Original Publication: San Antonio Express News, May 19, 2014
Dear Mr. Premack: Like many others who own land in the Eagle Ford shale area, I now have a mineral lease which is producing income. Also, like many others, my wife and I are concerned about protecting our estates from exposure to liability if something should go wrong. This land has been in my family since my grandfather purchased it. What strategies exist to shelter the land and to shelter our savings from liability while still enjoying income from the land? – U.L.
You are correct to be concerned about liability. The daily operations of hydraulic fracturing are handled by the oil company. But as the landowner, you are exposed to liability under many scenarios, one of which is environmental damage from the fracking. Any allegation of damages in a lawsuit will force you to defend yourself, and you want your liability shield to be as strong as legally possible.
Insurance is, of course, a basic necessity. You should have a broad general liability policy covering risks related to your land. But all policies have their limits and there are some risks that are not covered. Go beyond insurance when building your defenses.
Work with a qualified law firm (which can handle both estates and business law) and with a CPA (to be sure the tax ramifications are fully understood). The law firm will help you by establishing a Limited Liability Company and a Trust, and then modifying your deed so that the surface rights and the mineral rights are separate. The mineral rights will be transferred to the LLC and you will continue to individually own the surface rights. The LLC will be owned by the trust, which will, in turn, be controlled and owned by you.
An LLC is a hybrid form of business entity. Unlike a corporation, which must have shareholders, a board of directors and officers, an LLC is a flexible type of entity that can operate like a corporation or like a partnership. For tax purposes, the LLC can be a disregarded entity where the all profit is passed to the LLC’s members who then treat it as personal income, or the LLC can be taxed as a corporation. For management purposes, the LLC can be operated by one person or by a board of directors, or anything in between (like a married couple or several siblings). For liability purposes, the LLC itself may bear liability but the owners’ other assets are shielded.
Splitting the mineral rights from the surface rights is a further protection for you. If there is environmental damage from the fracking and the owners are held liable, the owners’ assets may be lost in the judgment. If the owner is the LLC, and all it owns is the mineral rights, then it is only possible to lose the mineral rights. If the LLC does not own the surface rights, then the surface rights cannot be lost in a lawsuit arising from the mineral rights. Also, any royalties that were paid to the LLC but already distributed to the trust are no longer assets of the LLC, and would be safe from liability in a lawsuit.
Having a Trust own the LLC simplifies the management of the LLC as well as the owner’s estate planning. The LLC can be managed by the Trustee of the Trust, allowing for easy succession if a Trustee becomes incapacitated or dies. It also allows for planned succession if a beneficiary dies, so you can keep the benefits inside the family for many decades. Assets held in Trust can be passed to new beneficiaries after your death without probate.
Unlike the precious gems buried deep within the earth, oil is dirty. Bringing it to the surface using hydraulic fracturing (fracking) breaks the subsurface strata, allowing the oil to be forced to the surface. Underground fracturing and flooding may cause damage to the water table, which could give rise to liability for the landowners who permit the fracking to take place. (c) 2014 Paul Premack, mineral collection of the Museum of British Columbia.
Forming an LLC and a Trust is complex, but the benefits can be extensive. As with all legal planning there are details which will be specific to your personal situation, and there are always pros- and cons- to be weighed. Consult with a qualified estate planning and business formation law firm to see if this strategy is appropriate to limit your exposure to liability.
Paul Premack is a Certified Elder Law Attorney practicing estate planning and probate law in San Antonio. His firm has offices in Texas and Washington, and handles business entity formation issues. Submit estate, probate, elder law and LLC questions by clicking “submit a question” at www.premack.com, or go there to view the archive of his past legal columns.