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Nancy A. McLaughlin is the Robert W. Swenson Professor of Law at the University of Utah S.J. Quinney College of Law in Salt Lake City, Utah, and the associate editor for probate and trust for the Real Property, Trust and Estate Law Journal. Ben-jamin Machlis is a third-year student at the College of Law.Over the past several decades, landowners have donated perpetual conservation easements encumbering millions of acres to government entities and to charitable conservation organizations known as land trusts. Landowners make these charitable gifts for a number of reasons, including a desire to ensure the permanent protection of their land and to take advantage of tax benefits.Until fairly recently, little consideration has been given to precisely what it means to protect land "in perpetuity" with a conservation easement. But as perpetual conservation easements have begun to age, and the protected lands have begun to change hands, questions have arisen regarding the circumstances under which these instruments can be amended or terminated.This article outlines the current guidance on this issue and offers some drafting suggestions. Because of space constraints, it focuses on perpetual conservation easements donated to land trusts or state and local government entities, in whole or in part, as charitable gifts and for which the donor claims or could claim federal tax benefits (tax-deductible conservation easements). This article is not intended to imply that conservation easements conveyed in other contexts will not be subject to the same or similar equitable principles.
Restatements and Uniform LawsComment a to section 28 of the Restatement (Third) of Trusts (2003) provides that a gift made to a charitable institution to be used for a specific charitable purpose, as opposed to the institution's general purposes, creates a charitable trust of which the institution is the trustee. This principle also generally applies to gifts made for specific charitable purposes to state and local government entities. Tax-deductible conservation easements are donated in whole or in part to government entities and land trusts to be used for a specific charitable purpose—the protection of the particular land encumbered by the easement for one or more of the conservation purposes enumerated in the Code in perpetuity (all references herein to the Code are to the Internal Revenue Code of 1986, as amended). Accordingly, the donation of a tax-deductible conservation easement should be treated as creating a charitable trust of which the acquiring entity is the trustee.In some jurisdictions, courts refer to gifts made to government or charitable entities to be used for specific charitable purposes, not as charitable trusts, but as implied trusts, quasi-trusts, restricted charitable gifts, or public trusts. Regardless of the term used, the substantive rules governing the administration of charitable trusts (including cy pres ) generally apply, although some procedural rules applicable to formal trusts (such as those relating to accountings) do not.The Uniform Conservation Easement Act (UCEA) is consistent with the Restatement (Third) of Trusts. The UCEA was approved by the Uniform Law Commission (ULC) in 1981 and has been adopted by 24 states and the District of Columbia. Although UCEA § 2(a) provides that a conservation easement may be modified or terminated "in the same manner as other easements" (that is, by agreement of the holder of the easement and the owner of the encumbered land), section 3(b) states that "[t]his Act does not affect the power of a court to modify or terminate a conservation easement in accordance with the principles of law and equity." In the comment to section 3, the drafters explained that the UCEA leaves intact the existing case and statutory law of adopting states as it relates to the modification and termination of easements and the enforcement of charitable trusts and that, independent of the UCEA, the state attorney general could have standing to enforce a conservation easement in his capacity as supervisor of charitable trusts. In other words, the UCEA does not and was never intended to abrogate the well-settled principles that apply when property, such as a conservation easement, is conveyed as a charitable gift to a government or charitable entity to be used for a specific charitable purpose.To confirm its intention that conservation easements be enforced as charitable trusts in appropriate circumstances, the ULC amended the comments to the UCEA in 2007. The amended comments provide that, because conservation easements are conveyed for specific charitable purposes, the existing case and statutory law of adopting states as it relates to the enforcement of charitable trusts should apply to conservation easements. The comments also provide that, notwithstanding UCEA § 2(a), the entity holding a conservation easement, in its capacity as trustee, can be prohibited from agreeing to terminate the easement (or modify it in contravention of its purpose) without first obtaining court approval in a cy pres proceeding.The Uniform Trust Code (UTC) was approved in 2000 and has been adopted by 20 states and the District of Columbia. Like the UCEA, the comments to the UTC (§ 414) provide that the creation and transfer of a conservation easement will frequently create a charitable trust; the organization to which the easement is conveyed will be deemed to be acting as trustee of what will ostensibly appear to be a contractual or property arrangement; and, because of the fiduciary obligation imposed, the termination or substantial modification of the easement by the trustee can constitute a breach of trust. The comments to the UCEA and the UTC are likely to be relied on as a guide in interpreting those acts so as to achieve uniformity among the states that have enacted them.Finally, section 7.11 of the Restatement (Third) of Property: Servitudes (2000) provides that the modification and termination of conservation easements should be governed, not by the real property law doctrine of changed conditions, but by a special set of rules based on the charitable trust doctrine of cy pres. In their commentary, the drafters explain that, because of the public interests involved, these servitudes are afforded more stringent protection than privately held conservation servitudes.
Federal Tax LawUnder federal tax law, the gift of a tax-deductible conservation easement must effectively be in the form of a restricted charitable gift or charitable trust.
Cases and ControversiesA number of cases and controversies also indicate that conservation easements are likely to be treated as restricted charitable gifts or charitable trusts under state law.
Charitable Trust PrinciplesFlexibility to modify conservation easements in manners consistent with their charitable conservation purposes is often built into easements in the form of an amendment provision. The typical amendment provision grants the government or nonprofit holder the express power to agree to amendments that are consistent with or further the conservation purpose of the easement. Absent an amendment provision, the holder might be deemed to have the implied power to agree to certain amendments that are consistent with the purpose of the easement or could seek court approval of such "consistent" amendments in a more flexible administrative (or equitable) deviation proceeding. But the outright termination of a conservation easement, or its modification in a manner inconsistent with its stated purpose (such as to permit subdivision and development of the land), should require court approval in a cy pres or similar equitable proceeding (as is contemplated under federal tax law).
Federal Tax LawsThe requirement under Code § 170(h)(5)(A) that the conservation purpose of a tax-deductible easement be "protected in perpetuity" should establish the basic parameters for a permissible grant of amendment discretion to the holder. The conservation purpose of an easement would not be protected in perpetuity if the easement could be amended in manners that adversely affect or change such purpose. Alternatively, the conservation purpose of an easement would not be jeopardized if the holder is given the discretion to agree to only those amendments that further, or are consistent with, such purpose. No formal guidance has yet been issued, however, on permissible amendments to tax-deductible conservation easements. Accordingly, the typical amendment provision authorizes only amendments that are consistent with or further the conservation purpose of an easement and additionally provides that amendments may not adversely affect the qualification of the easement or the status of the holder under Code § 170(h). The type of amendment that would satisfy these requirements is, at this point, unclear.In a 2005 report on The Nature Conservancy, the Staff of the Senate Finance Committee noted that modifications to tax-deductible conservation easements to correct ministerial or administrative errors are permitted. The Staff expressed concern, however, about "trade-off" amendments, which both negatively affect and further the conservation purpose of an easement but, on balance, are arguably consistent with or further such purpose. The Staff explained that the weighing of increases and decreases in conservation benefits is difficult to perform by the holder and to assess by the IRS.Government entities and land trusts also must be mindful of the effect amendments may have on their ability to continue to accept tax-deductible conservation easement donations. To be considered an "eligible donee," an entity must "have a commitment to protect the conservation purposes of the donation" and "the resources to enforce the restrictions." Treas. Reg. § 1.170A-14(c)(1). Although the Treasury Regulations provide that a conservation group organized or operated primarily or substantially for one of the conservation purposes specified in Code § 170(h) (as most land trusts are) will be considered to have the requisite "commitment," and the donee need not set aside funds to enforce the easement, the IRS might nonetheless take the position that an entity that agrees to amend the conservation easements it holds in contravention of their conservation purposes is no longer an eligible donee. The IRS also might take the position that the conservation purposes of easements donated to such an entity are not "protected in perpetuity" as required under Code § 170(h)(5)(A).Finally, private inurement or private benefit can occur when a charitable organization sells or exchanges its property for less than fair market value. Although no formal guidance on this topic has been issued, a land trust that agrees to amend a conservation easement in a manner that increases the value of the encumbered land and confers an economic benefit on the landowner would presumably violate the private inurement or private benefit prohibition and thereby trigger intermediate sanctions or jeopardize its tax-exempt status. States and subordinate government entities are generally subject to a similar prohibition on conveying public property to private individuals pursuant to state constitutions.
Easement-enabling StatutesAll 50 states and the District of Columbia have enacted some form of easement-enabling statute. Many states have adopted the provision in the UCEA that provides that a conservation easement can be modified or terminated "in the same manner as other easements." As discussed above, however, that language was not intended to abrogate the principles that apply when property, such as a conservation easement, is conveyed as a charitable gift to a government entity or charitable organization to be used for a specific charitable purpose. Accordingly, the entity holding a donated conservation easement should agree to modify the easement consistent with its stated purpose only in accordance with its express power to amend (as set forth in an amendment provision), in accordance with its implied power to amend, or with court approval obtained in an administrative deviation proceeding.A few easement-enabling statutes provide that a conservation easement can be modified or terminated (or converted or diverted) upon satisfaction of certain conditions, such as the holding of a public hearing or approval of a public official. As with the UCEA, however, there is no indication that these statutes were intended to abrogate the principles that apply when property, such as a conservation easement, is conveyed as a charitable gift to be used for a specific charitable purpose. Moreover, if conservation easements could be amended or terminated upon satisfaction of only the conditions in a state's enabling statute, and those conditions are not consistent with the requirements set forth in Code § 170(h) and the Treasury Regulations, conservation easements conveyed in the state should not be eligible for federal tax incentives.
Bjork v. DraperIn Bjork v. Draper , 886 N.E.2d 563 (Ill. App. Ct. 2008), app. den., 897 N.E.2d 249 ( Ill. 2008), the court invalidated amendments to a perpetual conservation easement that a land trust approved at the request of new owners of the encumbered land. The land trust argued that the state enabling statute, which provides that a conservation easement can be released by its holder, gave it the right to release or amend the easement at will, regardless of (1) the status of the easement as a tax-deductible perpetual charitable gift, (2) the easement's charitable purpose, which is to retain "forever" the scenic and open space condition of the grounds of an historic home, (3) provisions in the easement expressly prohibiting some of the activities authorized by the amendments, and (4) the provision in the easement requiring that the easement be extinguished, in whole or in part, only by a judicial proceeding. Although the court noted that the easement contemplated amendments, and that protecting the conservation purpose of an easement in perpetuity does not necessarily mean that the language of the easement can never be changed (the court explained that an easement could be amended to add land, which would most likely enhance the easement's purpose), the court concluded that "no amendment is permissible if it conflicts with other parts of the easement." The court was not presented with and, thus, did not address the argument that the conservation easement constitutes a restricted charitable gift or charitable trust, which may have afforded the court some flexibility to ratify amendments if any were consistent with the easement's purpose. The court did, however, properly hold that tax-deductible perpetual conservation easements may not be substantially amended or released by their holders at will.
Providing FlexibilityTo provide the flexibility needed to respond to changing social, economic, and environmental conditions, government entities and land trusts should negotiate for the inclusion of a standard amendment provision in the conservation easements they accept. They should also discuss their amendment policies and procedures and their interpretation of the standard amendment provision with prospective easement donors so there is no confusion or misunderstanding regarding their intent to agree to amendments that are consistent with or further the conservation purpose of an easement. If a landowner refuses to grant the desired level of amendment discretion, the donee can decline to accept the easement. Alternatively, the donee can accept the easement knowing it has less discretion to agree to amendments than is granted in a standard amendment provision. Donees also should consider when it is (and is not) appropriate to protect land in perpetuity with a conservation easement. In appropriate circumstances, more flexible land protection tools, such as leases or management agreements, should be employed.