Case:

Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate, and he was very successful in his investments.

Karl continued to buy and sell real estate at the age of 85. One of his properties was development land near the harbor. It was adjacent to and once owned by the local shipyard. Many years ago, the shipyard dumped some waste products on the land.

Karl was approached by a development officer from Favorite Charity. The nonprofit was involved in a capital campaign and Karl wanted to make a major gift. He thought the property could be sold for approximately $2 million. However, as he stated to the development person for Favorite Charity, there was a "minor toxic waste problem" on the property.

The nonprofit was not willing to accept the property with a "minor toxic waste problem." Under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the nonprofit potentially had strict liability. Under CERCLA, the Environmental Protection Agency (EPA) can investigate a contaminated site and require a "potentially responsible party" (PRP) to conduct remediation.

A PRP includes a current owner or operator of the facility where the release of hazardous substances has occurred. The fact that the release occurred many years prior does not relieve the owner of liability. If the nonprofit were on title, it could potentially be subject to liability.

Question:

How can Karl make a $2 million gift of the property without placing Favorite Charity at risk under the CERCLA provisions?

Solution:

The solution is to transfer the development land into a charitable remainder trust with Karl as the initial trustee. Karl is already on title and thus has potential liability. Serving as trustee does not increase his potential liability. Karl transferred the $2 million property into a FLIP charitable remainder trust in November. He obtained a qualified appraisal because the asset was valued at more than $5,000 dollars. Based upon the appraisal and the 5% quarterly payout from the unitrust, Karl reported a large deduction.

Karl was able to locate a purchaser for the property who paid $2 million to the CRT. The purchaser requested indemnification in case the remediation was more expensive than anticipated and Karl agreed personally to provide that indemnification. Within six months the buyer had completed the remediation and a payment was not required.

In August of that year, Karl gave the charitable trust to the remainder recipient, Favorite Charity. Favorite Charity CFO was pleased when she received $2 million in cash from the charitable trust. Because Favorite Charity was never on title, it has no risk for the "minor toxic waste problem."

Karl was pleased that he could fulfill his goal of making a $2 million major gift to the charity, while protecting the charity from potential CERCLA liability.