I want to leave my minerals for future generations, preferably not to be divided or sold. Which would be the best to do-- a trust fund or set up a LLC? I understand a trust fund must be divided after the executor dies, after 21 years. Can anyone suggest?
Carol, if leaving for future generations, it is likely more tax efficient to leave them in a grantor trust vs. an LLC.
It depends on how many minerals you own and the income that is generated now and in the future. Whether you put the minerals in a trust or in an LLC, you need to have someone act as manager. It is preferable to have the family manage the minerals if possible. If you use a trust, will the trustee be a family member or an institution? Institutions charge fees, sometimes based on income and sometimes based on asset value. It is not a good idea to let the institution have an override or permanent interest in the assets as the family may need to change trustees. You need to select an institution that is well-versed in mineral management and even then, it is more cookie-cutter and they do not have the capacity to really audit the revenues. If you use an LLC, then the members will need to make decisions as to management. Do they get along? If they are competent, it is preferable for them to manage the entity because that way they will learn about oil and gas mineral management and make the best decisions for the family's long-term interests. If you need to use an institutional manager, then you should weigh how to enable the family to remove or change institutions in the event that its work is unsatisfactory. And make sure that all information and documentation is delivered to the family. Institutions do not have the capacity for long-term storage of records and you do not want original records lost. Also make sure that the institution is not able to withhold information from the family. You should also look at an LP with an LLC as general partner. Depending on your state, there will may be more or less taxes due for different entities. And federal tax returns will need to be filed. There are a lot of considerations in this decision process and you should consult an experienced attorney.
Thank you so much for your information. I live in Texas and have talked to an attorney, but all they talked about was a trust. You have really given me more to think about. Do not know what a LP is. I am thinking that a trust may not be the way to go. Thank you again.
LP is a limited partnership. General partner has control and makes decisions. Limited partners do not have control but are also shielded from liability for operations. General partner must own at least 1%. Most often the GP will be an LLC also owned by some or all of the Limited Partners. In Texas, an LP is exempt from franchise tax for royalty income, but not an LLC. This is why this format is used. It allows transfers of LP interests without any more filings in deed records. You are likely consulting an estate attorney which is why you are hearing mostly about trusts. A business / corporate lawyer will understand and explain LP and LLC. Another consideration is that income passes through the LP and LLC to ge taxed to the individuals, whether or not it is actually distributed. Undistributed trust income is taxed at federal level and rates rise more quickly than on individuals. Distributed income is taxed at individual level. Do you want the income paid to the heirs or held and invested by trustee? Again, an institutional trustee will charge for this. Your decisions are linked to income and to the competency and ages of your heirs. If you use institutional trustee or a lawyer or law firm, have some way for heirs to change arrangements over time. The employees changes. The head of trust departments and policies and competencies change. Your lawyer will retire and some unknown will take over. If you use an institution, do not give it power to sell the minerals and invest in stocks or other assets. That is often standard language in a trust. And banks like to do things like that. The trust is a binding document and if it does not provide that copies of all leases, correspondence, tax returns, etc must be provided to beneficiaries, then likely they will have trouble getting information. Check again about the trust time as I have the idea that it may go for 21 years after death of last beneficiary (not 21 years after your death). So if one heir is an infant, then it would be his life plus 21 years.
Law Against Perpetuities -
Rule against perpetuities is aimed at the control of future interests in property, especially real property. It prohibits the grant of an estate where the persons entitled to inherit a future interest cannot be determined with absolute certainty within 21 years after the death of someone alive when the interest was created. In other words, in order to transfer a future interest in property, the transfer must be guaranteed to take place within 21 years after the death of a certain living person. For example, if the transfer is dependent on a future marriage of a child born to a living person, this might violate the rule since there is no certainty that the child will be born or will marry within that time.
In my view, LLC's carry much more flexibility to meet family needs than Trusts. Correctly done, LLC's can almost always mitigate tax obligations, making them an insignificant item when compared to long term uninterrupted longevity of an LLC. Just don't skimp on the set up cost. I've converted many trusts to LLC's as a better way to manage minerals long term. LLC's are also a better way to keep families together and headed in the same direction.
Gary L Hutchinson
Plus, it is often more difficult to replace trustees than it is a manager of an LLC. If you are worried about being able to pass interests down to kids or grandkids, and the trust is the better way to do that, there is the option of the trusts being the owners of the interest in the LLC or LP. The main difference I have seen is that trust agreements are usually not as sophisticated on managing an asset as most partnership or company agreements. That is because trust agreements started in the probate context, and were more worried about what powers a trustee had, whereas partnership and company agreements have always focused on running a business.
Hi Gary, in regards to the LLC idea, I think you’d have to all be in good terms with each other to do that no? Even if everyone agreed to a neutral Manager of the LLC, and that Manager put monies into the LLC, for distribution of funds do you just give everyone blank cheques and hope they only write checks to themselves for their share? What I’m saying is if all family members don’t get along, how would they get paid their royalties? If a Probate settlement involves starting an LLC to handle distributing ongoing royalties, are you saying you are avoiding Estate Taxes because it’s all in an LLC? Wouldn’t everyone do that then to avoid such? It sounds too good to be true - my side of the family is new to this entire world, and are having to catch up very fast - I sure do appreciate this forum as it’s like a crash course in a lot of aspects, I like how everyone is helping everyone.
Is it possible to set up a trust, containing an LLC that owns or leases your own wellbores where you hold 100% of your working interest, for the purposes of reducing taxes, containing liability and passing ownership to your heirs without probate?
As one who has had to pay taxes on trusts, I strongly disagree
I would not