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What if I don’t do any planning after I sign an oil and gas lease? (part 2)

Posted: October 24, 2010

This is part 2 of last week's news item.

John C. Becker
Penn State Professor of Agricultural Economics and Law


5. Will the right person get the property, i.e. will the person who could or should benefit most from the property be the person who receives it?

If you take no action before your death to decide what happens to your property after your death, the intestate law will apply and distribute your property to the designated list of heirs set forth in the law.  In general the law looks first to spouses then children, parents, grandparents, siblings, children of siblings, aunts and uncles, children of aunts and uncles and cousins  in making these distributions.  When a set of heirs is identified, all heirs in that class of heirs share equally in the property until the property is fully distributed.

Whether any of these people are the right people to inherit your property, or the people who could or should benefit most from your property is something only you can answer.
 
6. Will the distribution to my heirs be equal or equitable? 
 
In the absence of any decision on your part to prepare a will, living trust or create a joint ownership arrangement, the likelihood of an equal distribution among all children is great.  Whether an equal distribution is a fair distribution is a personal assessment only you can make.
 
7. What will be the consequences of a transfer of my property after my death?
 
Perhaps the initial concern is assessment of inheritance and estate taxes, if these taxes exist when you die.  As an item owned by you, this asset is subject to inheritance and death taxes if the interest is separately owned.  Assets that are owned as tenants by the entirety are not subject to inheritance tax in Pennsylvania and may be subject to a marital deduction in calculating federal estate taxes if they exist at that time.  A portion of the value of assets owned as joint tenants with right of survivorship property will be subject to inheritance tax.  Separately owned property transferred from a married person to his or her spouse is taxed at a 0% rate for PA inheritance tax.
 
8. What might be some short term and long term impacts of my failure to make a decision regarding the distribution of my royalty interest after my death?
 
In the short term, one impact involved loss of a portion of the interest to inheritance or estate taxes.  This will reduce the value of the royalty interest when it passes to the next owners.  The value determined for the royalty interest will be the most important part of this situation.  If death occurs when production is high, the impact of these taxes will also be higher. 
 
Once in the hands of the next owner, the asset will be used as that person sees fit.  The decisions they make regarding the property could be either good decisions or bad decisions.  If the person making the decisions lacks experience in making these decisions, then the risk of poor decisions might be increased.
 
Once these assets pass to the next owner, the assets are subject to judgment claim by that person’s creditors as any other asset owned by that person would be.  If the next owner’s marriage ends in divorce, the royalty interest will be considered as part of the assets the divorcing couple will distribute among themselves.  How it will be divided cannot be forecast, but it is safe to say the royalty interest will be valued and included in the marital assets that the divorcing couple will ultimately divide between themselves.

9. Summary

Planning is often done to avoid particular problems or to take advantage of opportunities that require affirmative steps be taken during an owner’s lifetime.  When there is uncertainty as what types of problems will be faced, planning becomes more difficult because of the uncertainty.  This discussion focused on some of the typical questions people ask when the question of planning is raised.  The examples are not the only questions that people might ask and you may not have gotten answers to all the questions you have.   If you have not gotten the answers you hope to get keep looking and make decisions only when you have the amount of information that makes you feel comfortable making it.