A "quandry" re proper vehicle for holding mineral interests

Ok folks, not sure which is the proper forum for this so I'll start here.

I own in my own name a number of small mineral interests spread over some 40 different counties in 10 states. A small percentage of them are producing and the income, especially over the last few years, has been and will continue to be an essential part of my ability to support my wife and myself.

We have four children to whom I would like to leave these interests. My wife and I also have a "standard" revocable "A-B" trust. Both of these facts pose problems regarding the interests.

First, if I want to put the interests into the trust so that they pass directly to my wife if I die first, I'll have to file new deeds in 40 counties (and notify some 25+ producers for new division orders). But whenever the second of us dies, the kids could be facing 40 probate filings.

If I put the interests into a limited partnership, S-corp, or similar vehicle with the wife and kids, I'd still have to file the new deeds but we could avoid probate. However, my wife and I need all the income while we're alive, and can't afford to be sharing it with the kids at this stage.

So does anyone have suggestions on how to structure something that would allow us to keep the income and avoid probate? I've thought about a salary for me as a general partner with no profits to distribute, but that might still make the limited partners liable for taxes. ????

hello, my uncle went ahead and passed his mineral interest to his children but it was stipulated the he would recieve a montlhly amount back from them every month for them to live on so they don't have to worry about it,,it is already passed to the kids..good idea...not sure what vechicle he used to do this.

John, I inherited the minerals I now have. My mother placed hers in my parents trust, upon her death, I received them from the trust. No probate in Montana. I've had the wording of giving warranty to the title of the minerals in my lease but so far have been able to remove that. I have the paper trail from attorney with the recording numbers stamped on them. For when they were originally in my mothers name , to the trust, then out of the trust. I've been fortunate, however, they were all in the one county. I hope this helps. They put everything they owned in the the trust. We didn't have to probate.

John,

I have read info where some families have the oil and gas properties in a trust and some families with it the in LLCs. I’m sure the laws from the host states have some impact on all of this

I hate to see the rights get chopped up as they get passed down as well as a few that ends up selling, but I guess that is their right in most cases. It is possible to restrict this right with some trusts as well.

From what I gather from your post (and the way I understand that type of trust) the trust will have to be dissolved after you and your wife passes. I have seen some “family mineral trusts” that do not have to be dissolved on death.

I have also seen properties placed in a LLC. The LLC can be owned by the trust and managed by the trustee. The LLC can be a single member or partnership. From an IRS standpoint, these are handled a slightly different in tax filings. Your heirs would not need to be members. Per the trust, ownership could pass directly to them. The LLC could remain intact upon your deaths.

Do any of your kids take an active part in the management of these properties? Can you expect them to be able to take up where you left off? What is your plan from management of the properties is you are incapacitated? Will someone have the knowledge to carry on so it will maximize your income and correctly lease the properties?

Do the kids get along? If they don’t get along, it could be a curse to give them interest in a company that manages “their properties”. Nothing will divide a family quicker than money. It is your responsibility to make them aware of your wishes and how you intend to pass it on.

What is their financial situation? If they are not responsible with money, it is possible the properties will be more of a curse than a blessing.

I’ll be glad to provide you more details of our personal experiences with a similar situation by email if you wish.

Rick

Joanne G,

I’m curious. Have your experiences survived a full blown title review on a producing property?

I have seen things be a bit more lenient when leasing a property than when title work occurs for a division order of a producing well. Although limited, that is what I have noticed.

Rick, I will soon find out. I expect to see division order any time now. I do have copies of the paper trail and the recording documents. I don’t anticipate any trouble with it, now you have me nervous!

Rick that was a nice post to John. You touch on several good points. As to Joanne's situation, if she has the various recorded deeds mentioned, I don't think she needs to worry about a lack of probates.

I think you have enough of a paper trail to cover it. Most of the problem I saw only required the same paperwork to have to be recorded in the county clerk’s office that hold the property documents. I know it varies by state, but some have the estate, court, assessment, and property documents in different areas. And in many cases, the estate is in one county and the properties are in many counties.

It gets difficult trying to deal with parents estate. I’m thankful it was all taken care of and recorded. I didn’t care for their attorney but at least it was followed thru and finished.

Rick, could you please email your personal experiences with similar situations on passing minerals to children either by Trust or LLC. I now have them in a Trust with one of my kids as manager and will be Trustee upon my death. NARO recommended an LLC over a Trust. Your comments will be greatly appreciated.

lkershaw155@aol.com

Rick Howell said:

John,

I have read info where some families have the oil and gas properties in a trust and some families with it the in LLCs. I’m sure the laws from the host states have some impact on all of this

I hate to see the rights get chopped up as they get passed down as well as a few that ends up selling, but I guess that is their right in most cases. It is possible to restrict this right with some trusts as well.

From what I gather from your post (and the way I understand that type of trust) the trust will have to be dissolved after you and your wife passes. I have seen some “family mineral trusts” that do not have to be dissolved on death.

I have also seen properties placed in a LLC. The LLC can be owned by the trust and managed by the trustee. The LLC can be a single member or partnership. From an IRS standpoint, these are handled a slightly different in tax filings. Your heirs would not need to be members. Per the trust, ownership could pass directly to them. The LLC could remain intact upon your deaths.

Do any of your kids take an active part in the management of these properties? Can you expect them to be able to take up where you left off? What is your plan from management of the properties is you are incapacitated? Will someone have the knowledge to carry on so it will maximize your income and correctly lease the properties?

Do the kids get along? If they don’t get along, it could be a curse to give them interest in a company that manages “their properties”. Nothing will divide a family quicker than money. It is your responsibility to make them aware of your wishes and how you intend to pass it on.

What is their financial situation? If they are not responsible with money, it is possible the properties will be more of a curse than a blessing.

I’ll be glad to provide you more details of our personal experiences with a similar situation by email if you wish.

Rick

Sorry I can't offer a cheap solution. I suggest you consult with a lawyer who specializes in estate planning, or a lawyer who specializes in trusts. My husband is a corporation lawyer, and he says he would not try to work this out without such a specialist. We wouldn't use a professional who wants to sell insurance, although insurance might be a part of a strategy. Get one who is certified and look him up in your state's bar site to see if he/she has had any complaints. Check with your family lawyer or CPA. An LLC or a limited partnership of some form might be used by a good estate planning lawyer.

Many thanks to all who reponded to my questions. Rick, I think an LLC owned by our trust might be the answer. I'm getting an appointment with a CPA to go over it (on the recommendation of my trust attorney brother in law).

Andy

Andy,

Have you considered a family LLC where your kids are minority members now and at your and your wife's death could become majority members? As Rick said, it is a shame to chop up the mineral rights, but this would be a way to hold them as one entity unless and until the LLC is dissolved. The manager of the LLC would then neogiate future leases and other issues with exploration companies, and it might be a way to get one or more of the kids involved in the "business" so they will continue the legacy you started. You would still have the issue with deeds from every mineral ownership to the LLC.

Columbia1,

Thanks for your input. Yes I've looked into that and agree that an LLC, or possibly an LP, is probably the answer. As Rick suggested, we would probably have our "A-B" revocable trust own the LLC. The thing I'm trying to figure out now (and have an appt with a CPA to discuss) is 1) how to retain all or most of the income now, while my wife and I are alive, without having to distribute some to the kids, and 2) how to make sure that, if I can do that, the kids aren't going to be responsuible for any income taxes.

Columbia1 said:

Andy,

Have you considered a family LLC where your kids are minority members now and at your and your wife's death could become majority members? As Rick said, it is a shame to chop up the mineral rights, but this would be a way to hold them as one entity unless and until the LLC is dissolved. The manager of the LLC would then neogiate future leases and other issues with exploration companies, and it might be a way to get one or more of the kids involved in the "business" so they will continue the legacy you started. You would still have the issue with deeds from every mineral ownership to the LLC.

Mr. Davis,

Check with your CPA, but I believe that could be addressed within the LLC's ownership. As an example: You keep 49% ownership, your wife has 49% ownership (or your Trusts own this 98%), little Johnny has 1%, little Sally 1%. This doesn't eliminate the kid's need to report on income but it would essentially keep the royalty with you and minimize any current tax liability for your kids.

As a further thought... If there is multiple producing properties, but the bulk of the royalty income is from one or two tracts, you might deed most of the properties into an LLC but temporarily withhold the one or two big producers. Write, sign, and notarize a deed to your LLC on those retained properties. Just tuck them away to be recorded after your death. Run this by your CPA but I believe it will allow you to collect the income now yet have the property ready to roll into the LLC way down the road.

John,

You have as many problems as I have. When you are in 10 different states that alone causes lots of problems as some states are community property, some are J. T, etc.

Also, you need to think about how each of your children handles money as most family don't get alone after an estate that had any amount of money.

I would go to a GOOD attorney that specialize in estate planning/trust. Since you are in so many states, you may want to sell some of the less valued minerals and save a lot of money in the future. In some states it's hard to get clear title without probate and that may cost more than the mineral are worth.

Then a person has to think, what will be laws be in a couple years, including taxes, etc. Trust can be taxed at a much higher percentage.

Also, someone suggest that you deed the minerals to your children and they pay you a monthly amount. That can be really unfair to your children as one may be in a very low tax bracket, another in the 31% bracket. Who is going to pay the tax. Also, what if you son or daughter goes before you do, then his wife/husband may not want to share anything with you. It's a big hard world out there.

Rick Howell and others,

Thanks for taking the time to post all the valuable information. My father left myself and siblings some oil interests in Texas and, living in Massachusetts, I do not know where to start. As I understand, I have to probate his will in EACH county where the interests are held. I do not wish this same future for my children and others. Is anyone knowledgeable enough about Texas law to tell me where to start?

Ed C.

A discussion like this will seldom provide the best answer for any one individual's unique situation. As shown by the preceding posts, there are too many variables. Some techniques work best in some situations - others in other situations, again usually depending on the needs and/or facts and/or goals of your unique family .

I like to make an anology between cooking and estate planning. With cooking, there are many reciepes, usually with many common ingredients. But the final product of cooking depends can depend on how much you use of each ingredient, sometimes with only slight variations in the amount and kind of ingredients, producing a significantly different end product. So too is it often with Estate Planning. The final plan will often be a compromise between your general personal and/financial goals, and the restrictions imposed by a mix of various laws.

So the best advice I have heard so far is to establish a good working relationship with a TEAM of qualified estate planning attorney and CPA. The attorney will be more needed with the initial set up, and the CPA will be needed to help ensure that the estate planning entity and overall plan is properly operated in the coming years. BOTH should be involved with your initial planning. And plan on maintaining your relationship with the attorney & CPA in the comming years, so that you have your team in place, ready to update your plan, when the applicable laws (federal and/or state) change, or a court decision changes the interpretation of current laws.

Ask your attorney and CPA to provide you with written professional literature on the various topics, which preferably will include illustrations of how various techniques might be applied to various fact patterns. You might even ask your attorney and CPA to provide a recent court case where the outcome was not in the taxpayer's favor, as an example of what not to do when setting up trusts, limited partnerships, or LLC's.

Hi John,

I also had many problems with my moms estate when she dies. When I noticed the oil companies paying at the wrong RI, I had to get a CPL to straighten it all out. She had to prove Chain of Heirship. Which meant going through all the filed copied of legal documents in that county for the mineral rights that had been passed on since the late 1800's. In turn after many years of going through all that and Oil companies sending my checks to Ca Unclaimed Funds..still many problems and time. Law changed over the last 12 years. Yes it took me 12 years to get it all cleaned up and ready to take care of my own heirs for it when I pass. The attorney suggested to put it in a Family Trust with instructions as to whom it goes to and file it in the County all the minerals are in. That way Texas will recognize my wishes. So the best bet is to find a Texas attorney that specializes in that field ..Oil and Minerals.

Dear Andy,

Let me tell you a 60 Year Nightmare, so no matter what you decide to do, you will not do what my parents did. It started with my Grandfather, when he died he left all his assets in trust to split 1/6 between 5 kids and 2nd wife. When the trust ran out, the kids didn't want to fool with the minerals, so they started a Agency account with US Trust, Bank America, and how ever many other banks its been since. When my mom died, she thought the world of the trust department, because when I was a kid, the trust department of the Bank was a Service of the Bank then, they took care of their trustees, heirs, etc. When my mom died in 1989, she also left everything in trust to me and my sister. But now the Trust Department had become a Giant Profit Center. She always told me, if I asked the right questions of US Trust, then they would help me. I'm here to tell you, that I'm still working on finding the right questions to ask. First of all current fees, include 6% off the top on all Royalities, 3% off all investments, but this BANK does not know how to make money, on over 1/2 million in cash, they pay about 1% return. Plus $62 per property fee. They also don't listen to there trustees, nor communicate with future heirs. In our trust we have some 5000 acres that is located in the Permian Basin, that has not been drilled on for many moons, The Trust Department does nothing to promote this land, so I have taken it upon myself for my cousins to promote it. But now that we found a company that is interested in the Lands, the Trust Department has put the slow screws to me and my family, but not getting back to the Oil Company with what they need to make a good decision. Now they will not answer me back emails that I send them. In a nut shell, it's a 3 way split, my sister gets a Third, I get a Third and the US Trust Gets a 1/3. I have told this story to another here and his reply was, seems like your being abused by US Trust Company. I agree. But nothing I can do about it, written by my Mother for what she thought was best. IF all you have are minerals, then you might look at a trust. But be sure you know what your entering, because the BIG print tells you what you get and the SMALL Print takes it away.

For the last 53 years all the minerals were in one name, and checks split 6 ways, till we got wind that one cousin whos mom had passed was hiring an attorney to go to all the counties and split his interests off that of the other cousins. I have a letter from US Trust stating they did split up the takes and put under each name in 1993, but they didn't do it then, no when they got wind from me about my cousin, in 2009, then they did it, which stopped 1/2 of royalty checks for up to 2 years, while the oil an gas companies made the changes, all the while the bank knew what was going on, but did not let on to trustees who wondered, where did 1/2 of my check go, so the trust department would not be caught making an error. Don't worry they make plenty of them, even when they do, if you asked them what that entry to special account on report, they get you some BS, really expecting you to believe them. They outface lie my friend, and then Cover their Asses. So now you know the worst Nightmare.

If I were you, I would sit down with your oldest and start explaining to him your business, I see so many that don't know their parents business, and it's important that they do. Teach them now how to pay the taxes and deposit the checks. Just give it to them, and let them decide how they want to handle it, perhaps they will want to do it, and if they don't they can hire someone to take care of it for them, Don't tie their hands, by demands you want now. And now 60 years later, the splits keep coming, Aunt died and left her minerals to two hospitals, and one grandson is out of the trust business, while leaving 6 of us still tied to US Trust.

Surely there has to be a better way! I hope you find it for your kids sake,

God Bless,

CW