I have noticed that some of you have your mineral rights in a LLC or other legal entity. What were your reasons for doing so?
Joyce,
Some quick notes.
Estate Planning
To Limit Liability from outside sources and to outside sources.
The ability to pass down “shares” without allocating thereby breaking up the “actual” ownership of the mineral interests. Typically, the sum of the broken pieces will be less than the whole when selling or leasing.
Gives the ability to pass down interests and still keep management and control.
Limit the ability of the recipients to sell or transfer to those outside of the LCC. Kind of like creating a spend-thrift position. If shareholders want to sell, the operating agreement can spell out how and to whom they can sell with approval by whom, etc.
Members (owners) may have an interest even though they do not have the right to manage the assets.
The LLC survives the owners and the shares can pass without causing title issue.
The ability to transfer the assets in stages to the heirs and keep the rights intact. 5-10% transferred per year.
Allows other family members to take on roles within the LLC. It pains me to see people trying to manage rights they inherited with no information or training from the relative the willed it to them. In some cases they might as well have given them a helicopter.
You have to determine if the added hassle is worth the expense and extra paperwork to see if it is worth it. 20 NMA, in two tracts, with two heirs, is not worth it. Several 100 NMA in, 40 tracts, with 4 heirs and the desire to keep a family legacy going, is.
Rick, I love it ... I now have this visual of a bunch of folks flying around in helicopters w/o any training :-)
Rick,
Thanks for following-up in writing. It helps a lot and I think there's certainly advantages that are worthy of our consideration. Now, I just have to communicate it to family members!
Joyce,
I'm in the process of establishing an LLC for my mineral rights which are in several states. One of the primary reasons I'm doing so is to save my kids the costs and hassles of having to do "ancillary probates" in different states. I'm transferring my interests into an LLC which will be owned by a revocable trust that is already set up for my wife and myself. On the death of the second of us, the trust dissolves and the kids will then become the owners of the LLC without any probates, in our state or any of the ones where we have mineral interests. In the meantime, as trustee of the revocable trust, I can continue to manage the interests.
Our accountant suggested putting our royalty into our corporation because there are some deductions we can use if we do so. Something about we have some losses from an investment that we can take off against some capital gains (I believe he said) among some other things. The main thing that I hate is that a corporation can't give to a church and get the deduction (unless it's changed since we went into business about 12 years ago). We could donate to schools at that time though so we set up a little fund to help some kids with college needs but I really want to use part for church and be able to deduct it. This might be a question for Bob Berry. Didn't he say it was a CPA?
Thanks Linda & John. Appreciate having the benefit of your experience. The benefit of avoiding ancillary probate is one that I had not thought about and it would apply to my heirs. Yes, would be great if Bob Berry would weigh in on this!
Just to put this in perspective, I do not currently own the mineral rights. They are currently in a trust that was set up by my parents. My mother died in 2009, but my father is still living. We are looking at moving the minerals to an LLC for a variety of reasons. So, another question about LLC's - do you have latitude in distributing funds from the LLC? For example, with the royalty checks are currently received, we have no latitude for when they become taxable income. But, with an LLC, is it possible to control when the royalty payments become personal income? I hope my question makes sense.
Joyce Sills said:
Thanks Linda & John. Appreciate having the benefit of your experience. The benefit of avoiding ancillary probate is one that I had not thought about and it would apply to my heirs. Yes, would be great if Bob Berry would weigh in on this!
Short answer is no, it is not possible.
Joyce Sills said:
But, with an LLC, is it possible to control when the royalty payments become personal income? I hope my question makes sense.
Joyce Sills said:Thanks Linda & John. Appreciate having the benefit of your experience. The benefit of avoiding ancillary probate is one that I had not thought about and it would apply to my heirs. Yes, would be great if Bob Berry would weigh in on this!
On a Federal level, the LLCs are taxed as a pass-through entity in regards to taxes. Some states may treat them differently. Oklahoma does not. There are two types of Corporations C-type and S-type. Our attorney and tax advisors tell us that the S-type is very close to the same as an LLC. Tax wise the same, hassle factor the LLC is easier as it has a much less “formal” requirements on internal procedures. A lot of the requirements may be a good idea, but not required. Shareholder meetings, minutes filed, votes recorded etc.
There may be some advantages with a S-Corp in some cases because of self-employment tax (FICA) . This may not be an issue or much of one depending on “salaries” paid or income from working interests. Don’t confuse salaries with profit distribution.
Delaying the profit distribution will not delay the taxable income on an LLC. A LLC can be a sole-proprietor or multi-member (IRS classifies it as a partnership). If a multi-member, a separate tax return is prepared with a form 1065. Copies of this (maybe just one page of it) goes to the members for filing with their return. If you receive enough income to require quarterly taxes, then you will need to be aware of the income to allow these estimated payments to be made.
Depending on the situation, a C-Corp will allow a delay of taxable income as the corp itself is taxed. Then the income from the corp to the owners is taxed. This can (and usually does with small ones) ends up being double taxation.
An LLC does not have an advantage of tax write offs that you would not ordinarily have as an individual because it is simply a pass-through system. The same with a S-Corp. The C-Corp does have other opportunities for write-offs.
Warning. Verify any of the above with a good CPA or Tax Attorney for your situation. I am neither!
Thanks Rick - I appreciate your taking the time to provide a detailed response. Just thought it might be another benefit of an LLC, but if it's not, it's not! There's still plenty of benefits as I see it.
Is Rick on the ball or what .
Rick, you are such as asset to all of us out here. All of this can be so confusing and onerous. You make it easier to understand and even make us laugh! Proud you live in my town!
Thanks for the nice words, Joan. I do have to admit however, I now live in Moore. (I guess tha make me a Mooreon but be careful how you spell it)
Good to see more people on here from the OKC area!!
Hey Rick, one more question about LLC's... We just formed a family LLC to manage mineral interests in 9 states, our office and one employee in Oklahoma. Do you know, off the top of your head, if we have to register the LLC as a foreign limited liability company in all of the other states?
MY SIBLINGS AND I JUST INHERITED MINERAL RIGHTS FROM DIVIDE COUNTY AND WE ARE IN THE PROCESS OF SETTING UP AN LLC. IS IT NORMAL TO SIGN OVER OUR DEEDS TO THE LLC OR THE LAWYER SETTING UP THE LLC? WE EACH INHERITED 25% SHARE.