What Are the Implications of Having Oil and Gas Royalties When Planning an Estate in Texas?

Estate planning in Texas can be highly complex. It’s even more so when oil and gas (often referred to as mineral rights) are involved.

Many landowners in Texas have minerals on their property that could be valuable, but most owners don’t work to develop the minerals themselves. Instead, they lease those rights to an operating company, including part of any royalties that may be earned as the minerals are developed.

In those cases, the owner retains ownership of part of the royalties. Those royalties don’t necessarily come on a regular basis but start and stop with the production of the minerals. It can take years, even decades, before the minerals are exhausted at that location. That means the royalties may continue off and on throughout those decades.

What Happens if the Oil and Gas Rights Owner Dies Without an Estate Plan in Texas?

Texas law mandates the succession plan for distributing assets when someone dies without a will or other estate plan (known as dying intestate). The mineral interests would likely ultimately follow the state’s ruling of family members in this order, but only after a lengthy court process of establishing the identity of the heirs:

  • Spouse. If there’s a surviving spouse but no surviving children, or if all the children of the deceased were also children of the surviving spouse, then the spouse will likely inherit all assets. 
  • Children. If there’s no surviving spouse but there are surviving children, the assets will be divided among them.
  • Spouse and children. If there is both a surviving spouse and surviving children who are not the children of the surviving spouse, the mineral rights and royalties will usually be divided so that the spouse receives one-third of them and the rest goes to the children.
  • No immediate family. If there’s no surviving spouse or children, the assets may be divided among more distant relatives, including siblings, parents, grandparents, nieces and nephews, etc. 
  • No family. If no surviving family members, no matter how distant, can be identified and located, the assets will most likely be taken over by the state of Texas. 

What Steps Should Be Taken to Protect Oil and Gas Royalties in an Estate Plan?

While it’s possible that oil and gas rights and royalties may go to the person the estate owner would prefer even if they don’t have an estate plan specifying that, it’s highly risky to assume that is what will happen for certain. It’s always possible that someone would bring a legal challenge to the court when it sets out to distribute the assets, and if they’re successful, those assets may not go to the right person. In any event, the transition is much faster and less expensive with a proper estate plan in place. To ensure that all assets are distributed according to the owner’s wishes, it’s vital to work with an experienced Texas estate planning attorney who can help develop a plan that will allow the assets to go to the beneficiaries the owner named. 

There are at least two steps that must be taken to transfer oil and gas royalties from one owner to another. 

  • Recording the deed. A deed must be recorded in the county where the mineral rights exist. This legalizes the ability to receive royalties.
  • Transfer the deed through the operating company. Once the deed has been properly recorded, it must be presented to the operating company. When the latter has the recorded deed, they can change the recipient of the royalties. 

Suppose the original recipient of the royalties dies intestate. In that case, the matter must go through probate court, which could have the final say on who should be the beneficiary–and it may not be the original owner’s first choice. If there is no will, the court must appoint a second attorney, called an ad litem attorney, to investigate and prove that all the heirs have been identified. At least one of the heirs must take action to pay for the cost of the probate and for both attorneys, before the court will even consider who the heirs are.

What Are the Options for Including My Oil and Gas Royalties in My Estate Plan?

There are multiple ways to do this. Among the most common:

  • Wills. Creating a will that specifies to whom the royalties should pass is a good way to create a legal mechanism that will likely be honored after the original owner passes (as long as the will is legally drawn up and no one contests it). However, wills must go through probate regardless of whether anyone contests it. Probate is a public process, so the details of the will may become public knowledge. 
  • Trusts. The estate’s owner can create a revocable trust that takes ownership of the royalties. When the owner passes, the trustee overseeing the trust passes the ownership (and the deed) to the named beneficiary. Trusts don’t have to go through probate, so the information remains private. It may also be quicker to distribute assets held in a trust and don’t have to go through probate. A revocable trust has an advantage in that the estate’s owner can change or cancel the trust at any point in their lifetime, so if they want to name different beneficiaries, they can do so. Trusts may be revocable, non-revocable or may be contained in a Will, depending upon how they are written. The downside is that there is no official place where trusts are registered or kept, so the specific documents sometimes cannot be located after the death of the owner, which may result in further court proceedings. 
  • Family Owned LLCs. If a family owns land as well as mineral interests or has other business interests, another method of passing the benefits to the next generation may be through a family-owned business or LLC that would maintain ownership of the assets.

There are pros and cons to each of these approaches. It’s crucial to understand that oil and gas royalties can be highly complex and bureaucratic to account for in an estate, so it’s highly recommended that you work with an experienced estate planning attorney, as well as a tax expert. 

What Should I Do if My Estate Will Include Gas and Oil Royalties?

Call the Laura D. Heard Law Firm as soon as possible at 210-775-0353 to request an initial consultation. This type of estate planning can be incredibly complex. Our knowledgeable, experienced estate planning attorneys can review the specifics of your estate to help you develop an estate plan that meets your needs now and your beneficiaries’ needs in the future.