My father owns a percentage of mineral rights in Texas. He and the other owners recently signed a new lease and he says he wants to give his share of the lease to his children. Can a lease be directly given without also giving the mineral rights? His intent is to keep the mineral rights but give the income from the lease to others (in lower tax brackets). This doesn’t sound doable to me but I am just starting to help him manage this stuff and have no experience with mineral rights so I welcome any advice.
Greg, yes this can be done. As an example, he can write and record a "Royalty Deed" to his children. In effect, he retained ownership of the mineral while giving away the royalty (income) those minerals produce. However, this is a permanent transfer and isn't a temporary arrangement. Your Dad needs to decide what he wants to do. Then seek an attorney who specializes in Oil & Gas law so what is done meets his wishes without creating any future unintended land mines. It can be done but seek professional advice before recording anything.
Greg, your dad could probably also sell his royalty stream for a set period of time. If you can sell it to strangers, there should be no reason you can't sell it to family, $10 cash in hand and other good and valuable considerations. When you are talking to the lawyer, you might ask about that.
Your father could give a term royalty deed basically for the term of the lease and have it expire at that time unless it is producing and if producing have it extend as long as there is production.
Dirk
He could deed and retain a life estate. No will, no attorneys.
Retaining a life estate in the royalties does not accomplish his goal of "giving the share of his lease to his children." I like the Term Royalty Deed WITHOUT reserving a life estate.
If he wants to sell his rights in the lease only and keep the minerals, he would execute a royalty deed and describe the granted property as "all royalty under that certain lease [then describe the parties, date, and filing info]." The grant will terminate when the lease terminates.
I like Andrew's idea.
Andrew said:
If he wants to sell his rights in the lease only and keep the minerals, he would execute a royalty deed and describe the granted property as "all royalty under that certain lease [then describe the parties, date, and filing info]." The grant will terminate when the lease terminates.
Folks, thank you for your advice. You've given me some options to pursue which is exactly what I needed.
I read very briefly about royalty deeds. My father asked me if there was anything he could do to give the lease bonus payment that he has received. I think my answer will be "not really at this point". Even a royalty deed seems to not convey bonus payments -- if I interpreted what I read correctly.
A term mineral deed would convey bonus. If he wants to reserve the negotiating rights then he could give you a non-executory mineral deed.
What about a term mineral deed reserving the executive rights, like Mr. Dieterich suggested, but with an effective date equal to the day before the date that the father signed the current OGL?
I have never seen that done before, but what is the opinion of the forum about whether or not that would satisfy all objectives? It would vest title in the son, and the father could just return the check or bank draft and request that it be re-issued in the son's name. A problem could arise if the father has already cashed the cashier's check or company check, or if the father has already received payment from a bank draft to his account, because that means that the Lessee has already, or will at some time, report that payment as income associated with the father's TIN, which is contrary to one of the objectives. It could all be "backed out," I presume, IF you had a cooperative Lessee. But I doubt a Lessee would agree to all these financial machinations, there's nothing in it for them.
Pete, your comments are comforting since they show me someone was thinking about this the same way I was -- i.e. "could be backed out", "if you had a cooperative lessee", etc. Actually, my father is holding on to the check for this reason but it has been a week now since he received it and I'm not sure this novice wants to go pioneering down this path.
Well, if your father still has not cashed the check then you both have alot more leverage. I believe that I am right in saying that he can make moot the current lease by returning the check to the Lessee. I believe that consideration must have been made and received (meaning the check must have been cashed) in order for the contract (lease) to be binding. I recommend photocopying it first and returning it to the Lessee in person with a witness so that the Lessee cannot say, "Hey we never got that check back." If the Lessee is not local, go with certified mail, with the tracking number of the return receipt included in the letter.
Your father can just tell the Lessee that he forgot that he was going to execute the Term Mineral Deed to you, that he will do so forthwith (with the reservation of executive rights and without the Effective Date being retroactive), and that he will sign the new OGL afterwards. The Lessee won't care, they'll still have their lease, but in this case instead of your father going to the Lessee and begging them to jump through hoops to "back out" the financial transaction, the Lessee will have no choice but to do so and go through with another transaction, this time to you. Everybody wins.
Greg, Another option is to assign the bonus and royalty stream under the lease to the kids. You need to check to see if the lease allows assignments. It needs to be clear that he is not assigning the mineral interest. It is like assigning the lease from a rent house to the kids, but dad keeps title to the rent house.