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Oil & Gas Estate Planning

By:  Heidi R. Kemp
Emens Wolper Jacobs & Jasin Law Firm

When you consider the myriad of potential issues surrounding oil and gas, you probably think of things like the lack of transparency on royalty statements, whether the company is complying with the lease, whether the deductions are proper, and the list goes on.  You probably do not think about estate planning.  However, doing some advance planning with your minerals may be very advantageous.

One of the first things to think about is whether you want to avoid probate.  In Ohio, if you have assets titled in your name (and not in survivorship), those assets will pass through probate.  Probate is the process in which a court oversees the administration of your estate and the distribution of the estate assets.  Oil and gas going through probate can be very problematic.  First, probate is public record and anyone can see what assets you have, what they are worth, and who received those assets.  Second, during the estate administration process, a value has to be put on the oil and gas or minerals.  These types of assets can be extremely difficult to value and may require a certified appraisal that can be costly.  Lastly, the probate process itself can be time consuming and during that time, the oil and gas company will suspend any royalties until the oil and gas is transferred out of the estate to the appropriate person(s).  If a surviving spouse or other beneficiary is counting on the royalty income, this lack of royalties for months to even over a year can create a real hardship.

Luckily, in Ohio, there are easy ways to avoid probate.  The oil and gas may be transferred into a revocable trust during the owner’s lifetime.  The owner may execute a transfer on death designation affidavit (“TOD”).  The TOD gets recorded with the County Recorder but does not change the current ownership.  The TOD merely designates a beneficiary to receive the real property immediately upon the death of the owner.  The TOD avoids probate and the ownership change with the oil and gas company is much quicker than the probate process.

The owner may also transfer the oil and gas into a limited liability company (“LLC”).  Even though the oil and gas is owned by the LLC, the LLC interests will go through probate if the interests are owned in the individual’s name.  Again, there is an easy fix.  The owner of the LLC interests may execute a transfer on death designation that names a person(s) to receive their interests upon his or her death.  This process keeps the oil and gas out of probate and keeps the LLC interests out of probate.

Many people choose to transfer their oil and gas interests into an LLC for more than just the purpose to avoid probate.  It can be advantageous if a person wants to gift certain interests in the LLC to, say, their children to spread out the tax consequences of the royalties without giving up control of the underlying assets.  LLCs offer liability protection.  LLCs can also ensure that the oil and gas stays within the family if that is important.  LLCs also offer a centralized management structure that can be very helpful as the oil and gas interests fracture each generation.  Imagine a scenario where there are 20 people with an interest in the same oil and gas.  If held individually, the oil and gas company must lease each person individually and may encounter “hold-outs.”  If that oil and gas is in an LLC and the 20 people are members of the LLC, the oil and gas company would only need one lease with the LLC.  Usually, there is a manager(s) of the LLC who would be responsible for the day to day operations of the LLC, including lease negotiations.

As you can see, there are many things to think about when it comes to oil and gas estate planning.  If you are interested in exploring options, you should consult an attorney who is experienced in both estate planning and oil and gas given the intricacies of both areas of law.