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Personal Business: ESTATE PLANNING
A TAX BREAK THE DEER WILL LOVE
Veterinarian John Utterback died last summer, a week before he could sign a will that would have prevented developers from building on his ranch of several thousand acres. Utterback's piece of northwestern Colorado shot up in value thirtyfold over three decades, to around $15,000 an acre, as trophy homes marched across the hills from Steamboat Springs, a ski resort. As a result, his death saddled his daughter, Karen Norman, with an estate tax bill in the millions. To pay it, she'll probably have to sell at least part of the ranch. "I was assessed as if I was putting up houses in Steamboat rather than putting up hay," she says. "No way the ranch could even begin to pay that off."
What Utterback had been attempting to complete before his death was a conservation easement. It would have preserved the ranch as forest and pastureland and reduced the estate-tax burden on his heirs. The technique has long been in use as an estate-planning tool for conservation-minded property owners. But Congress recently expanded its scope so easements can be applied posthumously.
While the new law comes too late to help Norman, a provision of the Taxpayer Relief Act that went into effect on Jan. 1 gives relief to others in her situation. It gives heirs nine months after an owner's death to enact conservation easements, which allow limited agriculture and forestry but prohibit subdividing for development. The new law also cuts estate taxes by 40% of the land's value after the easements are put in place. The tax break tops out at $100,000 in 1998, a threshold that rises annually to $500,000 by 2002.
The measure is the first new tax incentive for private land conservation in over a decade. Like most land laws, it has generated controversy. Developers opposed expanding easements, and some lawmakers were concerned about the hit to federal revenues arising from estate-tax breaks, estimated at up to $400 million. That debate led Congress to phase in the measure and require that eligible land be located within 25 miles of a large metropolitan area, national park, or wilderness area or within 10 miles of certain national forests.
Conservationists wanted to see fewer eligibility restrictions and larger tax breaks. But Helen Hooper, director of public policy for the Land Trust Alliance in Washington (202 638-4725 or www.lta.org), calls the measure "a good start." The compromise on eligible land is aimed at containing urban sprawl and creating buffer zones near protected land where the pressure to develop is often greatest. The percentage of land covered is highest in small states, including Delaware, Rhode Island, New Hampshire, Connecticut, and Maryland. Indeed, 75% of privately owned forest land lies east of the Mississippi River.
The drive for expanded tax breaks has become more urgent as older people holding undeveloped land start estate planning. In New England and New York, 33.4 million acres of forest were held by 1.24 million nonindustrial family owners in 1995, says the New England Forestry Foundation. These landowners have an average age in the late 50s, so turnover of much of the land is looming. "There are plenty of baby boomers who are piling on debt and relying on inheriting that land," says Hal Lacroix of the Appalachian Mountain Club. "It just makes it harder to deal with the estate taxes when they hit and raises the pressure to sell to developers."
To qualify for estate- tax breaks, owners or their heirs enter into a legal agreement with a qualified conservation organization such as a local land trust. The agreement outlines restrictions on the property and responsibilities of the involved parties. Generally, easements limit the number and location of structures and the types of activities that can take place. But they can be tailored to meet the landowner's financial needs and personal wishes. The easements leave the property in the name of the landowner, who may live on it, sell it, or pass it on to heirs with easements intact.
LESS IS MORE. Conservation easements usually lower land values because they prevent development. But landowners in sought-after locales such as northern Virginia and parts of California have seen the opposite occur. "In markets where wealthy people are buying, limiting 50 or 100 acres to one house site causes the value to soar," says Sylvia Bates, executive director of the New Hampshire Society for the Protection of Forests.
That was one factor behind Congress' decision to cut estate taxes, so families could avoid getting stung. As more landowners enact easements, the green their heirs will see won't be just developers' dollars.Paul C. JudgeReturn to top