How can granting an easement reduce a property owner’s estate tax?

Many heirs to large tracts of open space—agricultural land in particular—face monumental estate taxes, or capital gains taxes. Even if the heirs wish to keep their property in the existing condition, the federal estate tax is levied not on the value of the property for its existing use, but on its fair market value, usually the amount a developer or speculator would pay. The resulting estate tax can be so high that the heirs must sell the property to pay the taxes.

A conservation easement, however, nearly always reduces property value. If the property owner has restricted the property by a perpetual conservation easement before his or her death, the property must be valued in the estate at its restricted value. To the extent that the restricted value is lower, the value of the estate will be less, and the estate will thus be subject to a lower estate tax. (Note that if the property owner donates the easement during his or her lifetime, he or she may also realize income-tax savings.)

Even if a property owner does not want to restrict the property during his or her lifetime, the owner can still specify in his/her will that a charitable gift of a conservation easement be made to a qualifying organization upon the owner’s death. Assuming that the easement is properly structured, the value of the easement gift will be deducted from the estate, reducing the value on which estate taxes are levied. Again, a lower tax results.