Family Partnerships - Pitfalls & Possibiliities

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

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Permalink Reply by bill h on January 19, 2010 at 5:47am
what if the properties mineral/gas rights were transferred from mother to siblings in late 2008?
We did not get an appraisal. Should we get one now? What if the transfer had been done even further in the past?
Permalink Reply by bill h on January 23, 2010 at 4:31am
made a mistake in previous post - property was passed from mother to CHILDREN
Permalink Reply by BuckinghamGasMan on January 26, 2010 at 5:06am
Andrew Carnegie once said that the worst thing that you can leave your children is money. I agree with that. If my land has the appearance of becoming a bonanza, I will set up a foundation to use my money wisely after my death for charitable purposes that I think are important. I would hate to think that my children and grandchildren might become slugs lounging around for the next royalty check to come in. It's the worst kind of welfare.

Set up 529 funds that will guarantee all your children/grandchildren/great grandchildren a good education. What greater good is that? Make a difference with whatever is left over.
Permalink Reply by Scott Stone on April 15, 2010 at 8:43am
Hi Rob and others reading this thread,
There are many issues not discussed here. We walk our clients through lists of dozens of questions and have them take those questions to their attorneys and accountants to help them determine if a family entity is a good fit for your situation. Issues like fair market value, gift of current economic benefit, capital stock tax, Pa transfer tax, control, ownership, profit, guaranteed payments, manager managed vs. member managed, limitations of marketability, succession, administration, integration with wills and trusts, fiduciary liability, third party liability, voting rights, and many more issues come in to play... These things all need to be designed in the operating agreement of your family entity. Between taxes, fees, legal expenses and appraisals, we are seeing these entity setups cost $10,000 to $50,000 depending on number of parcels, owners, and acres. There are two basic ways to set these up: the right way and the wrong way. If you are going to set it up the wrong way, you may as well not bother. Many will set them up the wrong way due to lack of expertise. You can give us a call if you have specific questions. 570-278-6926, www.stonehouseinvestmentmanagement.com , www.nepagas.com
Good Luck

-Scott Stone
Permalink Reply by Jahn Patrick on April 15, 2010 at 8:51am
There are so many unknown variables that it is hard to estimate anything. If one is worried about inheritance tax, i believe there are ways to set up trusts that may protect this. I don't know what calculation the other party was using to get these High numbers of return? Return will have something to do with Royalty, Decline Curve, Total MCF recoverable which is a real un-known. What if it is appraised and one drills a dry hole? Good luck.
Permalink Reply by Sam Douglass on April 15, 2010 at 10:39am
You are talking big bucks with that much acreage. Too bad you did not check into it before signing the lease. Find yourself a lawyer who specializes in estate planning. If you do not have one contact your local bar association, ask for the name of the chairman of the estates section of the bar association, call him or her and ask for suggestions of names. sam
Permalink Reply by Charlie on July 22, 2010 at 9:06am
I just read this thread with great interest. As an estate planner, it is exciting to hear that posters are discussing protecting their wealth with sophisticated estate planning techniques like the FLP or FLLC. However, I must caution all who are thinking of creating a FLP or FLLC for saving estate taxes, the process is extremely tricky.

As readers may know, the most compelling feature of the FLP or FLLC for estate and tax planning purposes is the ability of an interest holder to transfer interests in the FLP or FLLC to other family members at a reduced value utilizing valuation discounts. This means that family members may be able to discount the value of the FLP or FLLC interests given away, thereby shifting the income and future appreciation of the underlying assets within the FLP or FLLC out of their estate at a reduced value to other members of the family.

Given FLPs and FLLCs potential for considerable tax savings, the IRS has shown a zealous willingness to attack poorly organized FLPs and FLLCs. The most potent attack which the IRS has had success is under IRC §2036. The IRS has argued that pursuant to IRC §2036(a)(1), they can disregard previous FLP or FLLC transfers because the transferor of the property "retained possession or enjoyment of, or the right to the income from, the property." As a result, at one of the transferor’s death their estate will include any property he or she transferred during life, except when the transfer was a “bona fide sale for adequate and full consideration.” The effects of successful IRC §2036 challenge could be devastating, as all of the previously made gifts or transfers would be returned to the transferor’s estate and included in their estate value for estate tax purposes. Those discounts and tax savings would be GONE.

Generally to withstand an IRS attack under IRC 2036 or other similar provisions, the family must establish legitimate nontax reasons for forming an FLP or FLLC, such as managing a business, pooling family assets or protecting assets from creditors. The FLP or FLLC should also make distributions each year to the members/partners in proportion to their interests. Family members should not include personal assets like personal residences or bank accounts and the procedures set forth in the entities’ governing documents should be strictly adhered to. However, even following all of the formalities is not enough. These entities have great estate tax savings potential and are a walking tax audit. Be aware that even the most air tight FLP or FLLC could be taken to task by the IRS. I believe that FLP or FLLCs are still a great estate planning tool, but they must be meticiously set up and organized.
Permalink Reply by Monty on November 18, 2010 at 9:40am
What is the percentage of tax you will have to pay it your land is setup in a trust fund in PA?

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