Mineral rights are the ownership rights to underground resources, such as oil or natural gas. Mineral rights can be severed (separated) from the ownership of the surface land and so be owned by a different person. Such rights can be acquired by purchase, lease, gift or inheritance, either outright or in trust.
Depending on where the mineral rights are located, the relevant state law may treat mineral rights within its state as either real property or personal property. Examining the title instrument by which the mineral rights were acquired usually tells you whether it is real property or personal property. Mineral rights may be transferred into a trust for ongoing management and future distribution as part of one’s estate planning.
Oftentimes, a person owns only a very small fraction or fragment of the total mineral rights associated with real property. This often occurs because the land involved is very large and/or because mineral rights have to be repeatedly subdivided from one generation to the next. This fractionalization can be avoided by assigning mineral rights to a corporate entity for management and ownership purposes. Interests in the corporate entity can then instead be gifted from one generation to the next.
When a petroleum company produces oil from such property, a Division Order will be issued to all the mineral right owners to fix, “… the exact decimal interest (Net Revenue Interest or NRI) owned within a well, lease, production unit, or field-wide unit.” (www.mineralweb.com/owners-guide/leased-but-not-producing/division-order). The Division Order determines what royalties each mineral rights owner receives from the production of oil.
Ownership of mineral rights can sometimes generate valuable royalty income. Not all mineral rights, however, are productive assets. Ownership of mineral rights can sometimes be a long term wait and see game. The good news may come unexpectedly when a letter from an oil production company asking to lease your mineral rights arrives. Owning non-productive mineral rights, however, presents a problem for a trustee because a trustee has a duty to make all trust assets productive.
Mineral rights are a special asset within one’s overall estate planning. Estate planning for Mineral rights can be done using either one’s will or trust. However, before transferring mineral rights to a trust it is important to determine whether such transfer may affect or eliminate the income tax cost depletion allowance (tax deduction) on that ownership interest.
Special powers should be also be provided in the will or trust for a variety of reasons, including the following: to enable the representative to manage and lease the mineral rights; or to pool, consolidate, or unitize such mineral rights with others for exploration, development, management, or administration. Combining multiple owners’ mineral rights may be necessary given fractionalization or fragmentation of the mineral rights associated with the land.
Lastly, some people own mineral rights and/or are owed unpaid oil and gas royalty income and do not even know it. Anyone wondering if they own mineral rights may wish to hire a title company to examine the chain of title in the county recorder’s office. Also, one can also go to the state’s unclaimed oil and gas royalty website to examine for unclaimed royalty income. Otherwise, unclaimed property eventually escheats (belongs) to the state after a certain number of years.
The foregoing is a general discussion of a much more involved subject. Anyone confronting any issues discussed above should seek professional guidance and not draw any conclusions from this article.
Dennis A. Fordham, Attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at dennis@DennisFordhamLaw.com and 707-263-3235.