09/01/2011

Dear Michael: We have been ranching in eastern Montana for going on sixty years. Our son has been working with us for the past thirty years, along with his wife and children. We have a fairly large ranch and it’s a lot of hard work. Recently, however, they’ve discovered that our minerals are going to be drilled and there’s a possibility that we may see a large revenue stream from this source…

In our will, we had the land went to our son and we also had the minerals going to him as well because we didn’t want the minerals split up. We have three other children who know the situation, but don’t seem quite happy with it. Do you think it’s the right thing to do to keep the minerals with the land or do you think they should be split up upon our death? – Mineral Aches
 
Dear Aches: I applaud you for making provisions so that your son, who has stayed with you for so long, is going to be able to take over the ranch operation.
 
However, when dealing with my clients, I try to think of all the ‘what if’s?’ that can occur during a person’s lifetime. What if your son inherits the land and then gets an offer for it the next day and sells the entire ranch? What if he gets divorced after your death, and his spouse ends up with half of the property? What happens if he should die and leave the entire ranch to his spouse? Even though you’ll be gone, is this really what you want to have happen to your ranch?
 
In a good estate plan, all of these questions are answered. Should the farming/ranching son ‘sell out’ shortly after your deaths, I think it’s something to be considered about how the other children would feel about this. Certainly, he deserves a larger percentage of the value of the land than the other children who haven’t worked on the ranch, but somewhere between ‘even splits’ and ‘the whole hog’ there is a number that would work for everyone should he decide to sell.
 
This would also cover if he should get divorced and his wife desires fifty percent of the property. I would put it in my will that in order for your son (and his wife) to receive this property, she must sign a postnuptial agreement agreeing that if she should decide to leave what property she can take and what she cannot. Several states have laws regarding this already, but unfortunately, your state is not one of them.
 
Third, I would put something in the will regarding what happens if your son dies shortly after your deaths and the property then goes to his spouse – in most states. You can also put a condition in there whereby if he should die, the property is to go to a trust for the benefit of his spouse, and for the possible future use of any grandchildren that may be interested in ranching, but if none of the grandchildren ranch, then the property would be split between his spouse and your other children – again giving some consideration for the time she’s spent there.
 
When it comes to minerals, many people are afraid to separate the minerals from the land. As such, most of the minerals go to the child who receives the land. In days when minerals weren’t worth anything, nobody thought anything of it. Nowadays, families have been torn apart because one child received the minerals – along with the land – and the other children are on the outside looking in at a revenue source that has nothing to do with farming or ranching.
 
You can do a few things here to keep things fair. One, you can state in your will that the minerals will stay in a trust after your deaths. Perhaps you would give a larger percentage of the income to your son for having to put up with the traffic, the drilling sites, etc. as long as he is actively participating in ranching. However, the other children should not be excluded.
 
You can also set up a trust or LLP (Limited Liability Partnership) today to hold the minerals and handle them the way you’d like to see them handled. By doing this, you can share some of the income from these minerals today – not just when you die.
 
In either case, you can set up either your wills or your trust/LLP in such a manner so that if there is no activity on these minerals for whatever amount of years (North Dakota has a twenty year inactivity clause) the minerals would then be returned back to the landholder. In this manner, if the oil boom passes you by or peters out after ten or fifteen years, the minerals will be returned to your original ranch land and ranch owner.
 
Mineral income really doesn’t have much to do with farming/ranching and it’s a bit unfair not to share some of this wealth with your other children, grandchildren, great grandchildren etc. The land holder should receive a higher percentage for putting up with the drilling, but giving him one hundred percent just isn’t right. If you never want your family to speak to each other again after your deaths, giving the minerals to one child and having him be the only one to enjoy them will guarantee this result.


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