Mineral value descrepancy for inheritance

Law & Legal
1

Hi, I hope this message finds you all well. I have inherited mineral interests in Texas. In order to settle my grandfathers estate, we need to know the value at death. One of our trustees is fighting the method that my grandfather wanted the minerals to be valued. Which is the rule of thumb of X months income times 3-5 years. (This would be 200k or less) Since the disagreement, the same trustee had a valuation done resulting in a valuation of 1.2 million. To combat that valuation I had a a valuation done as well, resulting in a valuation of 200k. We seem to be at a stalemate now. We have since hired a lawyer thinking this will need to go to court. I’m hoping you can help guide me on a few things.

The reason for the 1.2million is that they are adding in potential future production of 700k+

Thank you

2

See my other response to the same question. As an heir, I would want that higher valuation because it sets the step up value higher. If anyone wanted to sell at a later date, they would pay less in capital gains taxes. The estate might pay more in estate taxes if it is over the limit as of the date of death, but if it is not, then the higher value is what I would want to have. The IRS would want the documentation from the engineer’s review. If the the $700K is based upon the performance of already existing wells in a reasonable contiguous area, then that is a reasonable way to approach it. For example, if you had one horizontal well with some performance decline data and permits for seven more in the same 640-1280 ac area, then the upside is reasonable. I am speaking as a geologist, not an attorney.

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3

Are the minerals part of a large estate which will be filing with the IRS? The IRS does not accept “rule of thumb” as a valuation method - that is simply an estimate that some people use to buy properties. For IRS purposes, producing minerals require a petroleum engineer, or someone with similar experience, to calculate the present value of wells based on production history, decline curves and prices, and must take into account the future revenues. Nonproducing minerals are valued separately - if under lease then the appraiser needs to know the bonus and lease term. A trustee has a legal obligation to do things properly. The valuation is your basis, which is reduced by depletion until it reaches zero or the minerals are sold. If this is really a fight about who gets what assets and how much from the estate, then that is a different matter. Legal fees can quickly mount when you go to court, so be prepared. It may take a long time, tying up the minerals in the estate instead of distributing them. It is likely that the trustees will each charge the legal fees against the estate and so everyone will get less cash.

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4

I agree with TennisDaze. We always use a petroleum engineer evaluation, not the “rule of thumb”. Producing properties include both known producing wells and potential production based upon engineering standards. Non-producing properties include leased properties and non leased properties. Our leased properties note the lease term and bonus and I give the engineer an additional comment if I have a written sales offer that indicates a higher value (phone offers won’t be allowed, so I always ask for a written offer via email or letter). For our unleased properties, I rely on their expertise and I also give notes if I have pooling information from contiguous sections. The engineer gives us a value as of the date of death and then again at six months after. The tax accountant then uses the proper one for the estate taxes. Document, document, document… And the evaluation bill is sent to the estate since it is the original owner of the properties until they are dispersed.

5

since it’s producing, hard to argue against the county appraisers statement; pretty solid 3rd party evaluation (if acceptable). most don’t sell minerals,

6

Hi. Thank you for your time and willingness to help. I have read your replies as well as the others. I believe i understand what has been said.

In a bit more detail…

  1. I have already inherited the minerals and they are in my name and oil companies are paying me directly. And no longer paying my grandfather/his estate.

  2. My aunt and my brother are Co trustees of the estate and are trying to get it settled. At the moment it cannot be settled/dispersed because of the discrepancy in the mineral value. A. The estate is valued at 5 million cash + the minerals. B. There are 5 beneficiaries, me being 2 of them. C. Trust states that everything should be divided equally. D. The minerals MUST go to me and no one else. I also cannot sell minerals for 99 years.

Since the minerals must go to me, the value of those minerals count against my equal share. Because my father and uncle passed away, I am receiving both their shares. The minerals are assigned to my fathers share that I’m inheriting. My aunt wants to value the minerals as high as possible to take up as much of that one share as possible. (Which puts more cash in her pocket)

My aunt without the knowledge/signature/agreement of my brother the other co trustee, went to MHA in Colorado and gave them my grandfathers check stubs, my check stubs and all well information. Her valuation came in at 1,028,000. She charged this valuation to the estate at 25,000.00. I had a valuation done by PetroValues to disagree with her valuation. PetroValues valued the minerals at 230,000.00. We don’t owe any taxes on any of the inheritance. The trust states that we must get mineral value at time of death so that the mineral value can be deducted from that one share, then the rest divided equally.

Her valuation from MHA states… 700k in future production 300k in current production Totaling the 1million+ dollars that she is stating.

My valuation from PetroValues states… 600k in future production 230k in current/fair market value.

I’m more than happy to share both valuations and trust documents with you.

For the last 60+ years my grandfather made roughly 20k a year from the minerals. The year before he died, 1 new well started bringing bigger money that he had ever seen. His first check was 27k/January then 20k, February, then March of 18K. I inherited around this time. All my checks from this one well have been MUCH lower than even the 18K.

The same oil company had been applying for permits for more wells around this time. The MHA valuation looked up these permits (which were after death of my grandfather) and they just multiplied that same higher paying well 3 times. So they are saying that I am getting minerals producing 27k a month X’s 3. Yet this is no where the case. I am now being paid on all 3 of these wells and not receiving anywhere near this much money.

It’s my belief that these minerals should be valued at time of death. And further how could they be valued at anything higher than what someone would pay for them. And based on the income I’m getting, I’d bet my left arm no one is going to pay more than 300k for them.

If i still have your attention, its also my believe that since we are not valuing them for taxes or for the IRS or to sell. I believe that i also lose value in the dividing the estate equally in the following ways…

  1. all other family members will be inheriting 1 million cash. I am inheriting a depleting asset, that has risk and uncertainty.
  2. I cant sell the minerals, I cannot invest the minerals. I don’t even have 100% decision making power over the minerals as they are just 20% of a much larger family.
  3. The entire estate is free of inheritance tax as there was no tax that year.(long story, but I’m sure). Everyone else gets the million dollars cash tax free. And i inherit a depleting asset that i now have to pay personal income tax on.

I would appreciate ANY advise thoughts etc on my situation.

Thank you so much in advance.

Shaun

I apologize for the formatting above the forum seems to alter it.

7

Would be wise to consult an attorney to get this straightened out.