In this episode, we dive deep into how to handle inherited mineral rights. Not only that, Justin talks about his experience with Mineral Rights Inheritance from his great great uncle Jake. I’m really excited about this conversation because we cover the ins and outs of one of the most common situations that most individual mineral owners face. So unless you are actually going out and investing in minerals, what we are going to talk about today may apply to you! Since this is a long one and chock full of tips, you can download a FREE copy of the full transcript of this Episode (MRP 39: Mineral Rights Inheritance) to use as a handy reference.
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As many of you know, Justin Williams has been helping me with the podcast for over a year now. I interview Justin in Episode 22 where he talks all about his background and how he came to inherit mineral rights and royalties in West Texas. We are going to jump in today and talk about the various steps in the process that you need to think about if you find out that you have inherited mineral rights. Justin also talks about his family’s experience in going through this process so you can learn from that as well.
Because we cover so much in this episode about what to do when you inherit mineral rights, you may find it helpful to download a FREE copy of the full transcript of this Episode (MRP 39: Mineral Rights Inheritance).
So Justin, before we get into the details can you please recap for those who are new to the show how you came to find out that you were the proud new owner of minerals and royalties?
What were some of the first questions you had? Who did you contact first to find out what you needed to do next?
How to Handle Inherited Mineral Rights
We are not attorneys. This information is being shared for informational purposes only. Please get help from a qualified attorney and a qualified CPA to help you through this process!!!
- First Things to Consider:
- If there is a will – depends on laws of your state and what property is involved.
- If there is not a will – legal term is “intestate”. Property is divided amongst the person’s heirs. Laws that dictate intestate succession vary by state. Probate is often required
- Probate – get help of attorney to figure out what to do. Generally, probate is required when an estate’s assets are solely in the name of the deceased. This process is required in order to transfer the property into the name or names of any beneficiaries. Some states offer simplified process for small estates when the deceased’s assets are worth less than a certain amount
- Trusts – Some estates can bypass the probate process through the use of revocable living trust. This is because when the trustee dies, the assets remain in the trust which still lives on. Sometimes assets like mineral rights (especially if they are non-producing) are overlooked and in that case you may have to go through probate.
- Ancillary probate. This refers to a probate proceeding that is required in addition to the primary probate that takes place in your home state. So if you inherit mineral rights that are in another state from where your relative died, you may have to go through ancillary probate in that other state. Some states make this easier than others and may only require you to file certain documents from the first state along with the will.
- Affidavit of heirship – this is sometimes a quicker way than probate to transfer ownership of real property like mineral rights when your family member dies without a will and has a small estate. State intestacy laws dictate who inherits the decedent’s property. This document will outline the heirs and how they are related to the decedent. It must be filed with the county recorder where the property is located in order to establish ownership of that property. Check with your attorney to see if this is an option for you.
- Stipulation of interest. Sometimes used when there is a conflict or confusion around ownership of fractional interests associated with a mineral estate. Usually it will consist of multiple conveyances. An operator may require this if in the process of preparing a title opinion they determine that there are title issues. Sometimes they will prepare it and send it to you for execution.
- What you should do if you are contacted about minerals some years after closure of estate, funds held in suspense and title issues that can keep operators from performing due diligence to find you or searching for deceased parties.
- Resources:
- When you find out you may have inherited property, contact estate attorney with knowledge of how to handle mineral rights. If you or another relative has already hired an attorney to help with probate process for other assets, they may be able to help you with minerals that might not be listed in will.
- Download a FREE Transcript of this Episode (MRP 39: Mineral Rights Inheritance)
How to Find Legal Description and Public Records Relating to Your Properties
Matt asks Justin about his experience with identifying other properties that his family owned but that were not part of the original inventory of inherited minerals and royalties. One of the first questions that many mineral owners have is, how much more might be out there? How did you go about finding what exactly you owned and if there was more out there? What did you find? What types of properties did you learned that you had interests in? Tied to a lease? Still active? Non-active? Minerals Interest/NPRI
Producing Minerals
For the producing properties, how did you find out about those? For those minerals that you were receiving royalties on, what did you do first?
Steps:
- 1) How to find out if minerals are producing, operator name (state oil and gas commission website)
- 2) Contact operator (find on oil and gas commission website, will list operator of any wells on your properties, list contact info). Also Google
- 3) Check if escheated (unclaimed) funds – check by state
Non-Producing Minerals
- For the minerals that you owned that weren’t producing. How did you find out about those? Where did you go?
- How did you find out if they were leased or not?
- So for mineral owners that may come across a legal description of mineral rights listed in a will or trust document, you can go to the county recorder and search for your relative’s name in grantor/grantee index or search by the legal description if you know it, see what documents come up. If your interest is leased, it will be recorded in the county where they are located. Will find an oil and gas lease or memorandum of lease from your relative to a lessee like and oil and gas company. If you are receiving royalties, your lease will be what is termed “held by production”.
- If leased, you are held to terms agreed to by your predecessor
- If not leased, YOU have the option to lease and get a lease bonus check. Listen to episode Importance of terms, listen to leasing episode 6 on basics of how to negotiate an oil and gas lease.
Tax Considerations
- Justin, in that first year, what did you learn from talking with your accountant? What were the things you needed to document?
- We cover basics of mineral and royalty tax considerations in Episode 20.
- Who to contact and when:
- When you inherit, may make sense to get an IRS appraisal to understand step up in cost basis at time of inheritance. We cover IRS Appraisals in more detail in Episode 32.
- For really small interests, probably better off just claiming $0 cost basis (might be more expensive to get an appraisal than the proceeds from the sale of that property).
- Before selling – contact a CPA who has experience with oil and gas properties to discuss your plans and to determine the best way to go about it to minimize tax liability.
- When you inherit, may make sense to get an IRS appraisal to understand step up in cost basis at time of inheritance. We cover IRS Appraisals in more detail in Episode 32.
- Have you gone through the process of selling any properties? If so, what did you have to do from a documentation standpoint?
- Selling Your Mineral Rights
- For mineral owners that decide to sell some or all of your inherited minerals
- It is usually a taxable sale
- It can be classified as capital gains or losses or fall under ordinary income, depending on your unique circumstance.
- Long vs. short term capital gains
- Generally capital gain treatment at tax advantaged rate if you hold them for longer than 1 year (long-term capital gains)
- Depletion Allowance
- Is a deduction allowed by IRS code for an owner of what is called a 1254 property (which is basically any oil and gas, geothermal, or other mineral property) that returns the taxpayer’s investment in the reserves used up in the generation of income associated with that property. This is because oil and gas reserves are finite in nature and when you produce them there are fewer remaining to be produced.
- Cost depletion – writing off capitalized cost of the minerals over its useful life
- Percentage depletion – 15% of annual gross revenue
- Potential depletion recapture at ordinary tax rate. Which basically means the taxation of property that has provided a prior tax benefit.
- For example, if you purchased at $10k, sold for $15k, already depleted full $10k, first $10k would be taxed as ordinary income.
- Very important to get the help of a qualified CPA to make sure you do the right thing
- 1031 Exchange – get help from a tax advisor before you sell to make sure you follow the required steps
- Property Taxes: In some jurisdictions you also have to pay property taxes. Make sure you stay on top of this, usually small amounts but they can put a lien on your property if you don’t pay. If you don’t – can get sold at auction.
- You will get 1099-MISC that will report annual gross royalty income
- State Income Taxes: One thing that sometimes is a complicating factor with mineral interest tax reporting is the fact that you also have to file and pay income tax in the state in which the production revenue was derived
- This is where a good CPA is worth their weight in gold in helping you navigate this. Did you know that the state of CO has a nice requirement that if you get income from states with no income tax (like Texas), you have to pay CO income tax?
- Selling Your Mineral Rights
Minerals Management
- Properly managing your mineral rights and royalties is an ongoing process.
- Having marketable title may be different than having the documentation required to be paid royaties
- Justin talks about recent example of going to Texas Railroad Commission (RRC) website and finding another well with funds in suspense, other example held up due to title issue, no contact from operator to rectify.
- Need to track your properties, royalties received, make sure you are getting paid.
- This is called performing a royalty audit.
- We cover this process in more detail in Episode 13 where we talk about royalty audits and litigation with attorney spencer Cox.
- Software tools out there to help you with this. Can listen to Episode 24 where we talk about how to automate how you track and analyze royalties with Phil Sherwood, the CEO of SherWare.
- Organizations that can help:
- National Association of Royalty Owners (NARO)
- Listen to Episode 32 where we talk with NARO Colorado President Rob Prentice.
Helpful Resources:
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