In this episode, we talk about how to navigate inheritance issues with mineral rights and royalties. Whether you’re an heir that finds yourself in possession of these valuable interests, or someone who wants to ensure a smooth transition for future generations, inheriting mineral rights and royalties can be a complex and challenging process.
We provide valuable insights into these challenges and the considerations involved in inheriting mineral rights and royalties. In addition to discussing the importance of understanding what you own and how to manage it we cover strategies for transferring ownership and avoiding inheritance disputes.
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Understanding Inherited Mineral Rights and Royalties
Private ownership of mineral rights in the United States is unique, as we are one of just a few countries that allow this. This is one of the factors that has enabled the shale revolution and why now the U.S. is the top oil producer in the world. In MRP 152: Mineral Rights News May 2022 where we featured a video from Steve Forbes talking about this. The example he gives is South Texas which is where the prolific Eagle Ford oil and gas play is located on the U.S. side of the border. On the other side of the border in Mexico, there is not the same level of oil and gas activity even though the geology is similar in both areas. This is because Mexico and most other countries take a top-down approach to developing their natural resources. In that case, it is the government that owns the mineral rights, not the citizens within those countries.
Another benefit with minerals and royalties is that ownership is perpetual in most states (except those that have dormant mineral statutes). We talk more about this in MRP 66: Dormant Mineral Rights. Do Mineral Rights Expire?. This is because mineral rights are a form of real property that can be passed down through a deed. The mineral owner can lease these rights and get paid a lease bonus, in some cases multiple times over the life of the asset. Once a successful oil & gas well is drilled, you then receive royalty payments.
Minerals and royalties can also provide a tie to the family’s history in an area. Your great-grandfather may have homesteaded and farmed or ranched and was granted surface and mineral rights. These interests provide a link back to where your ancestors may have lived at one point.
Common Challenges in Inheriting Mineral Rights and Royalties
Inheriting mineral rights and royalties can be a daunting and complex process, given the unique nature of these assets. One of the most common challenges faced by heirs is a lack of awareness of their family’s ownership of such assets until they inherit them. This can lead to feelings of overwhelm and confusion, particularly if you have no idea what to do with them or where to start. The problem is compounded by the fact that it is a private property that they never knew their ancestors held and now have to manage.
Another issue that people face when inheriting mineral rights is the uniqueness of the asset. Not only do they not know what to do with it, but they may also not know where to go for help. They may pick up the phone and call the estate attorney, but that may not be the right person for oil and gas matters. You may need to hire an oil and gas attorney or someone who has familiarity with these types of assets.
Timing can also be an unsettling issue when dealing with mineral rights. Unsolicited offers to purchase the interest can come in at a time when the heirs may be looking to sell property or when the owner doesn’t know enough about mineral rights. This situation can lead to making decisions that could leave money on the table or create disputes.
To minimize these challenges, it is essential to provide a complete inventory of assets and educate your heirs on your family’s mineral holdings. There are also additional resources available such as this podcast and online course as well as organizations like the National Association of Royalty Owners which provides additional education opportunities. By equipping yourself and your heirs with knowledge and skills, you can overcome these potential pitfalls. Structuring the management of the assets through a trustee can also be a solution for multiple heirs with varying levels of interest or ability to manage the assets.
Avoiding Inheritance Disputes
Inheriting mineral rights and royalties can lead to disputes among heirs, making it imperative to have strategies to minimize conflicts. The hosts discuss how to be proactive in planning for the transfer of assets and communicating openly with all parties involved. They also cover the importance of having a well-drafted estate plan and ensuring that all heirs are aware of the plan and their potential share.
Inheritance issues can cause disputes among family members, especially when property is split up and people feel they should be getting more. Even with good intent, legal complexity can arise when minerals pass through estates, and without a clear will, laws of interstate succession must be followed. One way to avoid disputes is to have a will that clearly spells out who gets what. It’s also important to have conversations with family members about how to keep assets in the family and split proceeds equitably. When there are disputes, it can create a cloud for the operator and cause further complications.
To transfer ownership of mineral rights and royalties there are a few strategies that can be followed, particularly when multiple heirs are involved. One strategy may be to creating a trust or family LLC to hold the assets. An attorney who specializes in mineral rights and royalties can help you come up with the best plan to handle these situations. It’s essential to be proactive in planning for the transfer of assets and to communicate openly with all parties involved (and potentially any other relatives who are planning on some of their interests to your heirs as well).
Be sure to listen to this episode as I provide an example of a client whose father inadvertently ended up with a larger share than his brother and what they did to resolve this before it created a conflict.
Case Studies and Real-Life Examples
In this episode, Justin shares his experiences with inheriting mineral rights and royalties including his personal experiences and lessons learned, including the need to understand ownership percentages, resolve title disputes, and plan for the transfer of assets. The process of inheriting mineral rights is a journey that requires research and understanding what it is that you own.
Learning What You Own
While there are highlights to the experience of inheriting minerals and royalties, there can also be challenges. This is especially true when you are surprised to learn that you inherited this asset:
If there would have been a clear communication upfront; if this would have been something that was communicated to my mom, if there were documents that my mom had access to, it really could have helped simplify this process. And I think there’s a lot of value in having other professionals by your side that can really help you to understand this.
Justin Williams
Reconnecting With Family
In previous episodes where Justin Williams and Barb Rankin share their experiences in inheriting minerals and royalties, they both highlighted the emotional and personal connections that can be made through this process and how this can present a unique opportunity to reconnect with family and learn about family history.
As Justin mentions in MRP 116: Justin’s Journey Inheriting Mineral Rights and Royalties, the process can present “a unique opportunity to go back through a timeline of your family history.”
This sentiment is echoed by listener Barb Rankin when we spoke with her about her experiences:
“It’s been such a nice bonding for my cousins and for me I mean we also saw each other a lot growing up every summer out on the farm. But then as happens in life. You live in different states. You’re busy with work with life and you. Can become separated and so this has been a wonderful way to bring us all back together and I have really enjoyed every moment of that.”
Barb Rankin, MRP 120: Listener Stories – Mineral Owner Barb Rankin
Taking it One Step at a Time
It is important to be patient and to take things one step at a time. Inheriting mineral rights and royalties can be a slow learning process, but each step builds upon the previous one, leading to a better understanding over time. Thankfully, there are a lot of resources that can help shorten the learning curve. Download my free Inheritance Resource Guide for the list of my favorite resources to help you on your journey!
Other resources like my upcoming Mineral Management Basics online course can help you navigate the complex process of figuring out what you own, where it is located, and the oil and gas potential with your interests.
Maximizing Value
Whether your are the one inheriting minerals and royalties or the one passing them on to the next generation, steps can be taken to maximize the value of your assets.
Take an Active Role
From an inheritance point of view, it’s important to take an active role in the beginning to understand what needs to be done, such as transferring ownership and doing a title search. Once everything is situated, it becomes more passive, but it’s still important to keep track of royalty payments and advocate for your mineral interests at the state and national level. It’s crucial to learn about what you own, have a complete list, ensure the title is correct, and have estate documents in place. Having a good attorney and landman in the state where your interests are located can also be helpful.
Maximizing Value for the Next Generation
When passing down mineral interests to heirs, it is important to leave good documentation for your heirs so they will have a good understanding of what they own and how to manage it. Important documents to make available as part of your estate documents include deeds, oil and gas leases, division orders, and any correspondence related to your minerals and royalties.
Maintaining the integrity of the interests by limiting how much they are split up and further sub-divided over time can help maximize their value. What may have started as 40 net acres can easily become less than one net acre after several generations of passing the interests to children and grandchildren.
If interests become too small, they may not be worth managing or selling, and potential buyers may discount their value due to uncertainty about ownership. Holding interests in an LLC or trust can help maintain their value, but may require following the wishes of the family.
Summary
In summary, inheriting or passing on your mineral rights and royalties requires careful planning and management. With the right strategies and professionals in place, heirs can maximize the value of their assets and make the most of this unique opportunity. And while it can be a lot of work at the beginning, by proactive management, clear communication and documentation, and finding the right professionals to assist with the process can make it a breeze for your and your heirs down the road. By taking things one step at a time and being patient, you can successfully manage your mineral assets and ensure that they bring value to your family for generations to come.
Resources Mentioned in this Episode
Education
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