by Ron Felger, Steve Williams, Ben Williams and Nate Williams, attorneys at Shambaugh, Kast, Beck and Williams, LLP

Death taxes, imposed either by the Federal or State government, can be a trap for families owning forested or farm properties. A conservation easement is a tool by which owners of property can avoid that trap, and may do the following:

• Save income taxes;

• Save or eliminate death taxes; and

• Preserve the nature of farm ground, forested ground, or other ecologically or historically valuable land.

An easement is simply a specific, limited right to use real property. A common example of an easement is the right of a utility company to install and maintain power lines across property. As the name implies, a conservation easement is a specific right to use real property that is tied, in some way, to a conservation purpose. It is not necessary that a conservation easement involve a charity. However, for tax and other reasons, conservation easements are often granted to charities.

The transfer of development rights to a charity committed to preserving farm land or open space is a common example of a conservation easement. Another common example includes the transfer of the right to harvest timber to a charity that is committed to the preservation of forested lands.

A conservation easement has practical benefits. One of the most significant benefits is that the owner of the property can generally continue to use the property. For example, if the owner of forested property simply gave his property as a whole to a charity committed to the preservation of the forest, he could not continue to use the property. By contrast, if the owner granted the charity a conservation easement, he would benefit the charity, preserve the forest and still continue to use and enjoy the property. If the owner grants the charity the right to harvest timber, the owner can no longer do that himself. He can, however, continue to live on the property, and use and enjoy the forest for every purpose except harvesting timber.

A Qualified Conservation Easement is a creature of the tax code. A Qualified Conservation Easement provides the owner of property certain tax benefits. Consequently, a Qualified Conservation Easement must also fit within certain IRS requirements.

The tax benefits of a Qualified Conservation Easement are numerous and potentially significant. First, there is an income tax deduction. In the year that a taxpayer makes a Qualified Conservation Easement, he will be entitled to a charitable deduction in an amount equal to the value of the property rights given to charity.

A Qualified Conservation Easement also has estate tax benefits. The first benefit is that the conservation reduces the value of the property. Instead of saddling the family with an artificial “highest and best use” value that is inconsistent with the conservation interests, the tax value will be consistent with the property’s actual use.

A Qualified Conservation Easement may also result in the additional benefit of an estate tax deduction, and can also be implemented in connection with Special Use Valuation, often referred to as “2032A Valuation” or “Farm Use Valuation”.

To maximize these income and estate tax benefits, a Qualified Conservation Easement must conform to certain criteria. First, the easement must be perpetual: it cannot be undone, either by the person granting it or by anyone else.

Second, the conservation easement must be granted to a charity which is committed to the conservation purpose and which has the financial resources to enforce the restrictions found in the easement. As a practical matter, the most important step in granting a Qualified Conservation Easement is for the owner of property to find a charity that shares his conservation goals and beliefs.

Lastly, the easement must be for a qualifying conservation purpose. Such purposes include the preservation of a relatively natural plant ecosystem or wildlife habitat, the preservation of a land area for public enjoyment, and the preservation of an historically important land area. In certain instances, the preservation of open space will also be considered a qualifying conservation purpose.

The criteria established by the IRS for a Qualified Conservation Easement also permit the owner of the property to continue his use and enjoyment of the property. The only condition is that the owner’s use and enjoyment cannot interfere with the conservation purpose.

Because of the flexible nature of an easement, there are numerous opportunities for an owner to grant an easement that is consistent with his particular conservation goals and his intended use and enjoyment of the property. Each opportunity will likely have a different tax consequence. Interested property owners should contact an attorney to discuss those opportunities and consequences as they apply in the owners’ individual situation.