We have 644 acres leased on in north central pa. There is drilling activity in the area with pipeline infrastructure. My question is concerning setting up a corp., llc, or limited family partnership. The lease is owned by a sister & brother with 2 and 3 adult children respectively. Heard on the news, fed inheritance laws may be changed in a few years. A gas lease attn. will be contacted, but any thoughts?. A concern would be that if the 2 owners pass away and the lease is left to the 5 children ,could 1 of the 5 stop a possible lease renewal. Thoughts would be great, thanks rob
You have asked a very complex question. I am a land owner and a CPA. First, I would suggest seeing both a CPA an an attorney who only does estate, trusts and wills.
You asked about which entity form would be best suited for your situation. This will depend on what you and the family's objectives are. I would not use the corporation entity because to get money out of a corporation it would come out as a salary. This would create a payroll tax issue and workmans compensation insurance. Personally, I have an LLC for one half of the property and my father ( my partner ) has created a trust for my sister and myself. The FLP is a good idea but it is coming under extreme pressure from the administration. It appears the FLP may lose most of it's benefits of discounting minority interests ( I do think that in some instances it still good business ( remember do things for financial purposes NOT tax purposes ).
The issue of one of the children dieing it a major issue. In our state there is a PA. inheritance tax and the federal estate tax. You would need to get an appraisal of your land and it's mineral rights NOW before any drilling takes place. For PA purposes if drilling has not started the value of the mineral rights is very small if any value at all ( you must check with your estate and wills attorney ).
The lease being left to the children due to the death of the brother and sister could be another issue. If you left the land and mineral rights in a trust or only the mineral rights the trustee would determine what is done---the trustee becomes the manager of the rights and controls how things would be done. If a FLP was the entity the general partner is the one who controls what is done. In a corporation the majority shareholder of the voting stock controls.
To answer your last quetion about federal estate taxes---it appers the law that will be passed ( it has not passed yet ) excludes 3.5 million dollars for each the husband and another 3.5 for the wife. The top rate seems to be set at 45%. The House and Senate have not agreed yet, but it is getting close.
Sorry for the length but you have asked a complex question. See your CPA and attorney, hopefully they have experience in your areas of interest.
I prefer a FLP or LLC approach. Another issue not yet mentioned is that LLC's (and corporations) are subject to the Pa Capital Stock Tax, a FLP is not. For an entity generating hundreds of thousands of dollars with essentially no expenses, this could be significant even though the tax rate is not that large and was expected to phase out... it has not because the state is broke and one might expect this to be looked to as a continuing source of revenue-- especially if seen to be a back door way to collect on gas royalties. With a FLP you typically have an LLC or a sub-s corp as the 1% General Partner. This creates another tax return to pay to file and a bit more signatory complexity, but no big deal. Using those 2 entities (FLP with 1% LLC GP) may confuse folks a bit more than using just an LLC (ie if I die and my wife has to figure this out). In either event I believe you lose gifting discount benefit if you retain control (and who wouoldn't want to?).
Gregory - I thought about this years ago but I think that is really complicated in that you have to separate the rights and or pieces of the land first. I mean, I have not heard of anyone saying to a company - I will lease you just 35% of this property - the companies would not go for that because it is very unclear what exactly they are leasing. Plus I think the only person who can lease the rights out is the owner of the rights. I think if a lease is not made/signed yet it is easier to spell it out in the lease - sort of like how lawyers have taken cuts of a royalty that way. I am trying to find out more about this.
I believe mineral rights are or can be separate from land anytime. But this was just quick thought about the leases. In all families there is always one bad apple or will be but in the long run the ones who stick together will survive this apple no matter what you do. Make sure you leave the courts out by making each person sign for their rights to be in this part of the family history
Rob - and anyone else, Did you find out more about this? Our family is still trying to figure this out. I guess my biggest concern is if the timing of something done is important. Is it really important to do something before production begins thus rights have increased value? Thanks for the original question.
I would very much appreciate the contact information of the lawyer you have worked with to set up your FLP. I have been contacted several attorneys so far, but have not had much success in finding one that seems to be knowledgeable about gas leasing/estate planning issues. Let me know how to contact you (maybe by e-mail) so I can send you my contact information. Thanks!
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