Gifting mineral rights?

I posted this query to the Oil and Gas board and it was suggested that I post it here, so…

Are there any boards that might discuss mineral rights? I want to gift my mineral rights to the current owner of the relevant land, my grandson, and want to know what kind of appraisal, if any, is required… Can I use the county’s tax appraisal? Or do I have to hire a professional appraiser?

Thank you for any input or ideas.

Are there any boards that might discuss mineral rights? I want to gift my mineral rights to the current owner of the relevant land, my grandson, and want to know what kind of appraisal, if any, is required… Can I use the county’s tax appraisal? Or do I have to hire a professional appraiser?

What state ? Were the mineral rights included in your original deed ?

Texas.

{Were the mineral rights included in your original deed?}

Well, I guess not. I received half the mineral rights via a gift deed from Mom many years (1996) before I received ownership in half the land in 2005 at mom’s death; I acquired the other half of the mineral rights & land via my brother’s(only sibling)death in 2019. I gifted the relevant ranch to my daughter in 2020 but kept a life estate in the mineral rights. Her son, my grandson, inherited this ranch when she passed in 2021 from brain cancer - I still have a life estate in the mineral rights and am receiving monthly $$ from the current relevant oil production.

I want to gift these mineral rights in which I have a life estate to the aforementioned grandson thus making him/it “whole” regarding the property. This will also remove a big job from the duties of my executor (not that grandson) at the time of my passing per the present arrangements.

A bit sticky I know. Probably TMI. Just trying to fix it NOW. The question remains: Do I need an appraisal to proceed? If so, may I use the county tax appraiser’s assessment which I have in hand or do I have to hire a professional mineral rights appraiser to proceed?

I am hoping for a simpler answer than my response above. Thank you very much.

I still have a life estate in the mineral rights and am receiving monthly $$ from the current relevant oil production.
.
.
.
The question remains: Do I need an appraisal to proceed? If so, may I use the county tax appraiser’s assessment which I have in hand or do I have to hire a professional mineral rights appraiser to proceed?

I am presuming that the monthly $$ you are getting are from an oil company that has all the expenses of the drilling and production, and you don’t have to pay for any of those costs. If that’s the case, then the payments are considered royalties, and you can value the rights based on the income, using a discounted cash flow method. You shouldn’t need a professional appraiser for that. I have seen articles indicating for royalty income that a rule of thumb is to value the royalty rights at 5 times the most recent year’s income at the time you give the gift.

AJ

4 Likes

Thanks for the replies I received.

AJ - Could you cite the articles where you read that valuing the royalty rights at 5 times the most recent year’s income is acceptable? I am unable to locate such via several google and bing searches. If you can give me the name of the publication and date it would be a great help. I will need to furnish my CPA with written verification. In consultation with him, it is not something he has dealt with in his long practice so we are on new ground. Thank you very much for any further direction you provide.

Well, I can’t those particular articles again, but I found some others.

Here are a couple that indicate 4 to 6 years of royalties:
https://texasmineralgroup.com/mineral-rights-value-rule-of-t…
https://www.usmineralexchange.com/blog/mineral-rights-value/….

Here’s one that that adds in a factor of how much production is declining:
https://capleroyalty.com/mineral-rights-value-rule-of-thumb/…

AJ

2 Likes

Thanks AJ! Soldiering on!

I do not practice tax and this is not legal advice. It depends very much on the specific transfer documents. But it sounds generally like the following:

So you probably needed to prepare(or still need to do a late one) a gift return for the gift of the surface and remainder interest of the minerals to your daughter. You will have needed the value as of the time of the transfer. That is two components:

(1) the value of the surface;
(2) the value of the remainder—this is some sort of actuarial value based on your life expectancy + the projected depletion curves of production.

Now ordinarily, significant gifting programs are undertaken by high net worth individuals to mitigate estate taxes. And this involves convoluted transactions designed to minimize tax. Really important if you have an estate likely to exceed… $12mm in 2022, potentially back to $6mm in 2026(potentially doubled if married).

According to IRS, seems that if you are nowhere near those amounts in total estate and these assets are not extremely valuable, you might consider using the appraisals that you have:

https://www.irs.gov/businesses/small-businesses-self-employe…

But if you are concerned about estate taxes, engage counsel or a CPA (or both) and let them tell you to pay for the appraisals–and consider it money well spent.

Also a good reason to have your attorney help you–if you actually retained a life estate, it will terminate upon your death. No further transfer is needed. But your grandson will need to update division orders, etc. And you will still need complete the gift return for the gift to your daughter

1 Like

I see that you want to go ahead and gift the life estate during your lifetime. You will still need to determine the value–and it’s a weird value, because (sadly) the LE could end at any time. So it has a value based on actuarial life expectancy.

1 Like

Update: Appraisal documented, warranty deed drawn and filed, all pertinents) notified. I went to my account yesterday to file an IRS 709. He approved all my work but said the 2022 forms would not be available until at least January, come back later. Learning as I go! I hope he and/or I don’t die before I can finish this project!

Again, thank all of you who replied for your input.

Update: Appraisal documented, warranty deed drawn and filed, all pertinents) notified. I went to my account yesterday to file an IRS 709. He approved all my work but said the 2022 forms would not be available until at least January, come back later. Learning as I go! I hope he and/or I don’t die before I can finish this project!

Your accountant is correct. The earliest you can file a gift tax return is January 1 of the year following the year of the gift, and the forms are updated annually.

Ira

1 Like