Has anyone had their mineral rights appraised for potential inheritance tax purposes?
If so, what is the process, what are the mineral rights potentially worth and how does the government handle the transition of the mineral rights to family members?
Any help would be appreciated.
First of all, the government does NOT handle transition of mineral rights; that would be done in a will. The value can vary tremendously depending on if a well is pumping on the property, nearness to other wells that are producing; closeness to a "field" as noted on some lands, and any leasing activity that has gone on in the last few years. We spent $2500 having our mineral rights appraised back in 2007 and was a small figure because the Bakken was just starting in Eastern Montana. I have heard a lot of figures, from $3;,000 per acre for adjacent to well minerals, to $10,000 an acre for an "average" producing well on the property!!
Hi Kristi,
That's an interesting question. When my grandfather passed away in the early 80's my mom had the mineral rights appraised when she transferred them from him to his children. They paid no taxes on it. My mother passed away in 2009 and we had an attorney do a transfer of the rights to ourselves (her children). There was no appraisal done and we paid no taxes that I am aware of. Now I'm wondering if there might be a tax?
Martha
Obviously the best advice is also the simplest in this case, talk to an estate attorney.
Did you really mean to ask about getting "mineral rights" appraised? like if you didn't own the minerals but had a life estate or inherited a lease that has been held by production prior to the lessors death? My brain just locked up.
Here is the process.....the executor had/has the responsibility to get minerals owned by the estate appraised, just like everything else in the estate......depending on your State and the size of the estate you received, you will owe or not owe inheritance tax......
I shouldn't assume this, but I am assuming you are not the executor...also that the executor has a share of these minerals as well as you......they will get it appraised and of course you want the appraisal to be as low as possible......but.....if the estate is worth enough that you have to be worried about the inheritance tax in the first place, then refer back to my first sentence but add an exclamation mark.
You are right, the government doesn't handle the transition of the mineral rights. I am really just looking for the answer on how to get mineral rights appraised. My family is going to inherit mineral rights and we are concerned that we could get stuck with inheritance taxes on the mineral rights.
It sounds like an estate attorney might be the answer to understand how mineral rights are appraised as they are inherited.
If anyone knows anything else, please chime in.
In our case it was a litigation case and our attorney in Sydney found a Mineral Rights Appraiser; who also was a farm/Ranch land appraiser and did it for us!
Are you inheriting "mineral rights" or "minerals?"
Is the estate worth more that $5 million? If not don't worry about inheritance tax.
...not to pick on you, per se, but I hate when people want help but don't want to provide the information required to get the help they ask for. I see it all the time. Give me answers but figure it out without me giving any information...........If the estate is of any size you hire an attorney....the executor does all of this.....I'm off point again I think.........You are just asking about appraising mineral rights.....I answered.
I have done appraisals for a number of estates in Colorado, Texas and Louisiana. I have some simple rules of thumb that have served me well. Generally, I give very little value to unleased minerals, unless the deceased recently rejected a bona fide offer -- in which case, that offer can be a floor valuation. If leased, but not producing, then I value the minerals at 3-5 times the bonus paid, depending on a number of factors. If the minerals are producing, I value them in the range of 36 to 60 times the average monthly royalty (in the case of the shales, you have to consider how long the property has been producing, because in the first year, a 60 times multiplier will over value the minerals.
Personally, I retain all the crazy, unsolicited offers to buy my minerals or producing royalties. These offers could form a basis for valuation as they come from independent parties with industry expertise.
And finally, Kristi. You fear your family is going to be stuck with inheritance taxes on the mineral rights. Keep in mind, at least in the case of Federal Estate taxes, it is the Estate that pays (of course, ultimately that is money the heirs don't receive). For 2013, the Estate Tax exemption is $5,250,000, so this is only an issue if the total Estate exceeds that amount. If it does, then the objective is to keep the mineral appraisal as low as possible. And to emphasize my point again. If the minerals are not leased, they likely have very little value. This methodology is consistent with states that have property taxes on minerals (like Kansas and Texas). They only have taxable value if they are producing. West Virginia, on the other hand taxes minerals regardless of production status.
I hope this helps.
I am the executor of my mother's estate. As executor, it was my responsibility to hire a licensed appraiser who was a reservoir engineer. He evaluated the producing and non-producing properties and set a value to those properties. He will give you a fair market value of the minerals potential production value at a certain discount rate over a certain number of years. (We had to this at my father's death as well.-Values change over time.) There are reputable firms in the oil producing states. Contact your local NARO chapter for names or contact your larger banks and ask for recommendations from their trust departments. They have to do this all of the time. The engineer takes into account the bonus money being offered, the value of the current wells and value of potential future wells based upon the production in the area.
You should speak now with a good estate attorney and get a plan. It may be to your advantage to put the mineral rights into a family partnership. This will make title much easier to track in the years to come. The title will remain with the partnership. Then you can pass the ownership of the partnership shares down to whomever you want without having to keep changing the title on every piece of property in every county for every person. What starts with one person can easily end up with hundreds down the line. We did this three generations ago and it has saved so much hassle as each person passed away.
The partnership value was appraised at my mother's death. Fair market value is listed by the engineer. Then the estate attorney and accountant are able to further discount the amount for estate purposes. By being held in a private family trust or partnership, you can get about 35-45% more of a discount factor. So if you owe taxes, it is a whole lot less!! The government does not handle the transition, but they sure want their cut of the money! You need to handle the transition through a good will, good estate planning and a long term vision. Some of these tracts can produce for over a hundred years given the right conditions.
M Barnes said:
I am the executor of my mother's estate. As executor, it was my responsibility to hire a licensed appraiser who was a reservoir engineer. He evaluated the producing and non-producing properties and set a value to those properties. He will give you a fair market value of the minerals potential production value at a certain discount rate over a certain number of years. (We had to this at my father's death as well.-Values change over time.) There are reputable firms in the oil producing states. Contact your local NARO chapter for names or contact your larger banks and ask for recommendations from their trust departments. They have to do this all of the time. The engineer takes into account the bonus money being offered, the value of the current wells and value of potential future wells based upon the production in the area.
You should speak now with a good estate attorney and get a plan. It may be to your advantage to put the mineral rights into a family partnership. This will make title much easier to track in the years to come. The title will remain with the partnership. Then you can pass the ownership of the partnership shares down to whomever you want without having to keep changing the title on every piece of property in every county for every person. What starts with one person can easily end up with hundreds down the line. We did this three generations ago and it has saved so much hassle as each person passed away.
The partnership value was appraised at my mother's death. Fair market value is listed by the engineer. Then the estate attorney and accountant are able to further discount the amount for estate purposes. By being held in a private family trust or partnership, you can get about 35-45% more of a discount factor. So if you owe taxes, it is a whole lot less!! The government does not handle the transition, but they sure want their cut of the money! You need to handle the transition through a good will, good estate planning and a long term vision. Some of these tracts can produce for over a hundred years given the right conditions.
I am by no means an expert. But it would seem to me that mineral rights leased or unleased have no actual value unless they are currently producing a royalty. Lease money paid in the past would be part of the assests of the deceasts (sic) estate. With transfer of the mineral rights going forward, the inheritees would then pay taxes on what is newly leased or produced. Why should taxes be paid for some "value" of the ownership and then pay taxes again when the lease actually produces revenue.
So a taxi is worthless until someone pays to ride in it? Please, some logic!
I think FrakinAndy is saying that a potential taxi is worthless until someone builds it.
After all the oil and gas professionals who have said on these forums that the oil and gas is worthless without them to get it out for us, I can not but conclude that they would agree.
So drill rigs are worthless until we let them drill!
l
r w kennedy said:
I think FrakinAndy is saying that a potential taxi is worthless until someone builds it.
After all the oil and gas professionals who have said on these forums that the oil and gas is worthless without them to get it out for us, I can not but conclude that they would agree.
Interesting conversations, with lots of unknowns. One thought to throw in as we are in the process of putting together our wills and estate planning due to the mineral interests we have.
First of all, it has been helpful that the LLC (or partnership as someone mentioned above) owns the mineral rights and not the individuals. Thus, the will and estate planning deal with the percentage of ownership of the LLC and not of the mineral rights in and of themselves.
Second, the dollar value of the mineral rights does count as part of the entire estate...and we spent a lot of time 4 years ago trying to find the value when my wife's mom died and the estate needed to be settled. As was noted above, 4 years ago the value was low so no inheritance taxes were due...it's a different ball game today.
Third, do NOT forget the State taxes on this. While yes, the FEDERAL TAX exemption is in the 5 million mark...however, in my case, the state exemption is in the 1 million mark...and anything above and beyond that is taxed pretty extensively. Thus, an estate lawyer has been very helpful to us in making our plans for the next generation. It's been money well spent!!
Fourth...I also agree with the note to keep bonifide offers for the mineral rights in the file...as these offers were used (in part) to determine value in my mother-in-laws estate settlement.
This is my two sense worth!!
Kristi,
Appraisals for official purposes must be made within strict guidelines and definitions set by the readers and in some cases subject to cross examination by other appraisers. Otherwise they are just speculation about what the writer thinks the reader wants to hear. If you are involved in a large mineral estate, find an estate lawyer that is associated with a mineral lawyer. Terms of art like "PROVEN PRODUCING" and "PROVEN NON-PRODUCING" RESERVES will be very important. Speculative value (lease bonuses) and narrowly defined FAIR MARKET VALUE as defined by the reviewing agency are also important but must not be combined.
Try Frank Erisman at Schwabe, Williamson & Wyatt near your area (Portland) or Beau Johnson, CPA at Tomkins and Peters Accounting firm in Hamilton, Montana, where your minerals are located. I've worked with both in Montana.
There is another law tim in Seattle that has done work in Sheridan County MT but I haven't worked with them directly as yet. Contact me directly and I will put you in touch through a client.
I think you are starting to see my point. Of course since a rig is on the surface and can be moved, it has scrap value even though it would be of no value as a rig if there was nothing to drill.
Dctex99 said:
So drill rigs are worthless until we let them drill!
l
r w kennedy said:I think FrakinAndy is saying that a potential taxi is worthless until someone builds it.
After all the oil and gas professionals who have said on these forums that the oil and gas is worthless without them to get it out for us, I can not but conclude that they would agree.
Kristi, I'm a CPA and I just dealt with the passing away of my mom who owned mineral rights in the Bakken. Whether or not you have an appraisal prepared will depend on if you have or might have an estate tax issue. There could be three estate taxes. The federal estate tax which starts at over $5M currently, the estate in the state where the deceased lived when they passed, and the estate tax in the state where the property is located.
My mom lived in Washington State when she passed. Washington has an estate tax that starts at $2M. Although North Dakota does have an estate tax statute, but for some reason no tax payment is required. My mom's total estate was well under the $2M. Because we were sure that there would be no estate tax, we did not have the rights appraised. I did do a little reading and assigned a value to the rights for purposes of the Washington State Probate.
However, here is something to think about. When an assets is sold, you pay tax on the difference between what you sold it for and its basis. Most of the time the basis is what you paid for the property. Federal tax code allows an up-step in basis to fair market value for appreciated property received from a decedent. If my mom had sold her mineral right for $10K and acre the day before she died, she would have paid tax on $10K because the basis in the rights was probable just about -0_. The tax would have been $1,500. If I sold the rights after receiving them from here estate for $10K, I would have paid no tax.
The issue here is being able to support a value for the up-step in the event that a beneficiary decided to sell the property at a later date. It could be years later. If there is significant value in mineral rights and there is a chance that the rights might be sold at a later date, it might be a very good idea to pay for an appraisal at date of death to reduce tax in a future sale.
Tax code is complex and can bite you if you are not careful. If you think you might have an estate tax problem, go see an "Estate" Attorney. It will be money well spent.
Greg
Greg, would this apply when creating a Trust exclusively to own the minerals or maybe a LLC?
My mother passed away 2 and 1/2 years ago. I have never paid inheritance tax on anything other than the proceeds from the active wells. Mother's attorney told me that, because incomes from the mineral rights are never guaranteed, there is no tax on the mineral rights themselves. If we were surface owners of property containing the minerals that would be a different story.