I have inherited mineral rights and in the process of changing the name on the lease/title. Before probate can begin, I have been asked by my attorneys (through the court) to come up with a date of death value of the mineral rights for future capital gains reporting. The obvious question I have is how do you value something that is volatile in nature. One year it could be very valuable and the next worth only tens of thousands? I had an offer to do an in depth analysis be an engineer, but is would cost $5,000-$6000. Is there a way to do it yourself? I know the 6 month rule (multiply 6 months royalties by 36-72 months) but that is pretty vague. Any insight would be appreciated!
There are several members of this forum who are experts in situations like this. I'm just waiting for one of them to chime in.
Thanks Kitchen. Some expertise is exactly what I need.
I have done a bunch of this type of work over the years, and unfortunately there just is not a simple answer to this question. It really depends on where your minerals are located and what type of production is occurring. Rules of thumb such as X times monthly revenue can be way off depending on the type of production involved. Further, for estate purposes it must be valued based on the conditions that existed at the time of death, without consideration for any subsequent events that may have occurred.
For instance, if the price of oil suddenly dropped by 60% shortly after the date, the valuation cannot take that into affect and must use the higher price. Also, if subsequent wells have been drilled, or plugged, or reworked, etc, none of that can be considered.
Depending on how many wells are involved, the $5-6,000 estimate you received may be very reasonable. Most engineers work by the hour, so you can minimize your bill by having everything as organized as possible beforehand. Have your payment history for at least 12 months prior to death, by Operator, by Well, etc. If the mineral estate is valuable, you will be better off having an independent appraisal and won't open yourself to increased scrutiny by the authorities.
Thanks for the advice Steve.
Use the search feature in the upper right hand corner. There have been a number of threads on how to value minerals. If the estate is large enough where you will need to file an estate tax return, there are guidlines as to what the IRS will accept on valuation methods.
Your own valuation won't hold up in tax court.
Multipliers can work. Dr. John Baen is an expert in the field.
http://www.barnettshalenews.com/documents/2010/Contemp%20Land%20OG%...
Engineering estimates are often inaccurate if they are not trained as appraisers - who discount for market conditions and include non-producing values in addition to well production value. They tend to value the production of the well and not the entire estate. There is a big difference. 1 well with undeveloped but proven production (PUD) may be worth far more than the simple multipliers. You want the higher valuation when using DOD values for future capital gains. Say your property is worth $100,000 TODAY. But 10 years from now it is worth $1,000,000. You pay Cap gains on the $900,000. If the value is zero TODAY, then the applicable tax rate times that extra $100,000 could be $34,000 or whatever your tax bracket rate is. But if the value is less down the road (if producing- a real possibility) then you owe no capital gains.
I don't want to hawk my own wares here but that is what I do as a certified appraiser (and registered geologist) and I see a lot of folks that mis-value their property and do so as an honest mistake. In doing so, they expose themselves to tax penalty risk. That $6,000 might not be as bad an investment as it sounds.