A Tale of Two Families
By Scott P. Borsack
Let me share with you a story about two families that we shall call Smith and Jones. Both families live in Bradford County and the parents own approximately 160 acres of land that was inherited from their parents. Both families grew with the addition of children, who grew to adults themselves and had children of their own. Both families leased their land to a natural gas exploration company. As drilling activities became more intense in Bradford County the units which included the Smith and Jones farms each saw pads installed and shortly thereafter drilling rigs were erected. Natural gas was brought to the surface from both of their wells and soon thereafter royalty checks followed. All seemed to be going well for the Smith and Jones families.
In time the rosy pictures turned sour as life sometimes will. The senior generation of the Smith family died in a car accident. Several months later, first Mr. Jones and then Mrs. Jones died from long illnesses. The stories of both of the Smith and Jones families were sadly similar. It is from this point that their stories take remarkably different paths.
Prior to the appearance of well pads or even the issuance of a drilling permit, the Smith family sought the services of a qualified tax attorney who recommended several steps to take. The family created a limited partnership and assigned their royalty rights to the limited partnership. They made gifts of limited partner interests to their children and trusts for the benefit of their grandchildren. Mr. and Mrs. Smith had new Wills prepared which took advantage of the federal exemption against the estate tax. They even purchased some life insurance. When Mr. and Mrs. Smith died, there was a Pennsylvania Inheritance Tax of several hundred thousand dollars due, all of which was paid for by life insurance. There were no federal estate taxes due and the children and grandchildren together enjoyed the benefit of nearly $12 million from the value of the natural gas royalties which the senior generation had preserved for them.
The story for the Jones family was not so good. Mr. and Mrs. Jones had done nothing more than prepare simple Wills which essentially passed their estate to each other and then to their children. Like the Smith family, the value of their royalty rights were $12 million. Within nine months of the date of death the Jones family had to pay $4.8 million to the federal and state governments for estate and inheritance taxes. The Jones family did not receive that much in royalty income from the wells prior to death and were faced with a $3.0 million shortfall. They tried to borrow money from their local bank pledging the royalty rights as collateral but were not successful. Friends and family could not raise enough money to cover the tax obligations. In desperation the Jones family sold 60 percent of their royalty rights for $3.0 million raising enough money to cover the outstanding taxes. The sale left the family with only $4.8 million in value. They were also forced to use $1.8 million in cash that they had saved from royalties received.
The conclusion of the stories for both the Smith and Jones families were very different. Driving these results was the fact that the Smith family planned for the Marcellus Shale windfall and the Jones family did not. Which of these stories will become the story of your family? You can choose which path to pursue. What is your plan for the future?
Let me share with you a story about two families that we shall call Smith and Jones. Both families live in Bradford County and the parents own approximately 160 acres of land that was inherited from their parents. Both families grew with the addition of children, who grew to adults themselves and had children of their own. Both families leased their land to a natural gas exploration company. As drilling activities became more intense in Bradford County the units which included the Smith and Jones farms each saw pads installed and shortly thereafter drilling rigs were erected. Natural gas was brought to the surface from both of their wells and soon thereafter royalty checks followed. All seemed to be going well for the Smith and Jones families.
In time the rosy pictures turned sour as life sometimes will. The senior generation of the Smith family died in a car accident. Several months later, first Mr. Jones and then Mrs. Jones died from long illnesses. The stories of both of the Smith and Jones families were sadly similar. It is from this point that their stories take remarkably different paths.
Prior to the appearance of well pads or even the issuance of a drilling permit, the Smith family sought the services of a qualified tax attorney who recommended several steps to take. The family created a limited partnership and assigned their royalty rights to the limited partnership. They made gifts of limited partner interests to their children and trusts for the benefit of their grandchildren. Mr. and Mrs. Smith had new Wills prepared which took advantage of the federal exemption against the estate tax. They even purchased some life insurance. When Mr. and Mrs. Smith died, there was a Pennsylvania Inheritance Tax of several hundred thousand dollars due, all of which was paid for by life insurance. There were no federal estate taxes due and the children and grandchildren together enjoyed the benefit of nearly $12 million from the value of the natural gas royalties which the senior generation had preserved for them.
The story for the Jones family was not so good. Mr. and Mrs. Jones had done nothing more than prepare simple Wills which essentially passed their estate to each other and then to their children. Like the Smith family, the value of their royalty rights were $12 million. Within nine months of the date of death the Jones family had to pay $4.8 million to the federal and state governments for estate and inheritance taxes. The Jones family did not receive that much in royalty income from the wells prior to death and were faced with a $3.0 million shortfall. They tried to borrow money from their local bank pledging the royalty rights as collateral but were not successful. Friends and family could not raise enough money to cover the tax obligations. In desperation the Jones family sold 60 percent of their royalty rights for $3.0 million raising enough money to cover the outstanding taxes. The sale left the family with only $4.8 million in value. They were also forced to use $1.8 million in cash that they had saved from royalties received.
The conclusion of the stories for both the Smith and Jones families were very different. Driving these results was the fact that the Smith family planned for the Marcellus Shale windfall and the Jones family did not. Which of these stories will become the story of your family? You can choose which path to pursue. What is your plan for the future?