Transfer of mineral and royalty ownership, tax question

My brother and I live in Arizona and we each own equal amounts of mineral and royalty ownership in Texas, Oklahoma and New Mexico. My brother is very ill and it is expected that he will not make it much longer than 6-12 months. My brother wants to transfer his mineral and royalty ownership to me so that I can manage it. The plan is that I would send him his portion of the royalty payments monthly. We want to avoid probate in the event of his death.

  1. How do we transfer my brother’s mineral and royalty interests? What do we need to do?

  2. In terms of incomes taxes, my brother’s portion of the royalties which I would receive and send to him would be reported as my income which will affect my tax bill. For tax purposes, how can I deduct my brother’s portion of the royalties from my income while he is still alive?

Thank you for any help you can provide.

Also, if you inherit the property you would be entitled to a “Stepped-Up Basis” which would be helpful to potentially reduce capital gains in the event that you sold the properties in the future.

Sorry for your brother’s condition.

This could be accomplished a couple of different ways. A simple land trust could be created, then the properties would be deeded into the trust. Upon your brother’s death the trust would transfer property to you. Oklahoma has no estate taxes. Another option may be to use Transfer on Death Deeds for the properties. Upon his death you as beneficiary would file affidavits to claim the properties.

That would be a problem. Perhaps a better solution is to name you as his power of attorney so that you can help him manage his income while alive. That way he is still liable for his own taxes for that income.

David: I am not a lawyer, but am a landman of 35+ years. I will first assume that your brother wants the income from the properties while he is alive and for you to have the minerals and associated royalties upon his passing. If this assumption is correct, you can have him transfer his interest to you on a mineral deed that is a “transfer upon death” deed, he as the Grantor and you as the Grantee. You should also be appointed as his Attorney in Fact to handle his affairs while he is still alive. In either of the instances, the income goes to your brother along with the tax liability while he is alive. Upon his death, the interests become yours with only the filing of his death certificate to evidence his passing. For you to receive his royalties and then pay them to him, to properly reflect the royalties on your taxes, you would need to send him an IRS form 1099 reflecting that you paid royalties to him and allowing your deduction of the same. This would be more confusing, in my opinion. This is only for the Oklahoma properties as most states have different laws/rules and is only my opinion, not legal advice. Todd M Baker

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You really need to discuss this with your attorney and with your CPA to understand the legal and tax implications of the various alternatives. If the income is yours, then you will be making gifts back to your brother. You may be able to accomplish this be means of a living trust which entitles your brother to all income and then the properties pass automatically to you upon his death. The question is who is the trustee and who can sign binding leases during your brother’s life. Or you may want to place all the properties into a limited partnership or LLC with each of you owning 50%. You could be the managing member of the LLC or the manager of the general partner of the limited partnership and make all decisions. Your brother could will his interests to you. Or maybe he could put his shares into a living trust which automatically transfers to you upon his death. This could have the advantage of only needing deeds to be filed once (out of you both individually and into the LLC or LP). Not sure whether you would receive a step-up in basis at your brother’s death, but the CPA can advise you. These require legal documentation of the agreements which must specify that someone has the power to lease the minerals.

Thank you everyone for your responses and help. I will assess the information you gave me and move forward with it.

Since mineral rights are considered real property his estate will have to be probated in each state. This will be costly, if this were in Wyoming it would cost a minimum of $2500 up to 4% of the appraiesed value of property in each state. Court costs, advertising, appraisals and legal fees. I suspect it would be the same or more in each state. It can usually be done by deed, trust, LLC or corporation. You need to contact a lawyer familiar with mineral estates in each state to transfer his interest in the minerals to his heirs as soon as possible. It will cost much less to avoid probate. If you don’t know any attorneys in each state, go to each state bar directory and look for attorneys in the county where your minerals are located. Or call the county clerk in the county where your minerals are and ask them for a list of attorneys that handle mineral rights.