Mineral rights and royalties require careful estate planning considerations

Generally, there are three kinds of interests associated with the excavation of minerals under the surface of a parcel of land. These are:

• Mineral interests
• Royalty interests
• Working interests

“Mineral interests” or “mineral rights” are the property rights one has in the oil, natural gas, precious metals and other minerals that exist under the surface of a parcel of land. If you are a landowner, you have the right to search for and extract the minerals that may be deposited below the surface of your land. If you produce oil, natural gas or other minerals, you have a right to sell, lease, or convey those minerals to another person or entity.

If you do not wish to excavate your land to search for minerals, you can lease your land to another party, who will then excavate the land. Oil and gas companies are quick to enter leases with landowners so they can excavate and produce the oil, natural gas and minerals that exist within the owner's parcel of land. The lease that you enter with the oil and gas company should afford you a share of the revenue that the company earns from the minerals that it produces from your land and sells. Because you do not yet know what, if any, minerals exist under your land, the share of revenue you receive may vary depending on any leasing bonus you may contract for in the lease. You will want your share of the revenue to be free and clear from the cost of extracting and producing the minerals, but these terms will be set out in your lease agreement. Your share of the total revenue obtained is your “royalty interest.”

The working interest is the oil company's interest in the oil, natural gas and minerals that it will produce for revenue. The working interest is affected by the royalty interest agreed to in the lease and the cost of production, which should be incurred by the oil company. You should not sign a mineral lease without seeking the advice of your attorney or estate planner.

The broadest mineral rights you can own are the rights to minerals that correspond with the surface area of the parcel of land that you own. You will know you own these rights if you own the surface rights to your land and, upon a proper title search, you determine that there are no other owners of the mineral rights under your land.

You also could own mineral rights under the surface area of a parcel of land without owning the surface area. This could occur because you leased mineral interests from another landowner or because you inherited mineral interests when land was passed down through previous generations in your family, but you share those interests with other family heirs, without actually owning the land.

Likewise, you could own surface rights without having an interest in the mineral rights under your land because you lease the mineral interests under your land to another party. You should receive royalty interests in exchange for those mineral rights.

Often, people do not know that they hold an interest in mineral rights. Every state provides searchable online records of unclaimed oil and gas royalties that you can search to see if you have any interests of which you are unaware. Each state may have a statutory provision that sets a time limit on unclaimed mineral rights, ranging anywhere from 3 to 10 years. If no one claims the unclaimed royalty interests within the prescribed time limit, those interests will “escheat,” which is a formal way of saying that those unclaimed royalties will go to the state.

Sometimes, however, you may learn that you have mineral rights by receiving notice in the mail. This may occur when someone inherits land but is not aware of the history of ownership of the mineral rights associated with the land. When this happens, the owner might receive a mineral lease proposal from an oil and gas company, which hired someone called a “landman” to track the title records for ownership interests in the land. If you receive such a lease proposal, this means that the oil company is interested in leasing the mineral rights contained under the land that you inherited. You may then negotiate to lease the mineral rights to the oil company and receive royalty interests on the minerals that the oil company produces from your land.

Keep in mind that a surface landowner who has mineral rights under the land can lease the mineral rights to multiple parties, each of whom may lease mineral interests designated in a specific area within a plot of land. This is called “fractioning” or “fragmentation.” If the land or mineral interests you own have been fractioned or fragmented, this can complicate your efforts to convey your mineral rights and royalties in your estate plan without a Division Order, which identifies the value of your interest. If you receive a Division Order, or if the land within which you hold mineral interests is fractioned or fragmented, you should seek advice from your attorney or estate planner.

Aside from simply gifting your mineral or royalty interests to someone during life, there are basically four ways to convey mineral rights and royalties in your estate plan:

• Lease
• Deed/title
• Will
• Trust

For any conveyance of mineral rights to be effective, the conveyance must satisfy five required formalities:

• The conveyance must be in writing.
• The writing must express the intent to grant or convey rights.
• The instrument must adequately describe the rights being granted.
• The instrument must identify the grantor and the grantee.
• The instrument must be properly executed.

Your estate planning attorney can discuss with you the advantages and disadvantages (including tax consequences) of each of these options and how to make the appropriate conveyance that is right for you.

If you have mineral rights to your parcel of land, you may lease your mineral rights to a third party — usually an oil and gas company — and obtain royalties as a share of the revenue derived from the lease, as described above. When you lease your mineral rights for a third party to excavate, be sure the lease includes provisions respecting your other rights and interests in the land, including those to the surface area and any buildings or landscapes situated on the land. Lease payments often are assigned to the owner's trust.

One common way to include your mineral and royalty interests in your estate plan is to convey your mineral or royalty interests by deed. This can be accomplished by filing a mineral deed form with the local Recorder of Deeds. The Recorder of Deeds will notify the grantee to whom you are granting your rights, and there will be a record of the transfer of ownership. This allows you to convey your interests to your chosen beneficiaries during life, without the expense and delay of probate proceedings.

Just as you may include other real and personal property in your will, you may include your mineral rights and royalties in your will as well. Including these interests in your will, to be conveyed upon your death, will subject your estate to probate proceedings. If you wish to preserve within your family your mineral rights to land that has been passed through several generations in your family, you might discuss with your attorney the option of creating a family partnership or limited liability company (LLC) to which you can bequest your interests and assure that they are not transferred outside the family partnership without authorization.

Another way to convey your mineral interest in your estate plan without subjecting the property to probate is by executing a revocable living trust or irrevocable trust. Your attorney should discuss with you the details of a trust before you choose this option. However, a trust will provide you some access and control over your mineral rights during life, which you entrust to your chosen beneficiaries upon death.

Mineral rights can be life-changing for those who inherit them during life and those who convey them upon death. If you learn that you have inherited mineral rights, or if you wish to convey mineral rights in your estate plan, you need to speak with an experienced estate planning attorney to effectively convey your interests in your estate plan.