Estate Planning For the Environment

With the long-term rise in oil prices and the near consensus that human conduct is contributing to climate change, people have become overnight converts to an ever growing array of new “green” lifestyle alternatives from the glamorous to the mundane — everything from hybrid vehicles to straw bale homes to non-bleached bathroom tissue.

Among the dizzying variety of “green” living options, people often overlook the estate planning and asset management techniques that can provide a tangible and potentially more significant means to benefit the environment.  During these difficult financial times, it is important to recognize that these techniques can confer significant financial and tax benefits while maintaining needed flexibility, both during life and upon death.  Some of these techniques are not exclusively for purposes of estate planning, but when combined they all contribute to a comprehensive estate and asset plan for the environmentally minded.

The first estate planning technique is the conservation easement.  A conservation easement is a legal agreement between a landowner and a land trust or municipality that permanently limits uses of the land in order to protect its conservation values.

A working farm overlooking the Shawangunk Ridge is a potential setting for a conservation easement.  The farmer may want to ensure that his land will always be used for farming so that the scenic views of the Ridge will be preserved and enjoyed by the community for generations to come.  If he wishes to sell the property, a mere promise from the buyer that he or she will keep the farm intact will not be enforceable in a court of law.  A conservation easement, however, will legally protect the land and the easement will “run with the land.”  Thus, if the farmer’s estate were to sell the land upon his death, all subsequent owners would be bound by the restrictions contained in the conservation easement.

Landowners often shy away from the conservation easement because, by its nature, it limits how the property may be used and, except in rare instances, it cannot be revoked.  However, it is a flexible device and can be crafted to permit certain specified uses and even some development in the future.  The terms of the easement should be negotiated between the landowner’s attorney and the municipality or land trust receiving the easement, and it would provide for the continuation of certain uses based on the needs and goals of the landowner.  There are many variables that the attorney must discuss with the landowner before he or she signs the conservation easement.  The easement may permit the construction of additional structures, roads and paths.  The farmer in the above example may even permit the development of a portion of the property.  The landowner may wish to permit public access for hiking and scenic enjoyment.

In addition to the obvious environmental benefits of the conservation easement, there are significant tax benefits.  With respect to estate tax, the Internal Revenue Code provides that if a person dies owning land subject to a conservation easement, the owner may deduct the value of the easement from the gross estate.  Additionally, if certain geographic, ownership, and other criteria are met, up to forty percent of the land value can be excluded from the gross estate with a cap of $500,000.   With a combined Federal and New York State estate tax rate of approximately fifty-five percent of the taxable estate, significant tax savings may result from the use of a conservation easement.

The conservation easement also confers income tax benefits on the landowner.  The Federal government allows an income tax deduction in the year the easement is created equal to the value of the easement up to fifty percent of the landowner’s adjusted gross income.  The deduction can be carried over into subsequent tax years if it is not fully utilized in the year of the easement.  There is an added incentive for a full time farmer or rancher who can deduct up to one hundred percent of his or her adjusted gross income.  Whereas the Federal government allows a one-time income tax deduction, New York State provides an ongoing annual tax credit against income of up to $5,000 per year.  This credit survives the landowner’s death and can be claimed on the estate’s annual income tax returns, which is particularly useful if the real property is held in trust by the family for many years after the landowner’s death.

The second estate planning technique is a testamentary gift of money or property to a charitable organization devoted to conservation.  An individual can make the gift either in a will or trust.  The will or trust would simply provide for the bequest to the organization.  The gift can be a specific dollar amount, percentage of the estate, or a gift of real property.  The testator could also make the bequest contingent upon another event happening such as certain beneficiaries predeceasing the grantor.  Depending on the testator’s wishes, the will or trust could require that all specified bequests to family members be satisfied first before the gift to the charity is made.

There are numerous benefits of including a bequest in a will or trust.   For one, the assets remain in the individual’s control during life, so he/she can modify or revoke the bequest at any time prior to death.  Additionally, there is no upper limit for such a bequest, and the entire bequest can be used as a charitable deduction against the gross estate for estate tax purposes.  The deduction would reduce the tax to be paid by the estate thereby preserve more of estate for distribution to the decedent’s family and beneficiaries.

While testamentary gifting is a fairly straightforward technique, the will or trust must be worded very carefully to avoid unintended consequences.  For example, if the will provides that a portion of the estate should pass to a particular conservation organization and the organization ceases to exist before the individual’s death, the share intended for the organization would pass to the other beneficiaries under the will, a result that may not have been intended.  To avoid this, language should be included in the will or trust to provide that, if the chosen organization is not in existence, then the bequest would pass to another organization with a similar charitable purpose.

The third technique employs what is called a charitable gift annuity.  Certain conservation organizations offer this option whereby an individual can transfer cash, securities or other property to the organization.  The organization in turn pays out to the individual a lifetime annuity, and the principal passes to the organization after the deaths of the income beneficiaries.
The benefits of the charitable gift annuity include an immediate income tax deduction for a portion of the gift to create the annuity.   Moreover, the annuity payments are treated as part ordinary and part tax-free income.  If the gift is funded with appreciated property, the annuity payments are also part capital gains income, which is usually taxed at a lower rate.  Finally, the individual has the satisfaction in knowing the gift was put to work for environmental or conservation purposes.  One caveat: the prospective donor should be careful to ensure the organization is well capitalized, since the annuity would likely be backed only by the assets of the organization.

Whether they are labeled as glamorous, mundane, or somewhere in the middle, the estate and asset planning techniques described above allow the environmentally minded individual to leave a lasting legacy of environmental stewardship, all while conferring significant tax and other benefits to the donor for his or her life, and often for generations to come.

August 2013

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