So You Are Now a Shaleionaire!

So you signed a great lease, they drilled several wells, and you are getting huge royalties.  Congratulations!  But there is a lot of potential negative that comes with all that positive. Sudden wealth can destroy families, divide friends, even end your life any number of ways.

We all aspire to maximize our financial gain from these shale plays but are we really prepared for what comes after? Perhaps its is something that needs to be discussed and prepared for.

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Permalink Reply by Marinell on June 9, 2013 at 4:49am

Don't worry.  We'll just divide up the money equally among the kids and let them worry.

We'll do this immediately.  Then, we won't have to pay to have our will changed.

Permalink Reply by Jim Litwinowicz on June 9, 2013 at 6:43am

If it were so easy.  First you'll have to pay income taxes.  Then when you divide it up among the children, there is the issue of gifting and what is taxable. And do you give an equal amount if one kid is making $250,000/yr and another is struggling to pay the bills? Either way, will they handle it maturely?

And not only do you have to divide the money but also the mineral rights ownership needs to be assigned in the event of your passing. Do it now or as part of the estate? Set up a trust or LLC?  Lots of options and issues there.

And for a lot of people the family comes with issues. A child, or two, may be have a drug and/or alcohol problem or maybe a gambling issue.  Wouldn't want to hand anyone with those issues a hundred grand or two.And if the parent is drug addicted but has children, how do you help the children without giving it to the parent that would waste it? Also, what about the offspring on a second or third marriage.  Wouldn't you want to be sure that the wealth you pass to them stays with the grandchildren should a divorce or premature death of your offspring come about?

Lots of things come into play.

Permalink Reply by wyalusing jim on June 9, 2013 at 6:48am

not a bad idea, if your family structure is such that all will be happy with the results.

there are however some things to consider when "splitting up the pie".

gift tax. there's an exemption, so long as the value of your minerals doesn't exceed it, you're ok, but it's a one time exemption. if you want to gift more to avoid inheritance later, you might be maxed out.

minor children? perhaps a trust would be in order.

if you deed off portions of minerals and or acres to each child, what if they later decide to sell? if one sells and the rest keep theirs, the sold land/minerals can encumber the negotiability/value of the others later on.

family limited partnership/llc. this can be a good way to avoid estate issues and keep the property owned as a whole while giving each member an equal say in the disposition of assets and leasing decisions.

if you retain all land/minerals in your name and gift portions of the royalties periodically, those gifts count against your lifetime gifting exemption, and then there will still be the estate issues at the time of your passing.

for some this will be simple, for others not so much.

wj

2z248p19vqnh9Permalink Reply by 2z248p19vqnh9 on June 10, 2013 at 5:52pm

One of the best things you can do to start with (because YOU 'get the money initially anyway AND WILL be paying taxes on it - as Jim Litwinowitz pointed out is this.... IF you wish to 'give it away...'gift' to each person maximum amount per year...IF possible (and they are 'young' - somehow PUT INTO TRUST...

Generation skipping is another way to create a trust...that way grandma/pa gives in WILL to grandchildren $$$ in a TRUST that IS accessible for educational purposes. Hopefully the parents ARE responsible enough to 'handle the trust' FOR the children...as trustees. U?GH!! tough, tough, tough! There are SO MANY variants - again as Jim simply summed up...and THAT is just the TIP of the 'gasberg' blowup of wonder-money...

Heck, most people never had money to begin with, let alone having all of this 'dumped in their lap' to deal with - AND the economy the way it is now - WORLD 'ROUND! - and even IF there were 'safe havens' - CAN you really 'trust them'. I recall an article a bit ago concerning a break-in of a major bank's holding of security deposit boxes...VERY wealthy ex=pats...and guess what? They DIDN'T INSURE their assets (that they THOUGHT were safe...)...and they LOST IT ALL! The BANKS don't insure the contents of those things! WHAT?! - shocked!!!

ONE good thought I had was investing % in 'solid' stocks' that give a good dividend...and then because these are a 'anchor position' - sell short term calls or puts...you make the call - and THAT is how the 'turn' can be made BUT...when you do that KNOW that you 'lock in that stock (again - why you invest in 'solids'...) for that TIME PERIOD of the contract.

Sticky wickets...and then DOING GOOD BY YOUR FAMILY that you love & pray will 'do right' can be REAL BUGGER!!

Keep a certain amount liquid for 'rainy day money' - you never know when the 'well runs dry'...and there's ALWAYS that 'rainy day'...or something completely unexpected that your life takes a left turn that never gets straight again from...life is NOT easy.

ALL we can do as individuals is to 'do our best'. Don't change...ENJOY the blessings that are bestowed (as well as the 'curses' that accompany them as WELL...). HOW were you before you had this money?...good, then stay 'tight & right' and you'll be 'yar'.

Take a deep breath, take it easy - don't rush. WHAT'S the RUSH?...

wyalusing jim - good options suggested. As far as minerals are concerned or 'gas well proceeds' - possibly set up trust under YOUR personal names - so that after passing on the TRUST lives on. IF the property gets sold - the minerals remain in the family. Land goes bye-bye, G/O/minerals STAY in the family...grant 'gas' for house(?)...ROYALTIES are cashed into estate account & then distributed AFTER property taxes/income taxes...depends on HOW this would get set up...

***Suggested to that Doug - young lawyer that he should think about publishing a 'G/O LAW' book - for things from HOW leases get worded to HOW royalties + get distributed/dealt with...like NOLO Law - THAT WOULD be a great service to many individuals out there. I'd do this, but I don't have the credentials (and it probably wouldn't make enough sense to people...)...so I refrain, but suggest.

***w-jim...gift tax? - what do you mean there is a 'one time' gift...I thought you could give 'x$/year' to each individual TAX FREE (to THEM, not you - YOU are going to pay tax on it anyway...) - are you saying that 'it's only once? - I've gotta' look into that...

Gift tax in the United States - Wikipedia, the free encyclopedia...

Exemption From Gift Taxes, Gift Tax Exemption, Lifetime Gift Tax Ex...

both good, basic info. to begin to sift through...then there's the problem of the lawyers, fiduciary responsibilities - WHO will be responsible for this?...IF you estate is only worth 'x'...a big bank (Mellon) may NOT 'take on' your trust because you DON'T have enough $$$ for them to handle it. Oh, man...nobody knows the troubles I've seen...

Lawyer's, CPA's...WHAT are you trying to do?...people've GOT to bite the bullet & figure this out for themselves. No one looks after YOU & YOURS like YOU do...and THAT is indeed the TOUGH PART!

*MINOR's - trust, definitely...grant $ dispersible in 1/3's @ 28/30...then in x3 five year intervals (28-33-3...) after that,IF the money holds out that long.... That way - they'll hopefully have it even through bad marriages +...DO grant right to have educational needs met by $xxx limit/year...that way you ARE helping, but they have to come up with the rest - AND they can't end up blowing it ALL on just partying/piddling it away. Maybe then they'll have something left for a downpayment on a house someday, too. SO MUCH - and HERE is the thing...you CAN'T 'control' it! I don't care how much you care...that is why you've got to do it & let go -OR- go on a trip around the world & at least THEN you've done something for yourself...THEN get down to the nitty-gritty...tough call.

GOOD thought. ENDEAVOR. As one light lights another, nor grows less - so nobleness enkindles nobleness.

Avoiding Family Disputes of an Inheritance - Nolo.com

Wills & Trusts - Nolo

Could be a good place to start...even IF you do go the lawyer/CPA/fiduciary broker route...you can get a good general idea of WHAT areas you may wish to address & HOW - so that WHEN you do speak to 'them'...you won't be 'wet behind the ears' & know nothing. Knowledge is power. No one takes your power from you - you give it away. Do your best - won't be perfect, but you'll do what's right. What has changed, what has stayed the same...? Time does tell...if only.

2z248p19vqnh9Permalink Reply by 2z248p19vqnh9 on June 10, 2013 at 6:26pm

Bad Move, Marinell...at LEASE (least...) get some *ideas for yourself. Take your time, but DO plan...it WILL be WELL worth your time to do so...THOUGHTS & PERSONAL RESEARCH don't cost you a lick!

Wills & Trusts - Nolo

Business Formation - Nolo (LLC's +)

Avoiding Probate in Ohio | Nolo.com...How to Avoid Probate - Nolo.com

NOLO - a good place to start...maybe not a direction you chose to take...as one light lights another, nor grows less - so nobleness enkindles nobleness.

Permalink Reply by Samuel J. Orr on June 11, 2013 at 10:05am

I find myself in the awkward position of agreeing with the last two posts by GG.

Permalink Reply by Trapper on June 9, 2013 at 2:25pm

I guess anyone in this situation should look for a good lawyer versed in estate planning. I look forward to the day when I am in such a "pickle" lol!

Permalink Reply by searcherone on June 9, 2013 at 2:32pm

Glenn, first I would personally find a certified financial planner, then a lawyer does the legal work. IMHO and like u if I get to this "pickle".

 

Permalink Reply by Samuel J. Orr on June 9, 2013 at 2:43pm

Jim raises a number of issues with this thread and it is wise to think ahead. For many or perhaps most of us the topic seems to be "putting the cart before the horse"......for many of us perhaps a long way before the horse. I suspect most people may not have the funds necessary to consult with lawyers who are really expert in the issues raised by the thread. Of course if and when a person becomes  a Shale Baron (the term I have coined and like better) that person assuredly should spend some of his money on hiring a competent attorney and possibly an accountant who can hopefully devise various strategies to minimize taxes and to also minimize friction and conflict among the family members to whom the Shale Baron will presumably wish to share some of his fortune , either by making gifts in his lifetime or by designating beneficiaries under his will. But alas for many of us the cart may be a far piece before the horse, perhaps so far that we may not be faced with any of the issues raised by this thread.

Permalink Reply by Keith A Williams on June 9, 2013 at 3:28pm

Samuel,

The problem with your way of thinking is that some of the issues must be addressed very early in the process. For instance if you transfer the assets early enough, their value is lower and they do not use up the lifetime gifting allowance.

Jim,

If you place the land and therefore the lease into an LLC and make your kids members of the LLC, then you are not "gifting". The taxes are paid by the member when the money is distributed.

For example, If I create an LLC and make myself a 50% member and each of my 3 children 16 2/3% members then when the money is split, I get 50% and pay taxes on what I get. The other 50% is split between my children. They pay taxes on what they get. You just accomplished 2 things:

Lowered the overall tax bill.

Avoided the gifting tax limit.

All this needs to be set up early, it may be best if this is done before the lease is even signed. Very much before the well is spudded. So talk to an accountant or lawyer. Create a plan! NOW!!!

IMHO

Keith

Permalink Reply by Jim Litwinowicz on June 10, 2013 at 3:32am

Keith; you are right that people with substantial land should plan ahead. The IRS has various timelines and deadlines for accepting various activities as legitimate. If you wait too long, the IRS may rule that what ever efforts you took are just for tax avoidance void and hit you with full taxes.  Anyone with a hundred acres or more should probably start taking action before signing a lease.  At the very least, they should talk to some tax experts, ie CPAs, financial planners, and/or tax attorney, to get an idea of what options they have and when to best execute them.

Permalink Reply by craig on June 10, 2013 at 7:54am

A family member created an LLC after they signed a lease, but before much drilling had taken place in the area. His biggest problem was getting a viable valuation basis of what was in the ground when the LLC was formed. The longer you wait the higher the valuation will be which changes things dramatically. You need a good lawyer to do this properly.

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