The Problem: Environmental Cleanup Liabilities Often Attach to Heirs, Beneficiaries and Surviving Partners
Posted: December 1, 2011The environmental cleanup issues associated with business succession and estate planning are real, and need to be planned for. The problem of unintended environmental cleanup liabilities, which are often financially devastating and can attach merely by becoming an “owner” of a contaminated parcel, can be very significant. (See previous blog post, “ToxicEstateSuccession.com”)
Individuals or entities that might otherwise have no prior relationship to the site or its contamination may nevertheless inadvertently become liable for 100% of the cleanup costs of soil, soil vapors and/or groundwater, merely through the acquisition of ownership of a parcel. This contamination problem can potentially even migrate far off-site and range into multiple millions of dollars. Likewise, surviving business partners can be left “holding the bag” on contaminated parcels upon the death of a business partner, merely by failing to adequately plan for potential environmental contamination issues in the company’s “Buy-Sell” documentation and in the company’s business succession strategy.
In the estate planning process, heirs or beneficiaries that become “owners” of contaminated properties, or who continue as “operators” of businesses that continue to contaminate, will be brought into the environmental cleanup liability scheme even if such parties had never previously had any liability for the subject properties. As an owner or operator, the heir or beneficiary might be liable, personally, for the entire cost of cleanup. This can occur even if the remediation costs are more than the total estate assets distributed to the beneficiary.
In the business succession context, a surviving business partner may find that the business left to him by the deceased business partner may well be saddled with significant environmental cleanup liabilities. Furthermore, if the partners do not properly plan for dealing with contamination issues at death, in the Buy-Sell agreement or otherwise, the surviving business partner(s) may find that he/she/they are stuck paying an inflated price (since the valuation doesn’t account for environmental cleanup liabilities) in the buyout of the deceased partner’s ownership interest. The surviving partners may even be forced to sue the deceased partner’s estate.
These potentially devastating situations can usually be avoided, simply by planning for how to deal with environmental contamination liabilities as part of the estate and business succession planning effort. Moreover, this analysis is so fundamental, and often so critical, that the legal, accounting and financial professionals responsible for the succession planning for a particular business or estate may find themselves personally accountable to their clients, and potentially facing errors and omissions exposure, if they do not include environmental contamination concerns as an integral part of the planning process.
In my next blog post I will set out various strategies for identifying contamination issues early, including a checklist for individuals, business owners, estate planning professionals and financial advisors.
(As noted in our first blog post, we invite each of you to participate by sending us your comments on this blog site, so that we can converse with you. While your posts – and our replies – will typically remain available only to us, we will occasionally post your blog comments, as well as our responses, to further the education of our readership. However, our blog outreach focuses mainly on our own periodic blog posts, which will each describe certain environmental contamination issues faced in the business and estate succession planning arena, ways to plan around these issues, and ways to minimize the unintended transfer of environmental cleanup liabilities to business partners, beneficiaries and fiduciaries. It is our intention to use this blog as the opportunity to begin organizing and coordinating the establishment of “working groups” in various regions throughout California and other states, to jumpstart this BEST PRACTICES approach throughout the country. This effort includes seminars, conferences, workshops, webinars and written articles.)