the decline in value will depend on many factors, including whether or not you, or future owners, could build on or subdivide the land. The difference in appraisal values before the easement is effective, and after the easement is in place, will be your federal income tax deduction.
Not all properties are eligible for conservation easements. According to the IRS, the property must serve a conservation purpose for the receiving government agency or charity. This could include land for the preservation of watersheds, open or scenic spaces, and historic buildings.
You do not have to put 100% of a parcel of land within the conservation easement. For example, if you own land that you bought for development purposes, you could designate that only a portion of it be converted into a park and included in the easement, with the balance available for subdividing. This may reduce the value of the segment that would become the park, but there is also the possibility that the remaining land could be worth more.
But, suppose your heirs are counting on receiving the cash that the sale of your property would generate after you die? To satisfy their needs, as well as your desire to preserve your land, you could establish a wealth replacement trust. Under this type of trust, the trustee would purchase a life insurance policy on your life for the value of the conservation easement. The income tax deduction and property tax savings that you should receive when you set up the conservation easement could be used to make the insurance premiums. And, depending on how the policy is owned, the proceeds could pass income and estate tax free to your beneficiaries.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.