Thursday May 26, 2022
Case of the Week
Minor Toxic Waste Problem
Case:Harold was a very creative and entrepreneurial person; he acquired many large parcels of property during his career. Many of these properties were developed with either commercial buildings or residential structures.
Harold has a parcel of valuable waterfront property that is adjacent to the main wharf in a seaport city. Harold recently called Glenda, a gift planner at his favorite nonprofit, and they talked about the possibility of selling the property tax-free through a charitable remainder unitrust.
Harold noted that the property could be sold for perhaps $2 million. He suggested that he might be willing to transfer the property to a FLIP unitrust with his favorite nonprofit as trustee. After discussing other areas such as debt and arrangements for sale, Harold stated, "While there is no debt on the property, it does have a 'minor' toxic waste problem."
Glenda was immediately concerned. What is a "minor" toxic waste problem? Harold indicated that an environmental firm had examined the property and there was some spillage of oil on the land, but he did not think it should be a major problem.
Question:How can this unitrust be created? Is there such a thing as a "minor" toxic waste problem?
Solution:Most nonprofits are reluctant to have their name on a real estate title unless the property does not present any environmental hazards. If there is a known toxic waste problem, then a nonprofit might be wise to refuse to take title to the property. Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), any owner in the chain of title may be charged with the full cost of remediation for an environmental hazard. While the owner can then litigate with other parties to try to collect part or all of the costs involved, a nonprofit with an endowment is a prime candidate to be required to pay for the remediation first and then sue to recover damages later from other potentially responsible parties.
Understandably, Glenda's nonprofit was not willing to serve as trustee. Even though the pollution occurred in an earlier period, if the pollution migrates while the trustee holds the property, the trustee might be declared an owner under CERCLA and therefore could be held liable.
Glenda proposed a solution. Since Harold is already on title, she suggested that he create a charitable remainder trust with himself as trustee. If there is environmental liability attached, Harold is already potentially at risk. After Harold created the trust, the property was then listed for sale and sold with the appropriate environmental impact survey.
After, the trust sold the property and now holds cash and securities. Harold resigned as trustee and his favorite nonprofit became successor trustee. While there may still be a potential claim against the trust assets under CERCLA, there is no basis for a CERCLA claim against the nonprofit, which was not on the chain of title.
In this case the new buyer paid $2 million. The nonprofit has now assumed the role of trustee and the proceeds are invested. Payments to Harold from the FLIP unitrust have now commenced.