Downturn in Oil and Gas Market Has Estate Planning Benefits

By John M. Hartzell, Jr.

Market prices for oil and gas commodities are currently at record lows. While this may be discouraging to many royalty owners, the current gloomy oil and gas market may reveal a silver lining in the way of timely estate planning and tax strategies.

While market prices and values are depressed, now is the time for owners of oil and gas assets to consider making gifts to their future heirs, before prices and values go back on the rise. By doing so, any future growth or appreciation on the transferred asset would occur outside of the owner's taxable estate. Gifting an oil and gas interest may also allow the donee to receive royalty income and pay the related income taxes at a lower tax rate compared to the donor.

Certain decisions need to be made before gifts are distributed or a wealth transfer program is implemented. For example, having an entity - such as a limited partnership, limited liability company or trust - own the oil and gas interest is an important consideration. Determining whether the gift is made outright, and free of restrictions, to the donee versus to an entity of which the donee is a beneficiary (trust) or an entity (limited partnership) should be carefully evaluated. As a component of a wealth transfer program, entity ownership of an oil/gas interest can provide certain protection and preservation benefits.