Strike gold for your clients via inherited mineral interests
Unlike other types of property transferred to heirs in estate plans, inheriting mineral interests is not as simple.
People who discover they have inherited mineral interests may be as surprised as the Clampetts on the TV show The Beverly Hillbillies who struck oil on their impoverished farm and became instant millionaires.
Mineral rights’ value lies buried deep beneath the surface, and like drilling an oil well, they’re as much likely to inherit a dry hole as receiving something of great value. Sorting out the inheritance can take time and energy and it likely will require support from you as their advisor to be sure that they receive the full value.
How mineral rights are transferred after death
As is the case in every inheritance, how mineral rights are transferred after death depends on whether the deceased had a will and whether or not the estate is in probate.
If a person dies in a state other than where the mineral rights are located, an ancillary probate may be required before the mineral rights can be transferred or sold. Not all states require ancillary probate, so it’s important your client consults with an attorney about the laws in the state where the mineral rights are located.
During the process, the executor can transfer mineral rights to your client, which means they are allowed to mine and sell resources themselves or enter into a mineral rights lease so others can remove them.
To transfer rights, an attorney or title insurance company must complete a title search to make sure their deceased loved one had the right to convey them. When mineral rights are separate from the real estate’s surface, preparers create a mineral deed with a legal description of all rights they’re to receive.
If there is a current lease on the mineral rights, that means the land’s owner entered into an agreement with an oil and gas company that allowed them to remove resources in exchange for some type of compensation. The executor can transfer interest in the lease into your client’s name so they can collect the royalty checks that the lease generates.
If the estate has gone through probate, the process is straight forward and will likely include these three steps:
1. Contact the county where the minerals are located and ask how to transfer the mineral interests after death. They’ll likely ask for:
- Copy of the death certificate
- Probate documents (if any)
- Copy of the will (or affidavit of heirship if there’s no will)
If the decedent owned non-producing minerals — no active wells and royalty checks — the transfer is complete when the county records the documents and you can skip Step 2.
2. If there are active wells and royalty checks, after the affidavit of heirship has been recorded with the county where the mineral interests are located, contact the well operators to find out what documents they need. In addition to the documents listed in Step 1 above, they’ll also require a new W9 Form with the new owner’s information.
Once the operator has reviewed the documents, they will transfer ownership to your client and send out division orders. After they have verified the information that they send and sign the division orders, they should begin receiving royalty checks.
3. Once these steps are completed, your client will own the mineral interests that they inherited.
“Weeeell, doggies!” What to do with a surprise inheritance
Many people are surprised they inherited mineral interests — often finding out when they get an oil and gas lease proposal in the mail.
Because mineral interests are often passed down from generation to generation, the share of the mineral interest becomes smaller and smaller with each successive generation. This is known as fragmentation of fractionalization. It’s common for people to own small fractions of mineral interests. The administrative oversight that these small interests demand is why people often sell their mineral rights and inherited mineral interests.
The saying, “You don’t know what you don’t know” is especially true when it comes to mineral interests. Receiving a proposal can be as exciting for your clients as it was for Jed Clampett. To make an informed decision about whether to accept the proposal, your client will need to consult with you and their other advisors.
A proposal means the oil company is interested in leasing the mineral rights contained under the land your client inherited. Your client may then negotiate with the oil company and receive royalty interests on the minerals from their land. Be sure to find out the going rate for royalty percentage and lease bonus payments. They may want to hire an oil and gas lawyer, landman or accountant.
A landman is a liaison between oil and gas companies and property owners. Their basic role is to research the land records to determine who owns the mineral rights, negotiate with the owners and then prepare and present oil and gas leases for signatures. Normally, landmen work on a contract basis for the oil companies that they represent. But they also may help landowners receive compensation for their mineral rights and ensure transfers are conducted legally and ethically.
There are many options and scenarios to consider when learning of an inheritance of mineral interests. So, it’s important to work together with your client and their other advisors to make decisions.
Request our Ways to Give at-a-glance one-pager as you discuss with your clients the many ways to fund a gift with non-cash assets such as mineral interests to the association.
About the Author
Senior Advisor, Charitable Estate Planning
American Heart Association