Inherited Mineral Rights Divided Equally Among Beneficiaries Vs Creating an LLC

My family is inheriting mineral rights and my attorney recommends that he divide them up equally into the names of each beneficiary. He indicates that a joint venture/entity would require tax returns & is simply a pass-through entity from the income to the owners.

I’m not sure it makes sense to have individual ownership. Especially since there are 9 Beneficiaries/8 Equal Portions. The are (4) mineral deeds, the largest net mineral acres is 20 and the smallest 2.5.

I am considering setting up an LC of some type. From what I have been told, dividing up the shares into 8 pieces = smaller Net Mineral Acre (nma), which if small would be more difficult to market. The larger the mineral holding the more value per acre it has.

Secondly getting minerals into the LLC (or other entity) means no need to create deeds for each of the 9 owners and file them all in both counties.

Lastly, the same seamless continuity would happen if you were to transfer the minerals to each of your heirs. It is far easier to transfer interest in an LLC to heirs than it is to transfer ownership of minerals.

There are royalties currently being paid by (4) different Operators. I also wonder how dividing the ownership will affect the amount of royalties each of us would get from those currently paying us. Example: If we are currently Receiving $24,000 net monthly If we divide the current minerals amongst the (9) beneficiaries/ (8) portions, can we each expect to receive $3,000 monthly? Will the amount of Production Taxes & Processing Fees remain the same or will these amounts increase overall if the mineral acreage is divided up into smaller portions?

Any input that you can provide would be appreciated.

  1. Your math is correct as to revenue. The revenue would be the same, just divided by nine.

  2. if you transfer the property into a LLC or another entity, you will still need to do a deed into that LLC or other entity. It will still need to be recorded.

3… You have some valid points. Now, let me add some things to think about. Who is going to be responsible for administering the interest, cashing the check, doing the tax return and sending out checks. Will that person want to be paid? If not, how long are they going to do it for free. While the nine of you may get along, what about the next generation? will somebody’s child starting griping that Aunt Trish is doing the right thing, or how much is she getting paid, and for what. Squabbles may start.

Thanks for the input Tim. If we keep the shares together it will most likely only be 6 of the 8 shares that my siblings & I have. The other 2 shares are going to 3 step-grandchildren. I would be capable of managing it for awhile but at age 65 I am the youngest & don’t know how long I would want to do so. And yes, I have to consider who of our children would want to take this on in the future. I am glad to hear that you believe that the revenue would remain the same, just divided by nine. So I guess the only downfall would be if we were contacted by a new Operator down the line on a section that currently has no drilling activity.

We followed your logic a few years back under similar circumstances and it has worked out well. Couple things to note:

  • The operating agreement for the LLC allows original partners to pass their interest on to subsequent generations through fractional assignments specified within the will of each member. [i.e. Sally’s two kids will each receive 1/2 of her 1/9 interest in the LLC] Admittedly, this may get unwieldly within the next generation since we started with 9 siblings, most of whom have their own kids. However, I’m thinking our wells will run dry before the crowd grows too big.
  • Interest in the LLC can only be sold to another partner(s) or the collective LLC to avoid the mess of managing unrelated members.
  • Partners are not allowed to bequeath their interest to an unrelated third party, trust or charity.
  • I handle the tax returns and distributions on behalf of the LLC, which really isn’t a much of a burden with tax prep software.
  • Also note that although Texas has no corporate income tax if revenues are less than $1M annually, the LLC does need to be registered with the Secretary of State within 90 days of initiating activity. Last I checked it was a one-time fee of $750. If you wait 91 days to register, the fee doubles. An additional $750 is due for each year in which the company was active without registering.

I think you are on the right track. If you think distribution to each heir is difficult now, think how difficult it will be 2-3 generations from now when future heirs who know nothing about minerals and have little incentive to learn to manage their minerals because they own only a half mineral acre here or there. Heirs to an LLC would have a decimal interest in the LLC. Our family is in the process of setting up an LLC for its minerals, but we have a slow lawyer. In our case there are four elderly children who have nine children in the next generation. Our projected LLC sounds much like that of Joe R’s. Electronic deposit of royalty income to the LLC, electronic relaying of those proceeds to LLC beneficiaries, and a CPA to do the LLC’s taxes can simplify matters. If a family member doesn’t want to be in charge, professionals are available. Our family’s trust once had a bank manage its minerals for 6% of net plus $25 annually per well. Don’t know what professionals charge these days. An LLC would also make it much easier for landmen and operators to locate and deal with the LLC, rather than having to hunt down individual mineral owners. The LLC’s bargaining power during lease negotiations should be enhanced. You will need a lawyer to set up an LLC.

Hi ! I can share the perspective of having an LLC/family partnership. Ours was set up many years ago by older relatives who are no longer with us. You seem to know what it means to create an LLC. Yes - remember that someone will have to become the “managing member” and file the taxes, become the contact, maintain all the record keeping, etc. It IS easier as family members pass, to just maintain the LLC, rather than having to deal with the transfers getting further divided among the various heirs. But as an LLC, you do have secretary of state filings, attorney fees to set one up, filing fees and deed creation in the counties the mineral rights are in, annual franchise reports, extra IRS filing, etc. In my opinion, the paper work is at times overwhelming - but if you have large enough mineral rights, I suppose the LLC was the correct way to go. Good luck to you!