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Estate Planning for Gas Lease Landowners

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Landowners who have signed an oil and gas lease and have received a large cash bonus payment realize the economic benefit that the Marcellus shale can bring. Those landowners who signed early and did not see the big initial payment may feel frustrated, thinking that they missed out on the opportunity of a lifetime. Those who have not yet been offered a lease, but have seen all of their neighbors enriched by leasing, may also have the sense that the gas leasing boom has passed them by.

In reality, Pennsylvania is only experiencing the beginning of the Marcellus shale play. Although the large cash bonus payments may be intoxicating, the real, substantial benefit will derive from the royalty payments that landowners may receive. While nobody has a crystal ball, the oil and gas industry clearly expects that the Marcellus is going to be one of the most productive gas fields in the nation. As development proceeds, the wealth will be shared with all of the landowners who have signed leases where the gas companies are drilling. For landowners in areas where the geology is good, leasing opportunities will continue into the future.

Signing the lease is only the first step. What landowners must understand is that the Marcellus has the potential to produce life-changing wealth, and that royalty income may continue for many years. Planning to protect this source of wealth for your family is the crucial next step.

It is not too soon to start thinking about this planning now. Those property owners who have started receiving royalty checks have probably already begun to think through concerns about protecting their children or grandchildren and dealing with issues such as financial problems or unstable marriages. But there may be real advantages to establishing a comprehensive plan before the drill rig shows up. Your Marshall, Parker & Weber’s attorney can explain why it makes sense to start planning sooner, rather than later.

To realize the maximum financial benefit from your gas lease will require working with a team of professionals who understand your unique situation and needs. This is not a “one size fits all” planning. You need to discuss gas lease royalty income within the context of your family, your overall estate plan and your specific goals. There are a number of options to consider, as discussed below.

Trust
Trusts are a tried and true estate planning tool that have been used for many years to protect assets from creditors, divorce and nursing home costs. For landowners who are primarily concerned about these types of risks, an asset protection trust may be the ideal way to hold property that is under a gas lease. Those individuals who have larger estates may also consider a variation of this trust for the purpose of minimizing federal estate tax.

Family Limited Partnership (FLP)
There are numerous advantages to using a family limited partnership to hold the rights under an oil and gas lease. Like a trust, the partnership protects the partnership assets from risks associated with creditors or divorce of family members. An FLP allows control over the land in the partnership to initially remain with the parents as General Partners, while gradually shifting ownership and eventually control to the children as Limited Partners. In addition, there may be a discount in value of partnership interests that could be of benefit for those facing federal estate tax.

Limited Liability Company (LLC)
A Limited Liability Company can be used to hold land or rights under a lease in a way similar to an FLP. Like a partnership, an LLC can be structured to restrict ownership of gas lease interests to direct family members. And the LLC can enhance the family’s protection from liability concerns.

Our lawyers will help you evaluate your circumstances and relevant tax and other considerations and help you decide which of the above options, or combination of options, will best accomplish your goals.

For 30 years the law firm of Marshall, Parker & Weber has been known for the expert estate planning assistance we provide to Pennsylvania families. We have the expertise to guide you in the long term planning that will protect your land and the wealth it can produce for your family for generations.