By Peter Hayes
The owner of a decades-old family business dies. His children inherit everything, including the site of the business.
A letter arrives from the state environmental department six months later saying hazardous waste has been discovered on the property.
Suddenly, the kids are facing liability for cleanup of the property, and any contamination that’s leaked off-site, too.
Instead of a comfortable inheritance, they’re on the hook for cleanup costs that could drain their bank accounts.
The issue, at the intersection of probate and hazardous waste law, is a recurring one at contaminated sites around the country.
Under the federal Superfund law, heirs can face liability as “owners” of a contaminated site, and the expense of fighting it out in court can be prohibitive.
But there are steps property owners and heirs can take to avert the dangers of a toxic inheritance.
The typical situation is a family business, such as a metal plating, paint or exterminating company founded between the 1950s and 1970s. That period preceded enactment and widespread awareness of environmental laws aimed at addressing pollution, attorney Summer Nastich with Nastich Law in Berkeley, Calif. told Bloomberg Law.
Nastich counsels clients on compliance with environmental statutes and regulations, including the Comprehensive Environmental Response, Compensation, and Liability Act (Superfund) and the Resource Conservation and Recovery Act.
“Often the owner would put the property into the family trust along with the family home and whatever other assets he had,” she said.
“So now it’s the 21st century and you have CERCLA and RCRA and all these other environmental laws, and you have this impacted property with potentially crushing associated liability in the family trust or dad’s estate and all of the assets in the trust or estate can be consumed to deal with it,” Nastich said.
Several estate-planning options should be considered by a family member owning property that might be contaminated to help avoid passing on liability to the next generation.
“In so many cases, families don’t know there’s a problem,” attorney Kevin Daehnke with The Daehnke Cruz Law Group in Newport Beach, Calif., told Bloomberg Law.
Daehnke’s firm specializes in legal issues relating to the investigation and remediation of contaminated sites.
While liability issues are similar, people inheriting contaminated property are more likely to be caught unaware than purchasers, Daehnke said.
“In the purchase and sale arena, banks won’t lend without a Phase I paper environmental assessment and, if potential problems are identified, a Phase II testing assessment,” he said. He was referring to the common testing protocols required by lending institutions before they will agree to finance a purchase.
“As a result, we have a sophisticated marketplace” when properties are bought and sold. “But we don’t have that in succession upon death,” Daehnke said.
In instances where there’s even a suspicion of contamination, heirs should be adamant that the parents investigate, Daehnke said.
“The key is to do an assessment up front on the potential for this problem,” he said.
After that, Daehnke said, “We may determine we need to address the problem while mom and dad are still alive, or there might be insurance that will pay for the cleanup.”
“If there’s a huge potential problem, then you should try to segregate the property from the rest of the estate,” he said.
Parents could also put money in a trust to pay for remediating the contamination, with any residual amount only passing to the children after the cleanup is complete, Daehnke said.
If cleanup before death isn’t possible, there are interim steps the family can take to lesson potential liability.
One middle-ground step is to control or contain the impacts of contamination, Nastich said. These efforts should include “halting off-site migration, eliminating possible exposure of people to the materials, or keeping the impacts from reaching groundwater or surface water.”
But if the owner doesn’t clean up the property, potential liability may be minimized by putting the property into a limited liability company (or LLC), or a separate trust to insulate it from other assets that will be passed down, Nastich said.
Monies inherited outside of the trust will thus not be tapped for cleanup costs, or in the case of an LLC, partners will be protected from personal liability.
Failure to do this “increases the risk of the other assets being consumed to address the potential environmental impacts and associated liability,” she said.
If other assets are put into a trust along with the contaminated property “all of the assets of the trust can be consumed under an order from a state or federal regulatory agency to address the impacts, or a court judgment.”
If a full cleanup isn’t possible, the property owner could take steps to contain the contamination so that it doesn’t pose a risk to future owners or adjacent property owners, attorney Margaret Witherup with Gordon Feinblatt, LLC in Baltimore told Bloomberg Law.
“This could include things like a clean soil cap, a deed restriction limiting future use of the property, or taking the property through the state’s Voluntary Cleanup Program to get a regulatory approval that the property will be safe for its intended use,” Witherup said.
Bad planning can lead to bad results even for sophisticated business owners, attorney James Pray with BrownWinick in Des Moines, Iowa, told Bloomberg Law.
Pray is chair of the firm’s environmental law practice group. His practice includes consulting and litigation services including environmental and due diligence issues.
“The worst situation I ever encountered was where the lawyer-father decided that a general partnership would be the best way to transfer a business interest to his three adult children while the father was still alive,” Pray said.
“While the father was comfortable with general partnerships in a law firm setting, that structure proved to be a disaster,” he said.
In the end, Pray said, because the children were general partners of the business they were personally liable for the cleanup.
But what recourse does an heir have if the property owner leaves behind a contaminated property—or one that is suspected of being contaminated?
Under the Superfund law, an heir, like any other “owner” of a contaminated site, is liable for the cost of cleaning up the property.
“The minute title transfers, any residual liability will be on the heirs,” Daehnke said.
One option is to reject or “disclaim” the inheritance.
“If you disclaim, you’re out,” Pray said.
If the heir suspects but doesn’t know for sure whether the property is contaminated, he could file a motion with the probate court seeking more time to inspect the site, Pray said.
Heirs do have a potential defense under the Superfund law as an “innocent owner.” But the burden is on them to prove several elements.
The heir must show that a third party caused the contamination; that the disposal occurred before the heir acquired the property; and that he exercised due care and took precautions to avoid worsening the contamination.
“The heir can’t have done anything to make it worse,” Pray said.
He also must cooperate with the cleanup and allow regulators access to the facility for testing and other purposes—sometimes for many years.
And cooperation may mean an heir loses some rights, Pray said. For example, the government may want an easement to install wells or allow trucks to get in.
It’s a very difficult standard, Nastich said. But if an heir can prove each and every element of the defense, he can escape liability as a Superfund owner.
Even so, an heir may not be out of the woods.
State environmental statutes may or may not have the same defenses as the federal Superfund law, and state common and tort law will not contain the same protections and defenses.
So even if someone has a defense under Superfund, they may still have liability under common law tort claims or be subject to a state agency order, Nastich said.
An heir can face tort claims like trespass and nuisance if contamination migrates to an adjacent site, Nastich said.
Over and over, the attorneys who spoke with Bloomberg Law emphasized estate planning and due diligence to avoid liability.
“We see all the time, expensive and wasteful litigation between heirs and other beneficiaries,” Daehnke said.
“There’s an easy fix—if the property is worth $2 million clean, and it would only cost $250,000 to clean up, the heirs are sitting on a property worth $1.75 million,” he said.
“But if they haven’t done an assessment, they don’t know that. So they may not want the trustee to spend the money on cleanup and so properties sit around for decades,” Daehnke said.
If, early one, the heirs had put the property into a trust, along with money to do an investigation and trustee access to those funds, the problem could have been averted, he said.
Nastich cites one case in which her client, the trustee for an estate, spent years trying to resolve a site cleanup. After the trustee died, one of the heirs had to take over the handling of the still-existing contamination.
The heir is still cleaning up the property today.
“Meanwhile, the other siblings are getting on in years and wondering if they are ever going to see a dime of their (previously substantial) inheritance,” she said.
As the cleanup drags on, the grandkids may end up having to deal with it.
“I worked on a site where the remediation was anticipated to span a century,” Nastich said.
“Without planning,” she said, “people can literally pass on a legacy of headaches, stress, and expense and their entire life’s savings can be consumed in trying to deal with these impacts.”
To contact the reporter on this story: Peter Hayes in Washington at PHayes@bloomberglaw.com
To contact the editor responsible for this story: Steven Patrick at firstname.lastname@example.org
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