Estate Planning Lawyer #1 was pretty insistent I place my mineral and royalty properties in an LLC even though my interests are by far mostly minerals and royalties with only a very few Working Interests.
After doing some research online, it appears I would be paying Social Security for all if I did this, so I consulted with Estate Lawyer #2. He said an LLC is a bad idea.
Opinions please.
Ann Whitchurch
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Usually people will say respond to a post like this and say you should ask a lawyer, but it sounds like you already have…
Did lawyer #2 say why an LLC is a bad idea? LLC ownership is super common. I am an oil and gas lawyer and I own minerals in several LLCs. I am not sure I understand your comment about social security, as you certainly don’t pay social security on a mineral investment.
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The type of estate plan may also be dictating the advice. If you only have a Will then maybe Lawyer #1 was trying to avoid probate. My assumption is that Lawyer #1 may also be advising to have a LLC because you own working interest. It could help with liability if something happened with the well. I would also be interested in why Lawyer #2 said it was a bad idea.
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Not an attorney, but giving my two cents worth. We have an LLC and that has been quite useful. Our attorney also recommended that we put our working interest in a separate LLC to protect from any liability to the other interests. I have actually heard that multiple times at NARO. We just discovered it, so will fix that potential risk. The LLC does not take out Social Security as far as I know. The proceeds are distributed to the members on a regular schedule and they have a K-1 for their taxes. The mineral titles stay with the LLC and as generations pass, it simplifies the estate issues. Other families do a trust.
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You need to discuss the income tax issues with your tax CPA or a tax attorney. I think that the LLC can elect to be treated as a partnership for federal tax purposes, which would allow the royalties to still go to Sch E. This election has to be done in the first year and is not a yearly option. The tax treatment of WI may still go to Sch C, perhaps depending on whether this originates as lessee of third party leases or from being an unleased mineral owner. You also need to consider options based on the state of formation of your LLC or LP or other entity. Texas at least treats entities differently for franchise tax.
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The decision largely depends on the type of assets. WI vs. Royalty or ORRI. The amount of holdings may impact the decision. A small interest in one state/county may cause the LLC to be overkill. Also, what are the family dynamics. In short, there are factors weighing for or against the LLC route.
This post is not legal, tax or financial advice. No attorney/client relationship created by this post.
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Having to pay Social Security on royalties if I put them in an LLC was my concern. I have very few Working Interests and I do have a Liability Umbrella policy. Thank you very much for your input!
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I believe Lawyer #2 thought it was overkill, Richard, Max & Rachel. Thank you all for your input!
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Thank you, Tennis. I’ve seen your informative posts for a number of years and do appreciate them. I will discuss with my CPA.
Ann
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Thank you, Martha. I hadn’t thought of a separate LLC for WI.
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For what its worth, I am very much in favor of placing mineral & royalty interests into an LLC for estate planning purposes. This makes transferring the minerals to the next generation a little more seamless as they can take over operating the LLC without filing probate documents in the county records. This is especially relevant if you have interests in multiple counties.
I am not a lawyer and do not play one on tv. However, I have a decent amount of experience with running title on interests owned by family groups that completely lost track of some of their mineral ownership in counties where estate documents were not filed. Keeping title clean is extremely important. It is also extremely important to keep a list of the interests and their locations. Make sure the next generation knows what you / they own.
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Ann: This should provide you with good questions to ask the attorney. An LLC does not necessarily avoid probate unless the decedent’s units are transferred to a trust.
This post is not legal, investment or tax advice, it is for discussion purposes only. Reading or responding to this post does not create an attorney-client relationship.
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FWIW, I was referring to the filing of estate documentation in various counties for title purposes. I’m really into keeping title in good standing and people frequently ignore that aspect of mineral ownership.
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Good information - Thanks
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