Friday April 19, 2024
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4.7.3 Environmental Issues
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Environmental Issues
Accepting Gifts of Real Estate: In a typical gift of real estate to charity, charity must take title to the property.
Charity as CRT Trustee: In many cases, a donor wants to fund a CRT with real estate.
The LLC Option: Instead of taking title to the real estate directly, a charity may establish a single-member LLC to hold the real estate and solve its environmental liability dilemma.
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Accepting Gifts of Real Estate
In a typical gift of real estate to charity, charity must take title to the property. Although charity will sell the property as soon as possible, it will now be in the chain of title. Therefore, any environmental problems arising from the property could subject the charity to liability.
With the potential unlimited liability associated with federal and state environmental laws, a charity must carefully review any gifts of real estate prior to acceptance. In particular, if the real estate is commercial or industrial in nature, a charity will want to take additional safety steps before accepting the contribution.
Such steps may include obtaining an environmental impact survey (EIS). Depending on the level of testing desired, an EIS might be Phase 1, Phase 2 or Phase 3. With each higher phase, a charity is provided with more assurances regarding the likelihood of an environmental problem. However, with each higher phase, the cost increases significantly. A charity can request that a donor pay the costs associated with an EIS, but in some cases, a charity will pay for the EIS if it feels the cost can be offset by the donor's gift. Thus, a charity and a donor have to balance the cost and liability issues carefully.
In some instances, a charity should simply refuse a gift of real estate if the environmental risks outweigh the financial benefits. This also applies to gifts of real estate in exchange for a charitable gift annuity. Since the charity becomes the owner of the real estate pursuant to a CGA, the same outright gift precautions apply to a potential CGA funded with real estate.
Charity as CRT Trustee
In many cases, a donor wants to fund a CRT with real estate. This is a common desire and is an excellent use of CRTs. However, in situations where the charity serves as trustee, it is important to review real estate gift acceptance policies, especially as they relate to environmental issues.
There are two courses of action the charity may take. First, the charity can request that the donor serve as trustee of the CRT until the property is sold. Once the property is sold, the charity may take over as trustee. This is an excellent and inexpensive solution. It keeps the charity (as trustee) from ever appearing in the property's chain of title. Therefore, charity should not have liability for any environmental problems.
Second, the charity can follow the usual safety steps for accepting gifts of property. For instance, the charity can request an EIS before accepting the property as trustee. After the safety steps are completed, the real estate may be transferred to the CRT with the charity serving as trustee. The downsides of this course of action are the associated costs, time and potential liability risk.
The LLC Option
Instead of taking title to the real estate directly, a charity may establish a single-member LLC to hold the real estate and solve its environmental liability dilemma. The charity would not be the manager of the LLC, but would have the power to appoint and remove managers. Charity would appoint the donor to be manager of the LLC. However, he or she would be required to serve without compensation.
After creation of the LLC, the donor would transfer the real estate to the LLC. The donor, as sole manager of the LLC, would then sell the property. Once the property is sold, the donor would no longer need to serve as the LLC manager. Afterwards, the LLC would distribute the sales proceeds to the charity. But more important, the charity would never be in the chain of title with respect to the real estate.
This LLC option is based upon the ruling in PLR 200150027. However, letter rulings may not be used as a precedent. Moreover, the IRS did not directly rule on the deductibility of the donor's contribution.
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Case Studies on Environmental Issues
Toxic Real Property, Part 1 of 3:
iane Plant is a real estate broker and a savvy investor. Over the past twenty years, Diane has made a fortune investing in undeveloped commercial property. She will generally seek out and buy land on the outer limits of potentially high growth areas.
Toxic Real Property, Part 2 of 3:
Diane Plant, 60, is a real estate broker and a savvy investor. Over the past 20 years, Diane has made a fortune investing in undeveloped commercial property. She will generally seek out and buy land on the outer limits of potentially high growth areas.
Toxic Real Property, Part 3:
Diane Plant is a real estate broker and a savvy investor. Over the past twenty years, Diane has made a fortune investing in undeveloped commercial property. She will generally seek out and buy land on the outer limits of potentially high growth areas.
Minor Toxic Waste Problem:
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.
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