We are at the point in our lives or maybe actually a couple years past the ideal point to start transferring our assets over to the next generation and at the same time limit our tax liability. Basically we would prefer to pass our assets on to our kids and legally limit how much of our money Washington gets to waste.
We are a married couple in our mid 70’s with approximately 1200 deeded acres in South Texas in what many say is considered the sweet spot of the Eagle Ford Shale play. We are leased and held by production by one of the majors and currently receiving royalties on 11 wells. Some on these wells are on our family ranch and we hold almost all of the mineral interest minus the O&G that we leased with. The remaining wells that we have are partial royalties scattered across numerous properties all in the same county.
The main property is a working family ranch that has been passed down over several generations and holds no debt. The combination of working interests, lease money and royalties over the last couple years have created a cash flow that we are still adjusting to in a very safe conservative manner. While we have received a significant windfall the future decision of well spacing, prices and improvements in UER by the O&G Company will actually dictate the total assets available to pass on to future generations.
There are lots of experts for hire that have lots of advice and to be honest some of these experts appear to contradict each other and this leaves my conservative nature unsettled. What I would like to do is ask those of you on this forum is your opinion on this subject.
Thanks in advance.
Lonestar,
You probably want to put the minerals in a family partnership, as it allows you to transfer partnership assets at a 30-50% discount compared to direct gifts. Producing wells are generally valued at 3x annual royalties for estate tax purposes. Depending on how the ranch is managed, you could put the surface in a separate entity or the same entity. You get discounts on value for surface also if you have it in a family partnership with transfer restrictions.
There are many issues here, too complex for a single post. As a threshold issue, you have to decide if you want to put these assets in a partnership where you are restricted from selling to outsiders. There are also an additional layer of annual tax returns and CPA fees. On the other hand, it simplifies the number of signatures needed to sign leases. It also sets up a written mechanism, I.e. the partnership agreement, if there are any disputes. In my view, it is a practical necessity as ownership gets more split up, especially for siblings or cousins who do not get along. The discount you get allows you to transfer substantially more,in assets to stay under the estate tax caps.
Hope this is helpful as a starter.
Wade, Thank you for the quick response and your opinion. Just as an fyi, this is basically the same advice that I received from a paid professional a couple weeks prior to your response and one that I will probably go with. My slow conservative approach is probably driving my kids crazy. But it is hard to teach an old conservative that is used to slow and methodical processes to be quick and spontaneous when making decisions that will impact current and future generations of heirs.
Lonestar,
Glad to help. Usually the two drivers of these decisions are health and possible estate tax cap changes. Having been in the kids shoes recently, you always worry the time frame is shorter than the parents think.
I agree a conservative approach is best, as you do not want to leave the parents without sufficient income if they live a long time. One word of caution, however. I have seen alot of annuities and life insurance get sold as part of the solution. In my view, life insurance is to protect you from dying too young. Annuities are to protect you from living too long. If it is being sold for any other reason, i.e. as part of funding an estate plan, I think there are alot of lower cost options out there. Total commisions on life insurance are usually 80-120% of the first year premium. Annuities pay 8-20% of first year premium. It varies widely on the product type. There are also trailing commisions.