Using Mineral Trusts

To Trust Or Not To Trust

Placing mineral interests and mineral royalty rights or interests in a “mineral trust” is an economic and efficient way for a current or future transfer of mineral rights to family members or beneficiaries in order to independently own and manage such rights. Mineral trusts are sometimes called a ‘Family Mineral Trust’ but can be used for more than conveyances to family members. When one creates a mineral trust one is creating it to convey to the trust all or a portion of one’s ownership in mineral rights. A mineral trust has a number of advantages over a traditional last will and testament. Assets held in a mineral trust are not included in an individual’s taxable estate. These trust assets are in effect owned and managed independent of any other property of the granting owners. The value of mineral interests, due to production increases or the changing market value of the minerals, may also increase dramatically. If a mineral trust is to be considered, it is important that these assets are included in a mineral trust as early as possible. This is done ideally prior to an increase in value in any royalties to avoid estate taxes. Mineral trusts may also take advantage of gift tax rules by gifting early in the ownership or value of the mineral interest and thereby shifting income and value to the trust rather than the original grantor.

A trustee is the “manager” of the trust property. The trustee is given his marching orders by the written terms of the trust instrument. It is said, ‘The trust controls the trustee.’ A designated trustee in a mineral trust handles all decision making concerning multiple mineral interests or multiple beneficiaries ass a single operating unit. This can make for more efficient decision making and collection of royalty rights.

Fractionalized mineral interests (smaller multiple interests) can often be lost in the shuffle and sometimes forgotten by later generations of beneficiaries. When a mineral trust is created, the earnings from royalties, leases and other income based payments, are held in perpetuity if an heir is lost, until that heir is located. Unlike abandoned property, with privately created mineral trusts beneficiaries are able to collect on past proceeds when they claim ownership.

Mineral trusts keep the beneficiaries invested in the asset(s). Without a mineral trust, ownership sometimes becomes unmanageably fractionalized. In a large family situation, or when the ownership transfers to third and fourth generation, an individual ownership percentage may be small. The cost of managing minerals can also increase when each individual must be consulted or when multiple small beneficiaries are receiving separate royalties based on their individual ownership. However when a trustee is managing the unit as a whole, the cost of managing is less expensive and the individuals usually have a better ability to monitor the trust asset.

Reconstructing and consolidating several divided mineral interests is an onerous process. This may be avoided by creating a mineral trust early on. It is also intended beneficiaries by proper drafting of the ownership terms in a mineral trust. Creating sound asset management to eliminate disagreement or confusion among owners and beneficiaries, a mineral trust agreement enables the trust maker to detail explicit rules. All beneficiaries are placed on notice of the trust terms which will designate how the trustee will manage the assets and income derived from royalties or income. Unlike a will, a trust does not have to be filed publicly. Using this type of trust allows individuals to maintain privacy.

David L Ganje
Ganje Law Offices

605 385 0330

701 355 6885

518 437 9000