Royalty Looking for suggestions on how to best set up my mineral interests. I have searched through the threads but everyone’s needs are unique so wanted to try to get some of the community thoughts here.
Mineral interests are all in Texas and we are Texas residents. No surface or working interests. All are in my personal name and currently set up as sole proprietorship. My wife and I plan to have these pass to our 2 children upon my death. .
What do you think is the most tax advantaged and proper way to set this up? Thanking you in advance.
Thank you for the response and wholly agree. I started there with two different local CPA’s and got two different answers hence my thought to reach out here to get a little feedback on what others may have done with a voice from experience. I’m also looking for a CPA who has more experience with mineral rights owners.
Since you are looking to pass these rights onto your heirs, IMO there is one best solution to your question. It is one that I have done for myself and it has been working as envisioned over the past 4 years.
Unless you are thinking about bringing in new investors to a LLC or LP (sole proprietorship is out of the question IMO) to purchase additional rights and run it as a business, the best option IMO is to look into setting up a Revocable Living Trust for all of your assets that will be transferred to your heirs upon your death.
I too have Mineral Rights that I will be leaving to my heirs and we have leased those rights to a major natural gas company for the last 4 years. The pad has not yet been drilled and completed but we expect it to when the initial lease term expires and we sign a 2nd 5 year deal. In the meantime we received a substantial bonus payment for the first 5 year lease which I ran through my Revocable Living Trust.
The myriad of reasons that I have for using this approach goes well beyond the scope of this thread but suffice it to say the primary reasons I have made this selection are:
The ability to have all your assets avoid probate
The Trust can be revoked at any time if you have a need to do so.
Since I am retired, I am in a lower tax bracket than my children so any taxes I have to pay on the income of the mineral rights are taxed at a lower rate for both Federal and State tax purposes.
I simply use a Schedule E to report all income and expenses of the income I receive from the mineral rights themselves. That will normally be bonus payments as well as royalty payments when the well is producing.
When you die the Trust automatically turns into a non-revocable trust and your heirs will enjoy a step up in basis for the assets in the Trust that pass onto them. At that time, your heirs would file a Form 1041 until such time as the assets are distributed per the Trust agreement
I could go on but a you can see there are substantial benefits to putting these assets into a Revocable Trust. It is important that you seek advice from a professional in terms of the manner in which your assets are titled before you are gone so those assets pass onto your heirs easily without having to resort to the Probate Court, which can take a big chunk out of your estate in respect to legal and probate fees.
I am a retired CPA and have had advanced training in Masters of taxation courses at a well respected Law University, so I set up a large part of this by myself. But for most people, you will want to seek out a law or revocable trust firm (at least in an oversight mode) that has done a lot of these in the past and you can rely upon their experience.
After seeing the benefits of this approach myself first hand, I think it is an approach you must look into even if you decide against it given your particular circumstances.
It appears you are seeing estate planning advice in Texas. Do yourself a big favor and hire an attorney who is board certified in estate planning and probate law by the Texas Board of Legal Specialization.