Hi,
My siblings and I have inherited some mineral rights from our father. Closing this estate has been a nightmare and this is the last item that needs to be done in order to wrap it up. From what I can tell, the mineral rights did not produce for about the past 30 years, but back in 2013 my Dad signed a lease and over the course of 4 years received a total of 40k from the lease. In the past year, since his death, the payments have declined sharply, roughly to $500 total for the past 6 months. How would I go about determining value on these rights? THANK you in advance.
Bluebird,
What State are the minerals in? I have been going through the same process and have found 34,924 different answers on how to value the mineral rights.
WV,
The mineral rights are in Oklahoma. Yeah, this determination of value seems to be a bit convoluted!
Bluebird,
I am NOT familiar with Oklahoma valuations, am not an attorney or accountant, but will share what I have learned.
Some States place a valuation as part of the tax process, generally estates will use that number as a basis and multiply it by a factor, best determined by either the probate attorney or accountant. Another valuation process is to calculate the average royalty payment for 5 years and multiply that number by 3.5.
Good Luck!!!
So, the last 5 years it produced, but prior to that it was dormant for probably 30 years. Using just the past 5 years, would that put an artificially high price on the value? I don't foresee selling the rights going forward (not sure about my siblings), so not sure it matters a ton, but what is throwing me is that it produced 40k in 5 years and currently barely producing. It could also be said it produced 40k in 30 years. Hope I am not making this too complicated.
What is the legal description?
Alfalfa County Section 10-26N-11W
When valuing mineral rights for estate tax purposes for mineral production from horizontal wells, is largely dependent on the amount of proven producing and proven non-producing reserves developed. If your father took volume depletion over percent depletion on his tax return, it is even more important for tax purposes. However, if the acreage is small or the minerals are a small part of the estate, third party offers made to purchase at about the time death may be acceptable or a factor of the last 12 months net income using discounted cash flow projections based on the recent production records.
Don't be shortsighted when establishing mineral estate value. Talk to your siblings and make a plan for the mineral inheritance. Perhaps you would be wise to form a trust or LLC for the minerals with the option of selling long term production or the leasehold itself. In that case, the tax basis should be a high number if possible.
Also, if your father could have owned more OK minerals than the land included in the existing lease, leave the possibility of discovery open.
If the total estate is large, seek the advice of an estate accountant so you don't allow an underestimate in a small portion (minerals) cause an audit for the entire estate.
There is no one size fits all. Prioritize.
Gary Hutchinson
Thank you so much for all the responses to date. Gary, the estate is small (after he gave away large amounts to someone who could "cure" him of cancer, and other such people in his life--I could write a book. But I digress!!) Anyway, these are the only mineral rights that he possessed. My siblings are unable to assist in the handling of any part of the estate issues, unfortunately. So, I think I will just have to make a determination and move forward.
I have no idea how my dad filed his taxes. We have had no third party offers.
I'm embarrassed to say that I didn't look closely enough (100 pages!!) to see that the amount drilled was actually net to my father closer to 80k for the five years. (I didn't see all the wells were paid out separately). Ugh. Sorry to confuse the issue. Looks like the payout for all the wells for the past 6 months is quite small. I so appreciate you all taking your time to help me out. I am buried up to my eyeballs with life right now and this handling this estate with no help from the executor has been really stressful. Right now I am just trying to do my best to ensure that this matter is cleared up for myself and my siblings. Thanks again. I will re read everything posted and try to make a determination.
Here's a thought for you: Have you considered offering to buy out your siblings mineral interest with the stipulation that that they will receive any royalties produced up until their death - this would be set up in a life estate! Minerals would revert to you upon their death.
Good luck,
Pat
Thanks for the suggestion- hadn't considered that possibility!