David, is an out-of-state owner simply receiving royalties from North Dakota considered “doing business?”
David Peterson said:
Is your LLC set up to do business in North Dakota? We had to register our LLC in Montana so we were able to conduct business in Montana. Thus, we registered through a company called LAWCO for $100 a year. Both of our LLCs were required to do this again in order to do business as an LLC in Montana.
Greg Campbell said:
Here is what my siblings and I did with the mineral rights that we inherited and the reasons why.
Here are some facts: My brother and I live in Washington State. Our sister lives in California. The mineral rights are located in Williston and McKenzie Counties in North Dakota.
Our mom lived in Washington State when she died. So the assets needed to be included in her estate for purposes of the Washington State estate tax and probate. Washington is not an expensive probate state so no living trust was in place. Washington’s estate tax starts at $2M. We knew that her estate would be well under that amount, so we did not get an appraisal of the rights. An amount needed to be reported for probate. I did some research and applied a per acre amount based on that research. Because I didn’t want the risk of the state asserting that I estimated low to avoid the tax or reporting requirements, I estimated high. I included a letter and other documents in the estate filing to support the valuation.
You may be asking why if there is an up-step in basis, why not get the appraisal? Well, it does cost money. And in our case mom told us that granddad said to never sell the rights. He was right, we just completed a lease that paid us a bonus of over $50K. Additionally, it appears that the common wisdom is not to sell Bakken mineral rights. If there will be no sale in the future, then no need for a good supportable basis number. But on the other hand, things change and maybe one of us needs or wants to sell. Then what will I do? I will probably use the number I came up with during the administration of the estate, which is probably higher than what an appraisal would have given me. There is risk here. In the event that the IRS looks at this potential transaction, I may not be able to support the value to their liking and therefore pay tax on the entire sale price.
Because the property is located in North Dakota, we needed to do an auxiliary probate in that State. In short, I hired an attorney that took care of this. I was never asked for a value of the assets. As part of the probate work in North Dakota, the attorney also handled the title transfer to my siblings and me.
After this transfer was completed, I set up an LLC in Washington State that will be taxed as a partnership and all three of us quitclaimed our rights into the LLC. Here are the reasons:
- To make it easier to transfer the rights from one generation to another.
- To be able to negotiate leasing of the rights as one.
- To make it easier for potential leasers to find us.
- To take advantage of a discount due to lack of marketability which should allow us to use lower valuations for the purposes of gifting and/or estate tax.
As I have said, oftentimes residents of California set up revocable trusts to bypass probate in that state and save some money. If my sister, who lives in California, chooses to, she could set up a revocable trust and transfer her ownership interest in the LLC to the trust, thus receiving the benefits of the LLC and the trust.
I must say it again. Tax issues are complex. You must get good advice. I, a CPA that prepares trust tax returns on a regular basis, would not undertake a trust strategy without the advice of a well-qualified attorney.