Estate Taxes

Estimated federal estate taxes for an individual

To calculate the value of inherited property for estate taxes purposes, federal law requires that the value of the land be based on that property's "highest and best use," instead of actual use. For example, a landowner owns a small family ranch near a growing city that might be more valuable as a residential development. When the landowner dies, taxes on the property will be based on the land's value as several potential homesites, even if the heirs do not intend to develop.

A conservation easement can place restrictions on use of a property that limit its "highest and best use." Because the property's "highest and best use" is restricted, its value and the estate taxes are reduced accordingly. If the landowner in the example above donates a conservation easement on the family ranch that prohibits the construction of new homesites, estate taxes on her land would be based on the land's value as a ranch, rather than a potential residential development. As noted earlier, there are limits on the income tax deduction for a conservation easement donation, but there are no such limits for estate tax purposes, so the savings can be substantial.

To realize estate tax benefits, landowners must donate the conservation easement during their lifetime or in a legal will. Heirs cannot donate easements to avoid payment of estate taxes. A landowner intending to convey a conservation easement by will must contact the potential holder to ensure that the organization will accept the donation.

A widowed landowner purchased a property 30 years ago that has appreciated significantly. The property, which is located near a growing suburban community, has a current fair market value of $900,000. The landowner donates a conservation easement to a local land trust that reduces the property's value to $500,000. Assuming the landowner has $100,000 in taxable assets in addition to the property and that no prior taxable gifts have been made, the effect of the conservation easement on estate taxes for heirs would be as follows.

Conservation Easements
What Is a Conservation Easement?
Why Use a Conservation Easement?
What is the Uniform Conservation Easement Act?
Frequently Asked Questions about Conservation Easements
Financial Benefits of Conservation Easements
Federal Income Tax Deduction
Estate Taxes
Local Property Taxes
Land Trusts
What Next?
Appendices