Asset Protection Planning
Developing an estate/asset protection plan for mineral rights has become a very hot topic for individuals. If you own mineral rights, have not entered into an oil and gas lease agreement, and are afraid that those mineral rights could be lost if you enter a nursing home, you need to develop an asset protection plan for those mineral rights with the assistance of counsel familiar with the Medicaid rules. Generally if a single individual enters a nursing home, they are permitted to retain $1500 of assets and still qualify for Medicaid assistance. For a married couple, the nursing home spouse may retain $1500 of assets and qualify for Medicaid. The community spouse may retain the residence, one vehicle, and one-half of the remaining assets up to a maximum of $113,640 and a minimum of $22,728. Mineral rights are an asset, however, with proper planning early, the entire amount of your mineral rights can be preserved for your loved ones even if you enter a nursing home. This planning will involve gifting the mineral rights to your loved ones. Timing of the gift is very important, so retaining the assistance of counsel to assist with this type of Asset Protection planning would be beneficial.
As a result of the oil and gas boom, individuals are receiving significant amounts of taxable income from oil and gas signing bonuses and royalties. If you have already received oil and gas income, making lifetime outright charitable gifts or establishing a Donor Advised Fund can help reduce the income tax impact. If you have not received the income yet, but soon will, the use of a charitable trust can reduce this income tax impact. The details of these ideas are as follows:
Outright Charitable Gifts during Life
The simplest way to leave assets to a charity is by an outright gift to the charity. You receive a current income tax deduction in the year the gift is made. This type of gift can especially be beneficial in the year a significant oil and gas lease bonus is received. For example, if you received $500,000 from this bonus, the federal and state income taxes could be as much as $210,000 for an Ohio resident. By making an outright gift to a charity of $50,000, you could save approximately $21,000 in federal and state income taxes while only reducing your amount of after-tax dollars by $29,000.
If you are not sure what charity to donate the funds to at this time, establishing a donor-advised fund may interest you. This is another way to reduce the income tax impact of receiving an oil and gas bonus payment. A donor-advised fund is a charitable giving technique that is established during your life and administered by a third party. The purpose of the fund is to manage your charitable donations on your behalf over your lifetime. This type of fund is easy to establish, costs little to administer, and is a charitable giving alternative to an outright charitable gift. Donor-advised funds are most commonly used with community foundations such as the Tuscarawas County Community Foundation. Since the Tuscarawas County Community Foundation (“Foundation”) owns the assets, you receive an income tax deduction at the time the gift is made. The Foundation administers the fund. As long as there are assets in your fund, the Foundation makes annual charitable gifts to public charities according to your wishes in the fund agreement. The assets are not included in your estate on your death.
Charitable Remainder Unitrust
If you have not already received your oil and gas bonus, transferring the ownership of your real estate to a charitable trust may be an option for you. A charitable remainder unitrust (“CRUT”) is a type of trust into which you make a contribution of property in exchange for an income interest payable to you for your life. On your death, the trust assets pass to the charitable organizations named in the trust document. A CRUT qualifies you for an immediate income tax deduction for a portion of the gift and an estate tax deduction upon your death. In addition, you do not recognize gain on the transfer of assets to the trust. The trust itself is exempt from income tax, so it too avoids recognizing any income taxes.
Please contact your attorney and tax advisor to discuss and implement planning ideas for your mineral rights.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
James F. Contini II, Esq.
Certified Specialist in Estate Planning,
Trust & Probate Law by the OSBA
Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
158 North Broadway
New Philadelphia, Ohio 44663