A Revocable Living Trust (RLT) will often fail to avoid probate unless all assets are properly coordinated with the RLT (commonly known as “funding” the trust). Failure to fund your trust almost guarantees increased difficulty and expense for your trustee and/or executor at your death. Thankfully, the process of funding your RLT is not difficult and can be accomplished in a relatively short period of time. I always ask clients to provide an outline of their assets so I can provide detailed trust funding instructions. While it's often unnecessary to know the exact number of stocks or mutual funds in a client’s portfolio, it is very helpful to know the type of account and what financial institution(s) my clients are working with. Unfortunately, clients will often provide an incomplete list of assets, sometimes even failing to disclose the existence of an asset all together. An asset omission is usually unintentional but does diminish the effectiveness of my advice and is akin to going to the doctor’s office, telling them half of your symptoms, and still expecting a proper diagnosis. Mineral Rights are one of the assets most frequently forgotten by my clients, thus the topic of this month’s newsletter.
What is a Mineral Right?
Depending on where you live or grew up, the term “mineral right” may not fall in your standard lexicon, let alone register as an estate planning concern. Familiarity with mineral rights does tend to be higher in places like Texas and Oklahoma where images of oil wells peppering the landscape come to mind. Although oil wells are not commonplace in Virginia, the same Carboniferous period fossil fuels are common in the form of coal and coalbed methane in the western part of the state. Virginia’s subterranean natural resources are not limited to fossil fuels, with valuable deposits of sand, gravel, and even Uranium all present. Although Uranium mining has been prohibited in Virginia since 1982, that does not negate the potential value should mining access change.
Fee Simple Ownership
Most people in the United States own their property in “fee simple” ownership. This means the property owner has complete ownership of a piece of land and all things attached or built on the land. More specifically, the fee simple designation affords the owner dominion and control over the surface, the subsurface, and the air space above the property. When real property was sold in colonial times to the first private property owners, all property rights (air space, surface and subsurface) conveyed to that purchaser. Since that first sale, property may have been bifurcated (also known as a “split estate property interest”) and differing parties may own the surface area versus the subsurface area (mineral rights). This commonly occurs when someone sells their land but reserves continued ownership in the subsurface mineral rights. The extent of a particular mineral right is often controlled by the language/restrictions notated in the deed originally separating the surface and subsurface ownership. A mineral right can be restrictive to one particular resource (like natural gas) or can convey extraction rights and ownership to all existing subsurface resources. Please keep in mind that the laws regulating the division of surface and subsurface property rights will vary significantly from state to state. It is always prudent to conduct a title search when completing due diligence for the purchase of property. Without a title search, a new owner
may be unaware of a competing owner’s rights to subsurface resources. Often a surface property owner’s interests will not align with those of a subsurface owner when it comes to the manipulation and disturbance of the land to access minerals.
Titling Mineral Rights in Your Trust
I commonly assist clients with the retitling of their real property into the name of their RLT. The property transfer to the RLT ensures probate avoidance at death and empowers successor trustees to take control of the property during the trust creator’s incapacity. In the same manner, mineral rights should be retitled from the name of the individual owner to that of their RLT through a deed of transfer. It is commonplace for subsurface owners to lease out their mineral rights to mining companies, although a large number of these leases tend to be held in speculation and not actively mined. If resources are being actively mined, I recommend my clients contact the mining company to update the lease agreement and redirect payments/royalties to the RLT. I have found clients will often discount the potential value of mineral rights, particularly when they are not being actively mined (and royalties are not being paid to the client). This can be a rather short‐sighted perspective given the fluctuating values of natural resources over time. As an example, the value of battery grade Lithium (lithium carbonate) over the last ten years has mostly sold below $10,000 per metric ton. Starting to rise in 2018, and then jumping dramatically in 2021 and 2022, we are now looking at prices over $70,000 per metric ton of lithium carbonate. That kind of increase in value for any resource often prompts mining companies to initiate mining when it was previously a cost prohibitive venture.
Trust Funding Reminder
While I would like to believe that every client will dutifully follow my advice to fund their trust, experience has shown me otherwise. One of the more troubling parts of my day is when I meet with the children of parents who created a trust, but failed to fund it. When this occurs, I have the dubious honor of informing them of the increased time, expense and hassle of probate. All of which could have been avoided if their parent had simply funded their trust. I understand the repetitive nature of this statement, but one last time I implore you to take initiative to fund your trust as soon as possible to avoid this costly mistake. If you are unsure how to fund your trust, or you have other concerns regarding your overall estate plan, please contact our office to set up a time to meet with one of our estate planning attorneys.