Mineral Rights & Royalties: Why Charitable Wealth May Be Under Your Feet

One of the more unusual means of charitable giving is the ability to access mineral rights & mineral royalties. In the US, it is estimated that nearly 8 – 12 million owners exist of mineral rights, with a smaller subset of recipients being exclusively holders of mineral royalties. A vast majority of these owners consist of individuals as opposed to corporate interests.

While the total value of charitable giving via mineral rights and royalties is unknown, this powerful giving strategy is naturally concentrated in America's leading energy basins. These regions, including states like Texas, New Mexico, North Dakota, Pennsylvania, and Louisiana, host the sizable oil and natural gas holdings that can fuel this unique form of giving.

Mineral wealth is often driven by localized productivity rather than only statewide rankings. For example, Ohio, while not always highly ranked nationally for natural gas, has experienced a shale drilling boom in its east-central parts, creating significant wealth. The scale of this regional production is evidenced by reports from producers like Ascent Resources, which has paid over $1 billion in royalties to Ohio mineral owners since 2022.

This article will focus on understanding the similarities and differences between mineral rights & royalties. It will look into how their value can be used for charitable giving, and the tax advantages they offer to donors who benefit from such holdings.

Mineral Rights vs. Mineral Royalties

Mineral rights are the subsurface ownership of land and the ability to access and remove those minerals. In many states or jurisdictions that have high mineral production, the concept of “severance” may have been established decades ago, in which the subsurface ownership of land is distinctly separate from the ownership of the surface of the land. Severance created two distinct legal estates: the land itself ( the “surface estate” ) and the land underground (the “mineral estate” ).

A mineral royalty is the right to receive a percentage of the share of production that is extracted from the land. This can be referred to as  a “share of the gross” and includes the following parameters:

-Gross Revenue: The royalty owner receives income based on the value of the mineral sold at the surface.

-No Costs: The royalty owner does not pay for any costs of production. That expense is born by the mineral producer i.e. the oil or gas company that has drilled, operates and maintains the well.

-Royalty Percentage: This is a percentage of the production value of the minerals sold at the surface. Many leases have a royalty percentage of 20-25%.

In many instances, the ownership of mineral rights and access to mineral royalties are the same. Those who only access mineral royalties without ownership of mineral rights are a small percentage of the total.

One of the most common forms of mineral royalty ( and the most ideal for charitable giving) is the Non-Participating Royalty Interest (NPRI). This royalty provides a passive income stream to the holder based purely on the success of the well.

Tax Advantages

There are several tax advantages to using mineral rights or royalties for charitable giving:

-Income Tax Deduction: The donor can deduct the appraised fair market value (FMV) from their annual income, not just the original cost basis.

-Estate Simplification: This removes a complicated and possible hard-to-value asset from the donor’s taxable estate.

-Avoiding Tax on Royalty Income: Gifting the income stream to the charity removes variable income from the donor’s adjusted gross income (AGI), helping the donor avoid a push-up into higher tax brackets.

The Mechanics of Giving Mineral Wealth

There are several ways to make gifts including:

• Outright Gift: For those donors who no longer want to hold the asset, they can transfer the entirety of the right or royalty through the means of a simple deed to the charity.

• Term Royalty Deeds: In this scenario, the donor can donate the income stream to the charity for a period of time. At the conclusion of that time period, the royalty reverts back to the donor. This method can be ideal for supporting specific capital projects or meeting specific dollar goals of the charity. A NPRI is an ideal tool for this type of gifting.

• Charitable Vehicles: A donor could use their rights and/or royalties, to create either a charitable remainder trust (CRT) , charitable lead trust (CLT) , or a donor advised fund (DAF) .

An additional vehicle that is available is a charitable gift annuity (CGA). In this process, the donor makes an irrevocable gift to the charity. A contract is created in which the charity will pay the donor a fixed amount of money each year for the rest of the life of the donor. Once the donor passes away, the charity keeps the remaining balance of the gift for its own mission.

When making such gifts with mineral rights or royalties, several steps are required:

-Valuation: Donations valued over $5000 should have  a qualified appraisal of its fair market value (FMV) as well as the filing of IRS Form 8283 Noncash Charitable Contributions to substantiate the FMV.

-Acceptance: Not all charities may know how to accept a gift of mineral rights or royalties and may be reluctant to work with such a gift. Charities who do accept such gifts will require  “royalty interests” ( which are income only and have no costs like an NPRI) and reject “working interests”

(which carry costs and financial/environmental liabilities).

-Legal Transfer: A deed of conveyance transferring the rights/royalties would need to be recorded in the state and local jurisdiction. Additional items like leases and recent royalty statements may also be required as part of the transfer process.

Conclusion

Whether executed as an outright gift, a term royalty deed, or through a charitable vehicle like a CRT or CGA, leveraging this unique “subsurface” wealth requires careful valuation and coordination with a charity prepared to handle the necessary legal transfer.

At Generosity Nexus, we have helped donors and charities travel down the complicated path of valuing, accepting, and transferring mineral rights and royalties. Working in conjunction with other experts, we can help all parties in this process become successful both in the giving and receiving of this mineral gift.

Don’t hesitate to schedule an appointment to learn more about how we can help you.