Estate planning follows gas boom

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Trusts and estates lawyers in Central and Western Pennsylvania said they've seen an uptick in inquiries from landowners with oil and gas interests who are interested in beginning the process of estate planning.

But, those lawyers added, there are several schools of thought regarding when -- and even if -- it's advisable for a landowner to consider gifting those interests.

R. Douglas DeNardo -- a shareholder at Rothman Gordon in Pittsburgh and chairman of the firm's estates, trusts and taxation department -- said inquiries have been "way up" recently, mostly from people who own land in the Utica Shale regions of Western Pennsylvania and eastern Ohio, where there are high concentrations of so-called "wet" gas.

Wet gas is a combination of methane and other components such as propane, benzenes and ethane that -- in the current market -- is much more valuable than "dry" gas, which is almost pure methane.

Dale A. Tice -- head of the gas planning group at Marshall, Parker & Associates in Williamsport -- said he began receiving an influx of calls from landowners with oil and gas interests in 2010, when the estate tax was originally scheduled to revert back to a $1 million exemption at the beginning of 2011.

While a last-minute agreement between President Barack Obama and Congress stopped that from happening, Mr. Tice said his practice has continued to be busy.

"There has certainly been an increase in the amount of work I'm doing for landowners with the goal of protecting their oil and gas rights and royalty income for future generations," he said.

But while Mr. DeNardo called the oil and gas boom "the most exciting thing that's come along in estate planning in years," he noted that not everyone is a good candidate, explaining that there are several considerations to be made before moving forward with estate planning.

First of all, Mr. DeNardo said, not all landowners with potentially valuable oil and gas interests are wealthy. For them, he said, it's especially important to consider whether it would be prudent to give those interests away -- and to spend money doing so -- prematurely.

"That's why the very first thing we ever do is ask them, 'Is estate planning a bigger concern than nursing home [costs]?'" Mr. DeNardo said.

The second threshold test for potential clients, Mr. DeNardo explained, is to determine whether they can afford to unload their oil and gas stakes before they've signed a lease and collected any bonuses they might be entitled to.

"A lot of these landowners are folks who don't have a lot money," DeNardo said. "They're the farmer that has been farming their whole life and getting by just on the farm income. If they were to do planning now before they signed a lease, in a lot of ways that's giving away everything. Those people aren't willing to do that because they want a piece of it."

The "middle-of-the-road option" Mr. DeNardo offers to many of those clients is to create a legal entity, through which they can eventually gift their oil and gas interests, but through which they still retain ownership of those interests until after they've signed a lease and collected their bonus payments.

"If a person owns 50 acres and they get $3,000 an acre [in bonus payments], that's a nice chunk of change. Then they can gift it away so [the recipients] get the royalties," Mr. DeNardo said, explaining that by employing that method, a landowner can act fairly quickly when the time comes to transfer oil and gas interests because the tax entity is already formed.

Of course, there are those landowners who can afford to gift their oil and gas interests and still live comfortably. To those clients, Mr. DeNardo said he typically recommends planning their estates as early as possible in order to avoid having to pay higher taxes.

"For people that have money to live on, we're telling them, 'The earlier you can give [those oil and gas rights] away, the better,'" he said.

Mr. Tice said he takes a similar approach, encouraging clients whose oil and gas interests are located in what he called "the sweet spot" of oil and gas development to set up entities while the values of their oil and gas interests are still low, so they can lock in at a lower tax rate.

"My thought has been the time to do planning is ideally before the property is fully developed," Mr. Tice said. "I'm basing this on discussions with a guy we've used for appraisals of oil and gas rights and I agree with him that before there's been any development, gas rights may be appraised at a low value.

"But when you look at the value after the wells have been drilled and are in production, at that point the value's going to be much higher. The ideal time to do estate planning is before that."

Mr. Tice did acknowledge, however, that the risk inherent in this approach for a client is spending considerable time and money on estate planning only to find that your oil and gas interests never appreciate in value.

Mr. DeNardo said another potential pitfall for landowners looking to gift their oil and gas interests is bad advice. He said he's seen several cases in which lawyers encouraged clients to transfer their oil and gas rights to family limited partnerships or limited liability companies, but neglected to inform them that those entities are subject to a 2 percent realty transfer tax.

That means that a landowner with oil and gas rights valued at $500,000 could unwittingly find him or herself saddled with a $10,000 real estate transfer tax bill, Mr. DeNardo said.

To avoid this issue, Mr. DeNardo said he's been encouraging more and more clients to set up dynasty trusts, which, if properly drafted, are not subject to the real estate transfer tax.

Tax law is different than energy law, which is why Steve Saunders, an oil and gas and mineral rights attorney in Scranton, tells landowners with oil and gas rights who are interested in estate planning to consult trusts and estates lawyers.

"It's not the kind of thing I recommend anyone dabble in," he said.

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Zack Needles: zneedles@alm.com or 215-557-2493. To read more articles like this, visit www.thelegalintelligencer.com.


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