Tri-State Neighbor: South Dakota Farm Newspaper

Dear Michael: We have a living trust where we have placed our mineral rights. Won't we accomplish the same thing as setting up a separate trust? - Revocable Rights

Dear Revocable: There are a few goals with setting up a mineral trust.

One, you want to move the value of the asset from your estate while it is still based on lease value and a small value, at this time. Once the gift is completed, then all future growth on this asset - due to royalties beginning - will be inside the trust and no longer a part of your taxable estate.

With a revocable trust - which gives you the power to revoke, change, administer or exercise rights of ownership of any part of the trust - all of the assets within a revocable trust are part of your taxable estate.

The value of minerals can be very small, if they are based on the lease income, but when leases turn into production and production produces royalties, the value of these minerals can skyrocket.

The sad thing is the minerals can be worth a lot of value one day, and five or 10 years from now, worth virtually nothing. If you have the misfortune of dying during this royalty period, IRS has no choice but to include these assets at their market value, for estate tax purposes, at the time of death based on the royalty value. It's possible your family could pay a great deal of estate taxes on your minerals only to have the wells dry up a year after you're gone.

Two, you may want to make certain the minerals are dealt with on an ongoing manner for years after your death. If we start segmenting the ownership of these mineral rights between all of your children and/or your children's children, we end up with very small ownership rights scattered about. This can be a problem dealing with these minerals someday as each child has an equal right to decide how these minerals will be leased, used or sold. If any one of the children doesn't like how the minerals are handled, they can put a kibosh to any activity.

With a mineral trust, trustees are named (typically two or more of the children) and they handle all the leasing, income, taxation and dispersion of the income as a single unit. This can save a lot of headaches, as you can imagine.

It also makes your minerals much more attractive to lessors because they typically only want to deal with one entity rather than chasing signatures down all over the country. If they have two quarters side by side and one has one entity and the other is owned by 27 children and grandchildren, the one entity is going to get the call every time.

A revocable living trust can have these same type of things, but it has to have verbiage in the original trust that states the revocable trust will morph into an irrevocable trust upon the second death of the mineral owners. If not, the minerals, like all other property in the revocable trust, will be given to your designated beneficiaries.

The other part of putting minerals in a trust, besides estate tax protection and ease of management, is the shield of Medicaid.

Like any other gift that is given away, Medicaid can attach these mineral rights should you have a claim within the five-year lookback period. However, after the fifth year and no application to Medicaid, the only thing to be attached would be the income derived from the mineral rights and not the rights themselves.

If you had set up a trust, which stated you received 50 percent of the income, then 50 percent of the income is going to go either to you or for your care for as long as you live. But the mineral rights themselves would be unaffected sheltered in the irrevocable trust.

The revocable trust does not have Medicaid protection as the owners have the right to change, rearrange, sell or take property out of the trust. If you do need to make application to Medicaid, you will be forced to sell these minerals to pay for your care.

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