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 (QTIP) election.5 A post-mortem easement could, in many respects, be viewed as akin to these, building flexibility into the estate plan, permitting curative solutions after the decedent's death and providing for creative planning.6 It could be a critical option if the estate lacks liquidity to meet its tax obligations.
Section 2031(c) of the Code explicitly sanctions post-mortem qualified conservation easements and generally makes the Code §2055(f) deduction available to them.7 Specifically, Code §2031 allows the post-mortem donation to be made by the decedent, by the executor, the trustee of a trust the corpus of which holds the land subject (or to be subject) to the easement, or any family member (as defined in Code §2032A) of the decedent. Though federal law controls the federal tax benefits, state law determines which parties have the right and authority to donate an easement.8 This is a complex issue in the post-mortem setting.
Authority to Donate
Does the executor or the trustee of a revocable trust that holds or is the devisee of the land in question have authority to donate a conservation easement? Arguably not, at least in the absence of specific authorization in the governing instrument or a specific grant of such power by statute. Only a few states have amended their state fiduciary powers acts to expressly authorize the executor to donate a conservation easement and even in such cases, there is generally some contemplation that specific authorization or consent of beneficiaries is necessary. Section 15-102(aa) of the Maryland Estates and Trusts Code, for example, provides that
A fiduciary may donate a conservation easement on any real property or consent to the donation of a conservation easement on any real property by a personal representative of an estate of which the fiduciary is a legatee, in order to obtain the benefit of the estate tax exclusion allowed under §2031 of [the Code] if:
(1) The governing instrument authorizes or directs the donation of a conservation easement on the property; or
(2) Each beneficiary who has an interest in the real property that would be affected by the conservation easement consents in writing to the donation.
As this statute illustrates, there is a concern that the decedent has at least authorized, if not directed, the fiduciary to donate the conservation easement. Such authorization seems prudent in any event, as discussed below.
The quoted statute also highlights another issue: consent of persons interested in the property. Obtaining the consent of all beneficiaries with an interest in the property where there is no specific authorization or direction to make a post-mortem donation may seem like a sensible, if cumbersome, thing to do from the fiduciary's standpoint, but the statute's requirement that their consent be obtained in that circumstance may also be a nod to the common law rules regarding passage of title to real property upon death (even though changed by statute in Maryland).9
Under common law, the general rule was that upon death, title to the decedent's real property does not pass from the decedent to the executor, but rather to the devisees under the will or the heirs where there is no will, subject to the rights of the executor to sell the property to pay for taxes or other estate obligations. Neither the UCEA nor New York's conservation statute provides guidance regarding those who must join in granting a post-mortem conservation easement. Thus, in the absence of an easement-specific statute providing guidance, those who hold title would seem to be the natural parties to donate the easement as a matter of state property law.10
Under the common law of New York, title vests immediately on death in the heirs and devisees subject to the limited right of the executor to use the real property to satisfy the estate's debts and obligations if necessary.11 Under Connecticut law, the fiduciary of a decedent's estate "shall" have the possession, care and control of the estate's real property unless such real property has been specifically devised or the decedent has provided otherwise in his or her will, though title still vests in the heirs and devisees.12 New Jersey, on the other hand, provides that "[u]ntil termination of his appointment a personal representative has the same power over the title to property of the estate that an absolute owner would have, in trust however, for the benefit of the creditors and others interested in the estate."13
In New Jersey, it would seem that with appropriate authority in the governing instrument, the executor could alone make the post-mortem conservation easement donation, but as a fiduciary holding "in trust for" the beneficiaries, it may be advisable to obtain their consent. In New York and Connecticut, it may seem at first blush that devisees of property under a will (either by specific devise or through their interests as residuary devisees) alone are title holders and thus can donate a conservation easement without the consent of the executor. This is neither realistic from a tax perspective (since the executor must file the election to take the exclusion under Code §2031(c)(6)) nor necessarily viable from a state law perspective.
The apparent authority of the devisees that derives from title is not absolute, particularly if the estate lacks adequate liquid assets to discharge its obligations, as the executor will have a right if not a duty to sell the subject property. Therefore, the most prudent course would seem to be for the devisees to join with the executor to donate the easement.
It is also apparent that in many situations, not all of the parties will have convergent objectives. As examples, the executor may wish to make the donation for the tax advantages but an interested person or devisee (depending upon the state in question) does not; or the executor, while not opposed to the easement donation, is unwilling to consent to the devisees' donation out of concern over a subsequent challenge.
Court approval is an option, but probably the least attractive one, due to the compressed time window for donating the conservation easement: To claim a federal estate tax benefit, Code §2031 requires the executor to make the election no later than the due date for filing the federal estate tax return (including extensions).14 The use of a so-called "receipt, release and refunding agreement," executed by the fiduciary and all beneficiaries, or the indemnification of the fiduciary by beneficiaries of substance could be options for the reluctant fiduciary. The lack of agreement among devisees appears to be the more problematic scenario.
Steps During Life
Where the planner is contemplating a post-mortem conservation easement, the testator should be able to resolve these conflict issues and remove uncertainty regarding authority by addressing the matter in his will, perhaps by granting sole authority to the executor to donate a conservation easement. It has long been held in New York that a will should be construed in accordance with the testator's intent.15 As this is generally uncharted territory in New York and many states, and in light of the uncertainty resulting from laws concerning devolution of title to devisees, which may allow devisees to challenge the executor's decision, it may be advisable for the testator to grant absolute title and authority over the property, including the right to grant a conservation easement for a specified period of time to allow the fiduciary to donate the easement, after which the property would pass to the beneficiaries, subject to the easement if one is donated.
Perhaps an even better option may be for the client during life to transfer the property into a revocable trust that grants the trustee—who becomes the sole title holder—specific authority to donate a conservation easement.16 While the trust beneficiaries presumably could object to the trustee's actions later in an accounting proceeding, this should remove the need for any beneficiary to join in the conservation easement grant. Provisions designed to indemnify the executor or trustee if sued by a beneficiary for donating the conservation easement and other provisions that reduce or eliminate a beneficiary's interest if he or she challenges the fiduciary's decision regarding the donation—essentially, an "in terrorem" provision—should in many if not most cases establish sufficient deterrents to the beneficiary and provide greater certainty to the fiduciary who must act quickly to obtain a tax benefit, but who could be surcharged later.
Many post-mortem scenarios, however, will not have had the advantage of advance planning. Consequently, consideration should be given to including authorization to donate a post-mortem conservation easement in the fiduciary powers clause as a matter of course. Absent such language, a valuable tax savings opportunity with a relatively short deadline may be more difficult to obtain or even unavailable.
The authors acknowledge assistance from Emily Hirshbein with the research and writing of this article.
Footnotes:
1. A discussion of the requirements to meet the definition of a qualified conservation easement for federal tax purposes, generally set forth in Internal Revenue Code §170(h), is beyond the scope of this article, but it should be noted that certain easements granted in perpetuity for some conservation purpose (but not necessarily meeting the more restrictive income tax requirements for conservation purposes) may nonetheless qualify for a federal gift tax deduction under Code §2522(d) or an estate tax charitable deduction under Code §2055(f), even though not eligible for the estate tax exclusion under Code §2031(c). A very general discussion is included below. For an extensive discussion of qualified conservation easements, see C. Timothy Lindstrom, "A Guide to the Tax Aspects of Conservation Easement Contributions" (Island Press 2008). In this article, unless otherwise noted, it is assumed that the post-mortem easement which is the focus here meets all of the Code §§170(h) and 2031(c) requirements for a qualified conservation easement.
2. 12 Uniform Laws Annotated 174 (2008).
3. New York Environmental Conservation Law §§49-0301 through 49-0311 (Cons. 2011).
4. Where the exclusion under Code §2031(c) is elected by the executor of the estate for a post-mortem easement and any person claims an income tax deduction with respect to such easement, the federal estate tax charitable deduction would not be allowed to the estate. Code §2031(c)(9).
5. Qualified disclaimers are governed by Code §2518 for federal tax purposes; the disclaiming beneficiary is treated as having predeceased the decedent, allowing property to pass to others, typically in a tax-advantaged manner. A QTIP election under Code §2056(b)(7) allows the personal representative to elect to qualify for the federal estate tax marital deduction certain property that does not automatically so qualify.
6. As with other post-mortem planning, where the mechanism is anticipated but only activated after death, when certain facts are known, an astute planner may anticipate but intentionally delay the decision to grant a conservation easement until after death.
7. Code §2031(c)(9). It should be noted that while Code §2055(f) broadly speaks of "any transfer" of a "qualified real property interest" (which includes a conservation easement in perpetuity), there is no language, as there is in Code §2031(c)(8), that specifically addresses the conservation easement transferred post-mortem, and in particular by persons other than the decedent (or presumably the executor pursuant to a bequest). Thus it may be argued that unless all of the requirements for Code §2031(c) are also met in connection with such a post-mortem easement (including the conservation purposes set forth in Code §170(h)(4), as limited by §2031(c)(8)(B)), it would not obtain a Code §2055(f) deduction.
8. See Aquilino v. United States, 363 U.S. 509, 513-14 (1960).
9. Md. Code Ann. Est. & Trusts §1-301 provides that title to both real and personal property passes to the personal representative of the estate.
10. The question of which state's law governs is outside the scope of this article, but generally the law of the situs will control issues concerning real property.
11. See, e.g., Matter of Burke, 492 N.Y.S.2d 892, 895 (Surr. Ct. Cattaraugus Co. 1985).
12. CONN. GEN. STAT. §45a-321 (2011); LaFlamme v. Dallessio, 261 Conn. 247, 251 (2002) ("[Connecticut] law is well settled that the executor of an estate does not take title to real property of the estate... Upon the death of the owner of real property, legal title to real property immediately passes to the decedent's heirs, subject to the right of the executor to administer the estate.")
13. N.J. STAT. §3B:10-30 (2011).
14. Form 706 is due within nine (or 15, if an extension is sought) months of the decedent's death.
15. See, e.g., In re Gustafson, 74 NY2d 448, 453 (1989), citing Matter of Cord, 58 NY2d 539, 544; In re Feuer, 212 AD2d 870, 872 (3d Dept. 1995).
16. See comment at note 12, supra.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
