My wife and I have been married for 35 years and I have (mostly) happily handled her mineral rights and taxes and such.
She is about to inherit another 10 properties from her mother, so 20 total max. Some produce and some do not. About $30k annually.
While I have enjoyed learning about the counties in Oklahoma and how this all works, our adult kids have other things to do with their time. And some of them have kids, and…
So, what is the best structure for a 60-year-old woman to use to manage these assets and then hand them to her children when she and her husband (me) die?
We have a family trust that is set up to protect her assets so they go to the kids if she dies first. So, we could use Family Trust, FBO . But is this best?
Irrevocable trust, LLC?
What do we need?
Easy to track all the assets and deeds - I have spent the past 6 years tracking down my mother-in-law’s interests. I find this fun, it makes her children crazy.
One account to receive payments.
One set of taxes with optimal taxation.
Protected from debtors, I guess. Seems smart.
Easy to divide by 3 when we’re both gone. Or, maybe the kids keep it whole and divide the shares?
I can manage all of this now. We are each 60. In 20 years I want it to be easy for the kids to understand and manage.
Then, we want a clean break for the kids into three after the second death.
As much as we don’t want further dilution, we really don’t want any issues among the kids once we are dead about how to manage joint assets. Each gets one-third, and you do you.
Mine were registered in the name of my Trust and considered an asset of the Trust - just like stocks, bonds, and real estate.
Or, she can just put them in her will with beneficiaries as she desires.
We are going through this same thing right now. Be very careful of my advice, as all family things can be different. I have managed my own, my sisters’, and my cousins’ minerals for 40 years. A lot of mineral acres. Leased, pooled, 1099s, etc. None of the next children, including ours who are 40 years old, have ever wanted to learn the business.
We have a fantastic law firm in El Reno, Oklahoma (just west of Oklahoma City) who has always done our considerable legal work including putting the acres into a revocable trust and being the exchange for lease payments. After exhaustive research, we are placing all the 36 wells and the mineral acres with a mineral management company called Argent Mineral Management. This is a huge company that has maybe 50 offices managing royalty owners’ minerals. It is NOT a drilling, leasing, or landsman company.
Our attorney’s office is recommending based on past client reports. All other research including BBB, Google Reviews, etc., is very positive. The minerals are in the various revocable trusts but we will COMBINE them back into one LLC so that Argent has only one lease with production companies and when leasing, there are many mineral acres, which brings premiums at leasing. They will produce a year-end report but NOT produce a K-1. It is easy to distribute the LLC income by the amount of mineral acres owned by each director.
There is a lot of information in this e-mail, and working with a trusted attorney in the state where the mineral acres are located is advisable. So our thinking is to get all those fractional mineral acre shares recombined and get them into professional management. An ending note, we have had extremely poor luck with bank trusts departments. They just do not understand the nature of mineral acre management.
Thank you for this detailed reply. As you guessed, since some of these assets were distributed to family members and now inherited, we have the option to combine some of them and simplify.
Your note says there is an LLC but no K-1. What do they send instead of the K-1?
Thanks.
I swear that this forum is the only place in the world where people just help each other via their own expertise and insight without a lot of baggage. Thanks!
A multi-owner LLC will need to file a federal tax return. If it has elected to be treated as a partnership, then it will file a Form 1065 with K-1’s. Presumably their tax accountant is taking care of this, likely based on the tax data provided by the management company.
Thank you for asking the question and for all the helpful answers. We are in a similar situation. I’ve been managing the minerals in my mother’s trust for my brother and me since Mother died almost 20 years ago. I’m 77 and my brother is 83. We have 8 children all together — none of whom are in Oklahoma and none of whom have been involved with the minerals. So we are asking ourselves all these questions. We also are asking the question of would it make sense to sell all of these as a bundle since our returns have been declining and we haven’t been getting many new leases. We have always lived by the mantra that we never sell; we just lease. Thanks for any comments.
This is a question for you to pose to your adult children. Are any of them interested in immediately learning about mineral management and taking over within the next year? Would they prefer for the minerals to be sold? The reality is that minerals are only effectively managed by someone knowledgeable and that is not a 1 hour process which can happen at your death. If there is a trust, does it terminate at the death of you and your brother and the assets split among your children? Or partially terminate when either of you dies? If the minerals are divided 8 ways, how much is there for each child? Do they get along and want to work together? If they are in different states and cities, do the cousins communicate on a regular basis? Does one of them want to take on the burden (unpaid?) for the other 7? As trustee, do you even have power to sell? You need to have your estate attorney review the trust terms and your other assets, to make good plans for transitions over next few years. Not to alarm you, but you should not delay family discussions and your own planning.
The key as others have said is to consolidate. View where you want the ownership to be in forty years and get it there now. Creating the entities is not much problem. Doing the conveyances into the entities is where the heavy lifting is created. In the conveyances of my minerals I used catch-all wording in every Texas County to eliminate the possibility of description errors.
As a lifelong landman and mineral owner, I can tell you the most common problem I have seen is people creating entities such as trusts, LPs, and LLCs, then never doing the conveyance to get the interests into the trusts.
If you paid attorneys to set up trusts, why in the world would you then pay a mineral company and their fees to manage your minerals? If your kids have no interest, why not just sell whenever you get a good offer?
John, it is good that you are thinking about this now. We have 500 properties in 8 States that I have acquired over a 40+ year period. At 67, I still have many good years left in me, but I have taken the time to develop a management, investment and divestiture policy. No one in our family has any interest or the knowledge required to own or manage these properties.
Consider the effort that you have put in over time to manage the properties and the value that has been returned to you and your wife. Now consider if that same diligence is not continued, what will happen to the value of the properties? There is always the consideration of the heritage and sentimental value attached to the properties, but ask yourself what is your purpose in passing on the properties to your children? If it is to pass on assets that will make their life easier, then is this the best vehicle?
We hold our assets in a living trust and have established a separate Tax ID for the trust. The separate EIN is beneficial in the case there is a death of a spouse. If you use your SS#, then a spousal death can trigger an administrative problem with the Purchasers and cause you some true management headaches. Make sure to consult an attorney with a solid estate practice for the greatest benefits. Paying a little today, can save massive amounts in the future.
But a Living Trust is a revocable trust that the IRS requires to be reported on your individual 1040, same as a single-member LLC, which is also a “disregarded entity” for federal income tax reporting. Must be an irrevocable trust to file a 1041.
I use Mineralware for Revenue and GIS management. MW can be costly for the small mineral owner. I have also developed our own Family Office System that integrates communications, document management, property management, and revenue/bank reconciliation.
Enverus has a good basic system at no cost, but watch out flor their add-on pricing. You can get some basic GIS for your wells, but there is no shape file overlays until you go up to the pay levels. No good provision for digitizing your paper or pdf check details. Mineral Answers can do that digitizing and provide an Excel file for you monthly tracking. It looks like MA can do it at a lower cost than Enverus offers.
I have not found a good overall management system, that is why I developed our own Family Office System. You can do quite a bit now with Google workspace with some basic control factors. If people are interested I might put together a YouTube series on the process.
True on the 1041 filing. You can still file the trust essentially as a dba with a separate EIN for Sched C or E reporting on 1040. The separate EIN assists with future Purchaser admin issues. It is not for special tax treatment. It can also help if you want to establish a Solo401K or defined benefit plan. This for information purposes only. Please seek expert advice before committing to a process.
As a percentage, the income or revenue from small interests isn’t going to make massive paychecks. A well has to just be flowing 2000 bbl a day to make any money and even then you still only get what’s left
The reality of massive returns on minerals is rare. Even more the reason to be thoughtful in family and property management decisions. I am dealing with 3 families currently that have received divisions of a mineral portfolio with many very small interests and dealing with the related challenges.