Don, I hope you get some great answers from this because it is a concern to us too.
From what I understand, the land, before drilled, is valued much more cheaply. Then after drilling, of course, the value goes up. If you and a spouse die while the land is still in production, your heirs can be assessed many times the yearly royalty and this causes their estate tax to be huge. Perhaps in the millions. (But I am not sure if that is a scare tactic or not, because who could pay that kind of estate taxes???) I hope someone corrects me if I am wrong.
We are also looking into a trust. Our land is not yet in production. It is important to take care of estate planning because of what your heirs might have to pay in estate taxes and because you don't know what the estate tax exeptions will be after 2012. Have you considered a trust? A family LLC? Where are you in PA? I am looking forward to the answers to this.
I'm a landowner who just completed the LLC process. We went this route so that the mineral rights would be separated from the real estate and to lower taxes. The trust will grant equal share of royalties to each member of the LLC so instead of us paying a higher tax rate on the entire amount, we will all pay a lower tax rate on our share. Also, when we die, our shares will be passed on to the remaining members. There is so much more that you can do with an LLC but I am not an expert in this field. I guess the first thing you have to decide is whether you want to divide your royalties with your family through this legal entity.
thanks for your reply. to many decisions to make - more input helps and I appreciate yours.
Anglea, to do the LLC,you probably worked with a lawyer who knew something about G&O. Are you already in production? Did your lawyer say you needed to work with and pay a CPA also? I am trying to decide between an LLC and a Trust. What about legal protection? Do you know which is more expensive to do... for example, I hear to set up an LLC it can be thousands of dollars? I agree with Donald that there are too many decisions!!
We worked with an attorney who specializes in estate planning. I don't know why you would necessarily need an oil and gas attorney. We are not in production, the decision to do this was primarily to simplify the estate for our children, but also to distribute future royalty income and lower taxes. A CPA will help guide you with decisions about how to structure your LLC to minimize taxes. We met with a CPA before deciding on an LLC and meeting with the attorney. The whole process, for us, will cost about $1,000, far less than the cost of a trust. The decision, however, depends on what you are trying to accomplish. There are many good articles on the internet that compare these estate planning tools. I did a lot of reading before I started the process.
We met with an oil/gas attorney - free consultation - who explained that 1) above ground and below ground should be 2 seperate deeds for future transfering to our kin. Doing this now the value of the below land -mineral rights- would be less thus keeping the 2% transfer fee lower. His estimate of the value, inc. mineral rights, would be accepted because of his expertise. 2) FLP could be set up as per our intentions for distribution. His initial fee would depend on his initial work but he would need to know our preferences before setting his fee whch we could accept or reject. ANYONE HAVE ANY THOUGHTS?
I have written about FLPs in the past in previous discussions, but as you know they are a sometime useful tool in the estate planner's arsenal to transfer mineral rights to the next generation at a discounted value, while protecting the landowner from personal liability. Please refer to my other posts.
However, I would like to point out a few things that I think may help you.
1. The fees for setting up this structure are costly. FLPs are highly scrutnized by the IRS because of their excellent tax benefits. If the FLP is set up wrong, the whole plan could be blown up. A fee of 3,000-5,000 would be relatively cheap.
2. The land including the mineral rights should be appraised before transferring the property into the FLP. Do not go on the lawyers word. Again the IRS is looking at these things closely. A qualified appraiser needs to determine the land's value, so that any future gifts of FLP interests are transferred at an appropiate value.
3. If you are in Pa., it is preferable to use an LP as opposed to an LLC to hold the mineral interests because the "capital stock" tax is imposed annually on Pa LLCs. LPs do not pay such tax.
4. I normally like to incorporate the general partner/parents of the LP to add an extra layer of liability protection.
The FLP is a delicate structure, but when done well have a number of unique advantages. I hope the above helps!
thanks - we haven't had any advice like yours and really appreciate it. are we able to meet with you? do you set up plans like this?
Yes. My firm and I have set up a number of these LPs. in Pa. We have been primarily working in the Northeast and Northcentral part of the state. But, I wont lie we are always looking for new business anywhere in the state . You can contact me at 570-826-5647 and we can chat.
thanks, we will be talking but next week we leave for a short trip to Fl. and so our conversation will have to wait until the beg. of Feb. thanks again - Don 724.865.2824