Dear Michael: We read with interest your last article on using mineral trusts, or limited liability corporations and how to go about setting these up. Can you explain a little further how we go about controlling this income from our minerals – whether it's lease income or royalty income.

We think our kids are great, but we've seen other families where children have shared in the royalty income and, after five years, these kids really don't have anything to show for it.

We think this may be a once in a lifetime opportunity for our children and we don't want them just increasing their lifestyle from the income they receive and not making some use of this money that may be life changing? Any suggestions of how we can impose more of our long-held beliefs and ideas about how this money should be used?

 

I understand how you feel. I've had a lot of my clients tell me they wish they could have done things differently for their children. However, once they put the minerals into an irrevocable trust or a regular Limited Liability Partnership, the control of the parent certainly decreases.

Under the mineral trust, before you start the trust, you have to decide all the verbiage within the trust such as what's in the trust, what income goes out of the trust, who gets the income or assets from the trust and when or why they receive this income, or the assets from the trust.

It sounds easy enough – when one only considers only their children in the equation. Remember, each of your children normally have ties to other people – their spouses, their children, their ex-spouses, their stepchildren. Anything that goes to your children may end up going to any one or all of these people. If something happens to one of your children, you have to have a backup plan for all of those things – also written into the trust before it begins.

Last, but not least, once the irrevocable trust is begun, it should run like a clock – although sometimes non-professional trustees can put their own personal spin on things at times. Professional trustees – such as bank trustees won't. But for the most part, the trust will do what you set it up to do and it'll keep on doing it – even if you don't want it to do those same things anymore because of familial changes.

For people who'd like to exercise a little more control over the minerals and/or their income and how it's distributed, when it's distributed, etc. perhaps the Limited Liability Company is the way to go.

Under this type of structure, you set up a business entity to own the minerals and visa vi the income from those minerals. The good thing about the LLC is that as long as you own more than fifty percent of the ownership of this business, you may run the business in any manner you'd like to. You can pay yourself salary, you can get involved with company pensions plans (to defer some of the income from the LLC), you can withhold income to the other owner/participants.

Why would anyone want to withhold income from the other owner/participants?

Let's say, after a few years of passing income through to your children, you're not impressed with how the money is being handled. You decide to retain their share of the mineral income – as well as your own, perhaps – and start accumulating money within your corporate structure. The children still receive a K1 for their share of the income, and it would be a good idea to work out a plan to pay their income taxes on this income from the corporation.

However, now with this accumulation of funds within your LLC, you might consider using this money to buy other hard assets – such as farmland, housing, rentals, business ventures, or other hard investments or you may just put it into CD's and let it accumulate.

Now, rather than having the money disappear into thin air or into lifestyle changes, you can accumulate hard assets to give to your children someday – assets that have actually increased in value over the time you held them within the LLC.   

Rather than just giving your children a sum of money that improves their lifestyle, now you can accumulate assets that are truly life changing for your children some day. On paper, your children own their percentage of the assets held, but as long as your alive and managing your LLC in the manner you'd like to see it handled, they really have no vote.

There is a further extension of the LLC and that's the LLLC. The third "L" stands for "Limited" as in limited voting rights. Under this structure, you can continue to gift your children the value of the accumulation of assets within your LLLC, but as long as they only own limited shares – non-voting shares – you still control the business.

By continuing to gift, you can shift your ownership of the assets over to the children, but as long as you maintain your 'general' shares, and they have limited shares, you still run the business – even if you only own one percent of the business overall.

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