The ever-talented George Strait may have crooned about Amarillo and All his Ex’s in Texas, but The Crude Oil Blues is a ballad instead made famous by rank-and-file Texans. Individuals owning oil and gas interests, as is so common in Texas, often fail to consider the requirements of transferring such mineral interests to their family members or other beneficiaries at death. Executors or beneficiaries too often encounter a daunting process to have those interests and their cash flow transferred into their names. In fact, some opt to leave these interests unresolved, due to lease inactivity or depressed market conditions. These loose ends in the administration of a decedent’s estate will ultimately cause greater entanglements for future generations, especially as the interests get fractionalized.
To ease the transfer of mineral interests at death, mineral owners may be well advised to consider placing their mineral interests in a limited liability company (LLC) during lifetime. The consolidation of Texas mineral interests into an LLC has compelling merits, with compounded benefits for individuals owning interests in multiple states. Whereas most of these interests within families constitute royalty interests, the mineral LLC offers an additional benefit for owners of working interests. That is, critical liability protection is achieved for the high-risk activities of oil and gas production. In fact, our Firm recommends that working interests and royalty interests be segregated into distinct LLCs so as not to expose the royalty interests to the risk of working interest liability within the same LLC entity.
As an example, meet George and Norma, both Texas residents. George owns, as his separate property, mineral interests in Texas, Louisiana and Oklahoma. Norma does not own any mineral interests herself, and has no experience with oil and gas interests or their management. George retires from his illustrious music career and at long last, passes away leaving his entire estate outright to Norma. Norma, as executor of George’s estate, probates his Texas Will in Atascosa County, Texas. Let’s review the steps Norma must take to transfer George’s mineral interests. Then, let’s compare the alternate results if George had formed Crude Oil Blues, LLC, during his lifetime.
Default strategy: Outright ownership of mineral interests at George’s death
- Not only must a Texas probate be undertaken for George’s estate, but in addition his out-of-state mineral interests require that Norma initiate ancillary probate proceedings in both Louisiana and Oklahoma. Once these probate processes are concluded, Norma must file a deed in each county (or parish) where George owned mineral interests in order to transfer the interests into her name. Norma must then contact each oil and gas operator with an active lease regarding the minerals and provide the necessary paperwork to have them reissue division orders in her name. The requirements for achieving revised division orders are as varied as the companies involved, and the royalty payments may be held in suspense for months while this is pending, first being a transfer from George to his Estate, then from the Estate to Norma.
- At Norma’s death, she leaves everything to their surviving children, equally and outright. The children must now go through the same onerous processes of multiple probate proceedings, filing deeds of conveyance and obtaining revised division orders, first out of Norma’s name to her Estate, then from her Estate in shares to her children. The mineral interests are fractionalized between the new owners (and further so, as each generation passes the interests down to future generations). This provides enterprising landmen with a chance to secure one party’s agreement on a lease and use such as leverage in negotiating with the others. A consolidated LLC could avoid that issue and more, as follows:
Alternate strategy: minerals owned in Crude Oil Blues, LLC, at George’s death
- Prior to George’s death, he conveys all of his mineral interests into Crude Oil Blues, LLC, and has division orders reissued to remit payments to the LLC. George is sole Member and sole Manager of the LLC. Since Norma is not versed on managing mineral interests, George includes provisions for the succession of management in the LLC Company Agreement, naming Hank, Jr., as successor Manager if George cannot serve.
- As a result, rather than owning mineral interests at his death, George instead owns 100% of the LLC membership interest. Accordingly, instead of bequeathing mineral interests to Norma, George bequeaths her all of his LLC membership interest. The membership interest passes under George’s Will via his Texas probate process, given it is personal property (rather than real property, as is a royalty interest). As a result, none of the underlying minerals require ancillary probate proceedings in Louisiana or Oklahoma. Furthermore, since the LLC already owns the minerals, there is no change in ownership of the minerals themselves (and therefore, no requirement to transfer by deed or reissue division orders). Norma now has the benefit of the royalty cash flow (through LLC distributions), but looks to Hank, Jr., to manage the interests on behalf of the LLC.
- At Norma’s death, her Will passes the LLC membership interest to the surviving children. They now each own a 50% interest in the LLC. As at George’s death, no deeds, out-of-state probate, nor revised division orders are necessary. Moreover, the mineral interests themselves (still wholly-owned by the LLC) are not further fractionalized down the family lines.
If George has the foresight to undertake the LLC plan, then once he is deceased, it’s pretty much Love without End, Amen.