Estate Tax Benefits
The Federal wealth transfer (estate and gift) tax scheme taxes the transfer of wealth for less than full consideration. It is essentially a "unified" tax structure, and it applies to transfers during lifetime and at death. The rates are high and the estate tax is due to be paid, in cash, nine months after the date of death. There are a number of key exclusions that assist the estate planner:
The estate tax is levied against the decedent's gross estate. The gross estate includes all property that a person owns or holds an interest in at death (including life insurance proceeds and property held in a living trust). For cash, stocks and bonds, etc. valuation is a simple procedure, but for many assets, an appraisal is necessary. In addition, real estate is generally appraised at the highest and best use (i.e. fair market value, or what price a willing buyer would pay to a willing seller, and which therefore includes development potential) regardless of actual use by the decedent or intended use by the beneficiaries. Land that is enrolled in "Current Use" for New Hampshire real property taxation is still valued at highest and best use for estate tax purposes.
The federal estate tax is due to be paid nine months after the date of death. If the estate has cash, or readily marketable assets, the tax may be paid without difficulty. However, if the estate is illiquid, and has significant taxable assets but little cash, problems arise. The classic example is the forced sale of real estate, at less than an optimal price, to have cash available to pay the tax. Planning for the payment of the tax that may be due is as important a function for the estate planner as minimizing the potential tax impact.
Even if there are funds available to pay the tax, most families are interested in reducing the tax that might otherwise be payable. There are a number of estate planning tools and possible solutions to this problem.
One solution is the conservation easement. The restrictions on the use of land imposed by a conservation easement reduce the economic value of the property. While most easements allow continuing commercial use for forestry and agriculture, not all economic benefit is lost. In addition, the property is protected for its open space and natural resource protection and for outdoor recreational uses. In many cases, the actual use of property does not change after the conservation easement is granted.
Another way to reduce the estate tax is to give estate assets away, thus reducing size of the gross estate that will be subject to tax. Once assets are out of the estate, subsequent appreciation after the gift and prior to death will also go untaxed, leading to potentially greater tax savings. The gift tax exemption amount will remain at $1,000,000.
In 1997, a new section was added to the Internal Revenue Code that provides additional tax incentives for donating a conservation easement. Section 2031(c) excludes from estate tax up to 40% of the value of land subject to an easement. As with any section of the Code, however, there are special rules and qualifications that apply, and not every conservation easement qualifies for the additional tax relief. The Treasury Department has yet to issues regulations for this section, and interpretations of it are still evolving, so some questions about the interpretation of this section still remain.
The maximum amount of the exclusion is $500,000. The actual tax savings depends on the top tax rate; for an estate taxed at the 45% level, the maximum tax savings is $225,000. Also, the amount of the exclusion will be reduced from 40% by a formula if the value of the easement does not reduce the value of the land by at least 30%. Another important feature of the new law is that the executor of a landowner's estate may grant a conservation easement after the landowner dies and still qualify for reduced land valuation in the estate and the additional exclusion. This is referred to as a "post-mortem easement".
Landowners should consult with professionals who are familiar with their financial situation when considering the tax impacts of conservation projects.
The Federal wealth transfer (estate and gift) tax scheme taxes the transfer of wealth for less than full consideration. It is essentially a "unified" tax structure, and it applies to transfers during lifetime and at death. The rates are high and the estate tax is due to be paid, in cash, nine months after the date of death. There are a number of key exclusions that assist the estate planner:
The estate tax is levied against the decedent's gross estate. The gross estate includes all property that a person owns or holds an interest in at death (including life insurance proceeds and property held in a living trust). For cash, stocks and bonds, etc. valuation is a simple procedure, but for many assets, an appraisal is necessary. In addition, real estate is generally appraised at the highest and best use (i.e. fair market value, or what price a willing buyer would pay to a willing seller, and which therefore includes development potential) regardless of actual use by the decedent or intended use by the beneficiaries. Land that is enrolled in "Current Use" for New Hampshire real property taxation is still valued at highest and best use for estate tax purposes.
The federal estate tax is due to be paid nine months after the date of death. If the estate has cash, or readily marketable assets, the tax may be paid without difficulty. However, if the estate is illiquid, and has significant taxable assets but little cash, problems arise. The classic example is the forced sale of real estate, at less than an optimal price, to have cash available to pay the tax. Planning for the payment of the tax that may be due is as important a function for the estate planner as minimizing the potential tax impact.
Even if there are funds available to pay the tax, most families are interested in reducing the tax that might otherwise be payable. There are a number of estate planning tools and possible solutions to this problem.
One solution is the conservation easement. The restrictions on the use of land imposed by a conservation easement reduce the economic value of the property. While most easements allow continuing commercial use for forestry and agriculture, not all economic benefit is lost. In addition, the property is protected for its open space and natural resource protection and for outdoor recreational uses. In many cases, the actual use of property does not change after the conservation easement is granted.
Another way to reduce the estate tax is to give estate assets away, thus reducing size of the gross estate that will be subject to tax. Once assets are out of the estate, subsequent appreciation after the gift and prior to death will also go untaxed, leading to potentially greater tax savings. The gift tax exemption amount will remain at $1,000,000.
In 1997, a new section was added to the Internal Revenue Code that provides additional tax incentives for donating a conservation easement. Section 2031(c) excludes from estate tax up to 40% of the value of land subject to an easement. As with any section of the Code, however, there are special rules and qualifications that apply, and not every conservation easement qualifies for the additional tax relief. The Treasury Department has yet to issues regulations for this section, and interpretations of it are still evolving, so some questions about the interpretation of this section still remain.
The maximum amount of the exclusion is $500,000. The actual tax savings depends on the top tax rate; for an estate taxed at the 45% level, the maximum tax savings is $225,000. Also, the amount of the exclusion will be reduced from 40% by a formula if the value of the easement does not reduce the value of the land by at least 30%. Another important feature of the new law is that the executor of a landowner's estate may grant a conservation easement after the landowner dies and still qualify for reduced land valuation in the estate and the additional exclusion. This is referred to as a "post-mortem easement".
Landowners should consult with professionals who are familiar with their financial situation when considering the tax impacts of conservation projects.
