Mineral Interests: Questions Donors Ask

“Mineral Rights” are defined as the ownership of the minerals below a parcel of land. Another term is “subsurface rights.”

Ores of metals, coal, oil, natural gas, natural gas condensates, coal bed methane, gemstones, and evaporates—including salt, potash, gypsum—are all examples of mineral interests.

Yes. Nonprofits can accept donations of non-producing (non-working) mineral interests. Non-producing interests, depending on the location and number of net mineral acres, can still have value which can be claimed for a tax deduction. A qualified mineral appraiser is needed should a donor want to take a tax deduction for non-producing interests.

The valuation of a producing mineral interest is a sophisticated process that estimates the interest’s expected future cash flow. For purposes of claiming a charitable income-tax deduction for the fair market value of a donor’s mineral interest, the donor will need to obtain a qualified appraisal for a claimed deduction of more than $5,000. The requirements for a qualified appraisal are set forth in the Internal Revenue Code and accompanying Treasury regulations, and the appraisal must be performed by a “qualified appraiser” as similarly defined. The sole purpose of the qualified appraisal requirement is to allow donors to take their charitable income-tax deduction, and the IRS will disallow the deduction if the requirements are not met. Thus, even a good estimate of value based on the interest’s annual income will not suffice to substantiate a claimed charitable deduction.

No. Although we may be able to provide helpful information about the value of the interest and point you to the qualified appraisal rules described above, you are responsible for having the interest valued according to the applicable rules.

Depending on the nature of your mineral interest, you will transfer ownership by a written assignment or mineral deed. In some instances, the nonprofit may be required to record a deed in the land records of the jurisdiction where the interest is located, even if the interest is non-producing.

Yes. You can use non-working mineral interests to create a Charitable Remainder Unitrust or, in some cases, a Charitable Gift Annuity. Because mineral interests are depleting assets, however, most nonprofits recommend that you also contribute stock or cash to stabilize the unitrust value and payments over time. You can also quite effectively fund a “Flip” Charitable Remainder Unitrust with both the surface and mineral interests in your property, allowing the trust to sell the surface interest and retain the underlying income-producing mineral interest.

Yes. You can donate the remainder interest in both the surface estate and mineral estate and continue to use and enjoy the property during the life estate term.

The answer to this question can vary depending on whether the interest is generating a large cash stream, whether the organization needs to hire a third party to manage the interest, and whether the donor used the interest to fund a life-income gift. The organization will evaluate the interest and make the decision that best serves its charitable purposes and your gift plan.

Mineral rights sales have to be filed at the county recorder’s office.  As with other land sales, you should be able to find out about ownership with a title insurance search.  Mineral rights are verified through deeds. Sometimes finding deeds that prove mineral ownership can be difficult if a transfer of ownership has not been diligently processed from one generation to another.

Mineral ownership may be affected by a will, trust, divorce degree, or other documents. Some counties index these documents by “grantor” and “grantee” or the names of the parties to the transaction.

Some state laws consider mineral interests to be “abandoned” if severed interests (where the surface owner is different from the mineral interest owner) have not been used for a period. The interest is considered used if activity regarding this interest has taken place, generally documented by the recording of a lease, mortgage, or other documents. This issue is complex and best handled by a land professional or a lawyer.

A mineral interest owner has the right to execute leases and collect land or leasing bonus payments. A royalty owner does not execute leases or collect bonus payments. Both the mineral interest owner and the royalty interest owner receive a percentage of the income once a well is producing. This percentage is agreed to in the lease that the mineral interest owner signs.

A land bonus is an agreed price between the mineral owners and an operator for a set number of years prior to drilling. The land bonus is like rent, usually paid upfront, but it can be paid annually with a set value per acre.  Sometimes a land bonus will be referred to as a “leasing bonus.” A land bonus is a means of holding the lease until the operator has time to line up contractors to drill a well.

Royalty is a percentage of the revenue from the sale of the product. In some states, there is a minimum royalty given to the owner of the mineral rights. The royalty percentage is usually negotiated in a lease.

The value of the mineral rights is determined by what the mineral is, i.e., coal, oil, natural gas, metal ores. It is also dependent upon the depth to the minerals and distance to markets. A qualified minerals appraiser can make an estimate of value of the mineral rights.

A royalty owner receives a predetermined percentage of production revenue. A royalty owner receives a check as long as the well is flowing. He bears no costs to drill or maintain the well. A working interest owner pays an agreed percentage to drill and complete the well in addition to maintenance to keep the production flowing. His percentage of production revenue is calculated after expenses.

Oil and gas royalties are gifted for a number of reasons.  One is to reduce the taxable portion of an estate.  Another reason might be if the oil and gas royalties are too small to divide among the number of heirs.  Some owners gift because they no longer have the desire to manage their royalties.

Surface rights are defined as the ownership of the land for purposes such as agriculture, housing, and commercial buildings.

Subsurface rights are the rights to extract minerals from below the surface of the land. Many times these subsurface rights are called “mineral rights.” If an individual owns mineral rights to a tract of land, they are legally entitled to the minerals beneath the surface and may utilize the surface within reasonable perimeters to access the minerals underneath.

The terms are usually used interchangeably, although in some states the term “mineral interests” does not include interests of oil and gas. Owners of subsurface interests will need to check the laws in their state.

If you own the surface rights you don’t always own the subsurface, or mineral rights. In the United States, the minerals rights may be owned independently from surface rights.

When you lease mineral interests, it is like a rental agreement. It is the opportunity for someone to extract the minerals from the subsurface for a set period of time (usually 3-5 years). If they do not drill, the lease is ended, and the owner of the mineral interests can lease the subsurface minerals again. Alternatively, if the lessee drills and decides not to pursue extracting the minerals, the mineral interest owner can lease the subsurface minerals again.

When you sell the mineral interests, it is like selling a house. As the seller, you receive an agreed-upon value for the subsurface minerals, and after the documents are signed you receive a lump sum compensation. You no longer own it and cannot receive any additional revenue streams from the subsurface rights. However, it is possible to limit the depth of the subsurface rights or the type of mineral extracted. Generally, one cannot separate oil from gas rights but may be able to separate coal. Keep in mind that coal-bed methane (natural gas) extracted from a coal seam is owned by whoever owns the coal interests.