Post-Mortem Conservation Easements: An Overlooked Planning Opportunity

Your client owns a country home with acreage that has excellent scenic views, is part of a local or state area designated as ecologically significant in some way or is home to protected species of flora or fauna. The client wishes to protect the land as well as her wallet, and you have suggested that she donate a qualified conservation easement on the property or a portion of it. A conservation easement is a voluntary, legally binding agreement between a private landowner and a public body or eligible not-for-profit corporation that restricts the development and use of the land to achieve certain conservation goals, such as the preservation of wildlife habitat or a scenic view. Through the donation, the client may retain many of the rights associated with fee simple ownership, including the right to sell, transfer or devise the property, while generating substantial tax savings.

An individual may donate a conservation easement during life or at death through a devise in his or her will or via a revocable trust. The lifetime donation results in federal income and gift tax deductions while a testamentary donation could garner an estate tax exclusion, an estate tax deduction or, in certain situations, both the exclusion and the deduction.1 Conservation easements may also generate state income and estate tax benefits and local property tax savings.

Common law easements, siblings of covenants and servitudes, have long been used to restrict the use of land or to grant a right of way across another's land for routine matters like the placement of utility and telephone lines, but several common law impediments impacted their use for conservation purposes. The Uniform Conservation Easement Act (UCEA),2 enacted by many states and loosely adopted by New York in its conservation easement statute,3 addresses some of these and accords conservation easements statutorily favored status.

Over the years Congress extended income, gift and estate tax benefits to conservation easements, certain aspects of which are scheduled to expire at the end of next year. Although federal law allowed an income tax deduction for certain "open space" easements as early as 1965, it was not until 1980 that Congress enacted Internal Revenue Code §170(h), providing a permanent federal income tax charitable deduction for a lifetime donation. The Treasury Department issued extensive regulations interpreting Code §170(h) in 1986. In the same year, Congress enacted §§2055(f) and 2522(d) of the Code, providing estate and gift tax charitable deductions, respectively, for conservation easement donations. In 1997, Congress enacted Code §2031(c), which currently permits an exclusion of up to $500,000 from the estate of a decedent who donates or a decedent who during life donated a qualified conservation easement.

A client who does not wish to establish a conservation easement during life may wish to donate an easement at death; this may be accomplished, for example, by a bequest under her will or disposition under her revocable trust. The bequest of a perpetual easement to a qualified organization for some conservation purpose would result in a federal estate tax charitable deduction, and if it meets additional requirements, would be eligible for the 2031(c) exclusion as well.4

But what of the decedent who fails to make a donation during life and fails to make a bequest directing the donation of a conservation easement in his or her testamentary instruments? Various post-mortem elections or decisions allow estates to cure certain shortcomings or uncertainties in the estate plan. Two prime examples are the disclaimer and the qualified terminable interest property...