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Thursday, May 2, 2024
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Case Studies |
Preserving the Razorback Sucker, Bonytail and the Inheritance
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Case:
Marty Campbell, 71, owned more than 2,000 acres along the upper Sampson River. As a nature advocate, Marty strongly opposed the non-natural developments along the Sampson River. In particular, dam installations and the introduction of non-native fish changed the river environment and put many fish at risk. For example, the razorback sucker, humpback chub and bonytail all once thrived in the Sampson River system but now face potential extinction. Marty wanted to do something positive to help the situation.
In addition to his environmental concerns, Marty also faced several tax challenges. His estate was $3 million, with his land holdings valued at $2 million. Marty wanted to leave the land to his children. However, he was in a difficult position because his estate would owe a significant amount of tax on this transfer. Unfortunately, he did not have significant other assets from which to pay the estate tax and he was unable to qualify for life insurance.
Question:
Marty wondered if he could use his land holdings to protect the ecosystem from further development, leave the land to his children at his death and eliminate his estate tax liability.
Solution:
After speaking with the Director of Development at his favorite charity, Protect Nature, Marty learned he could give a conservation easement on his land to Protect Nature. See Sec. 170(h). This gift would help protect the natural habitat of the endangered species by banning designated "critical areas" from public access and use. In other words, Marty's land would forever be used for environmentally friendly purposes.
In addition, the conservation easement reduced the value of his land from $2 million to $1.5 million. The benefit of this was twofold. First, Marty was entitled to a charitable income tax deduction for the $500,000 decrease in his land value. Since his adjusted gross income for the year was $250,000, this benefit provided a $75,000 deduction (30% x $250,000) with a carry forward of the remaining $425,000. Second, and more important, Marty's estate is now valued at $2.5 million. With his estate below the exemption amount, Marty could leave all of his land to his kids and pay no estate taxes!
Marty was extremely happy with this result. He was able to make a real and substantial difference to the environment that would last forever and he was able to provide his kids with a wonderful inheritance. This truly was a win-win deal.
Editor's Note: Marty may be able to take advantage of another tax benefit. Under Sec. 2031(c), land subject to a conservation easement may, upon election of the executor, be excluded from the gross estate. The amount excluded depends on several variables.
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