Financial Considerations for Your Marcellus Dollars

Posted: November 13, 2011

Penn State Extension programs to help people consider all possible options in financial planning your Marcellus money.

Recently Penn State Extension Marcellus Education Team conducted a series of educational programs targeted to landowners who have or will receive natural gas lease/bonus payments and royalties from producing wells. The dollar amounts involved can be extremely significant and unfamiliar to most of us. Failing to develop a clear, well prepared and well-executed plan with experienced professionals has the potential to leave landowners with much less than they expected. 

A recent study of respondents to a survey by Dr. Tim Kelsey at Penn State University showed that of the leasing dollars received by landowners, 55% were saved and 17% were spent on taxes in the year they were received. Additionally, 66% of royalty dollars were saved.

A general comment might be that the earlier you discuss and make plans for how you will manage this new-found income, the greater the number of your options will be. If a check has been issued to you for a lease or royalty payment, strategies for protecting and limiting your tax liabilities as well as estate planning and wealth management are diminished, but not eliminated.

At the Penn State Extension Financial workshops, the following three areas were addressed by an attorney, a certified public accountant, and a financial advisor:
1.    Estate planning
2.    Tax strategy
3.    Wealth management

There is no such thing as “one size fits all” with regard to any of these three subject areas. We all have differing circumstances and priorities. Some of these include age and family, estate size, future plans, and financial situation.

Estate Planning

Some areas regarding estate planning covered in this discussion included types of wills, payment types (lease, royalty, delay and operating rights, timber, damage), and estate valuation. You may also consider alternatives to a will. These might include a living trust, deed conveyance, assignment, or another business structure such as a corporation, limited liability company, or partnership.

Tax Planning Strategy

Tax planning strategies are best discussed with a certified public accountant (CPA), someone knowledgeable in oil and gas income and the local, state, and federal tax laws that apply to them. And again, the sooner the better because this is the time of the lowest asset values, low interest rates, and the valuation discount.

While a lease (or bonus) payment may be a one-time event, royalty payments may be made monthly and over a period of many years. This further intensifies the need for qualified professionals.

Lease and royalty payments are generally considered unearned income and are impacted by local, state, and federal tax laws. A CPA will be aware of changing tax rates and tax regulations.

Wealth Management

So, it’s not enough to plan how to minimize taxes and protect your estate for future generations. How do you invest, grow, and manage this income. Another professional in your life should be a financial advisor. This expert will be able to advise you about the myriad of possible investments and their pros and cons.

The Advisor Trifecta

A concern I’ve heard often is the selection process for getting the right team of professionals working for you. You want both a trustworthy expert and someone with whom you personally feel comfortable working.

Talk with your friends about whom they engage. Are they happy or have they heard of someone else? Does this professional have natural gas experience? Can you speak with them and do they answer your questions? Many of us don’t enjoy doing this, but a call to the person’s office and a short conversation will tell you lots. Were you greeted as a potentially valuable customer? Have they had experience dealing with oil and gas dollars, and for how long?

This selection is extremely important, and treating it as such will serve you well with many benefits, both financial and non-financial, in the years ahead. Most of us will find it very difficult to “fire” an advisor (particularly if they are a friend), and many linger in unsatisfactory relationships for years. Not only can this be personally stressful, it might be costing you thousands of dollars in taxes, poor investment decisions, and estate inheritances.

Jon Laughner
Penn State Extension, Beaver County