Conversion Easement Exclusion Chapter 34 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1 Incentive to private landowners to preserve undeveloped land IRC Section 2031(c) provides an estate tax exclusion (limited to $500,000) related to the value of the land that is subject to a donated qualified conservation easement What Is The Conservation Easement Exclusion?

Conversion Easement Exclusion Chapter 34 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company2 When the land meets specified geographical requirements When the land has been owned by the decedent or a family member for at least 3 years immediately prior to decedent’s death When the easement is contributed on or before the due date for filing an estate tax return, and no interests are retained, except as allowed When Is Use Of The Conservation Easement Exclusion Appropriate?

Conversion Easement Exclusion Chapter 34 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company3 As of the decedent’s date of death, the land must be located in the United States or its possessions Land must have been continuously owned by the decedent, or a member of the decedent’s family, during the 3 years immediately preceding the decedent’s death Land must be subject to a “qualified conservation easement” which is “a qualified conservation contribution…of a qualified real property interest” as generally defined in Section 170(h) What Are The Requirements?

Conversion Easement Exclusion Chapter 34 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company4 Contribution must be made to a qualified organization and used exclusively for conservation purposes A real property interest is qualified if it is a restriction granted in perpetuity on the use which may be made of the property A “conservation purpose” includes preservation of land for: –Public recreation or education –Protection of a natural habitat of fish, wildlife, or plants –Preservation of open space, including farmland and forestland What Are The Requirements? (cont’d)

Conversion Easement Exclusion Chapter 34 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company5 Donor may not retain any rights to develop the easement for commercial purposes, other than farming Election to take the exclusion under Section 2031(c) must be made on the estate tax return, and once made is irrevocable The applicable percentage of the value of the land subject to a qualified conservation easement that may be excluded from the decedent’s gross estate is equal to lesser of –$500,000, or –40% of the value of land, reduced by 2% for every 1% (or fraction thereof) by which the easement is less than 30% of the value of the land What Are The Requirements? (cont’d)

Conversion Easement Exclusion Chapter 34 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company6 –Mary had inherited a ranch that had been in her family over 40 years and was located next to a national park –The ranch was worth $1,000,000 when Mary conveyed a qualifying easement worth $250,000 (25% of the property value) to a qualified charity A right was retained to operate the property only for ranching and farming, with no development rights How It Is Done – An Example

Conversion Easement Exclusion Chapter 34 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company7 –Mary died and the following represents the exclusion calculated for Mary’s estate: The 40% exclusion percentage is reduced by 2% for each 1% that the easement is below 30% of the value of the entire property Mary conveyed 25% of the value of the property The reduction equals {(30%-25%) x 2%} = 10% The percent exclusion equals 40% - 10% = 30% The estate exclusion equals $750,000 x 30% = $225,000 which is less than the $500,00 exclusion limit How It Is Done – An Example (cont’d)

Conversion Easement Exclusion Chapter 34 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company8 Decedent’s gross estate is reduced by the qualified conservation easement exclusion The basis in the property subject to the qualified conservation easement exclusion is not stepped-up for income tax purposes with respect to the exclusion –Basis partially step up and partially carryover Tax Implications?

Conversion Easement Exclusion Chapter 34 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company9 Calculation of Basis