Creating a Family Trust or LLC in West Virginia
Properties are exchanged for any number of reasons. A family-owned property interest, be it a hunting cabin, expensive beachfront vacation home, or mineral interests, has issues that can be disastrous if there isn’t an adequate plan put in place.
“A family should develop some kind of vehicle to continue to own and manage the property, and provide some creditor protections in the event that family members are in trouble or someone was hurt on the property. It provides protections, and can provide that there will be funds to maintain the property for at least the near future,” says Joshua S. Rogers, an estate and trust attorney in Morgantown.
In West Virginia, there has been a real boom in the oil and gas industries. People who have owned or inherited mineral interests that historically haven’t been very valuable, all of a sudden have land that is producing or has the potential to produce a pretty significant income. Families need legal entities to protect their interests and the income they provide going forward. These entities can ensure the family has the right to the income; the leases are renewed, property taxes paid and royalties distributed; is protected from creditors; is insured against injuries on the property; and the interest will be passed down.
“Often for these situations, we will use a family limited liability company (LLC) and occasionally a trust will be used,” Rogers says.
A family LLC can be set up as manager-managed, where a family agrees to appoint someone to run the company. Often, this will be one or a few family members, a lawyer, or a CPA.
Rogers illustrates a typical scenario when a family doesn’t establish a trust or LLC: “Dad passes away, and now the mineral rights are owned by the kids equally. The kids may not have an immediate interest in selling, or it might not be a possibility. If it’s an interest a family wants to keep, formalizing a legal entity for centralized control and centralized management is essential as it passes from this generation to the next. As it goes down the generational line, the ownership interest gets splintered to the point that no one is keeping up on the property taxes, and no one is doing the administrative work to make sure the interests get transferred properly. Before you know it, the ownership interests are so small and owned by so many people that no one is willing to keep up with it anymore and this is when things are sold in tax sales. It can lead to many bad situations simply from people neglecting what they should be doing.”
Anytime an interest in property is exchanged, there will be tax considerations. Usually these properties can be quitclaim deeded without consideration, which essentially exchanges the property from the original owner into the trust or LLC for an interest in the partnership. Under West Virginia law, there are no excise taxes on this type of transfer.
You may get a discounted value for owning an interest in an LLC rather than owning the mineral rights, which may lower estate taxes a little bit, but not much, Rogers says. West Virginia has no state inheritance tax or estate tax, and the federal exemption is $11.2 million per person, so estate taxes don’t apply to many families doing this kind of plan. For individuals that are in the higher asset range, estate and gift tax assessments must be done by an attorney.
Many of the deeds that are inherited or purchased in West Virginia have issues with the chain of title. An action to quiet title is a declaratory judgement filed in circuit court to resolve all ambiguities, and get a clean title via court order. Oil and gas companies often insist on a quiet title before paying royalties under a lease, Rogers says. These actions can take months or even years to resolve, depending on the situation.
“A lot of times the issues with title happened a long time ago so there aren’t a lot of factual disputes about it,” Rogers says. “Most of the ones I’ve handled are purely legal issues. We take the language in the deed and apply the case law to determine how the title flowed. It can be tough to track down who the interested parties are in these cases and it can take a lot of time and due diligence to do so, so this can be tough litigation.”
Setting up an LLC can be fairly simple and done online in a matter of hours. The difficulties arise, Rogers says, “One, in doing the deed work and conveying the property into the LLC; and two, I always recommend that the family put in place a strong operating agreement or a trust agreement that dictates how it’s going to operate. Who will be the manager or managers/trustees? How will the succession plan work as family members pass away? Some of these documents can be over 100 pages and you absolutely have to work this out on the front end.”
And for that you need a reputable and experienced lawyer.
“You want to make sure that it’s protected to the highest extent possible, with centralized control and multiple beneficiaries that can profit from it. Even if the property isn’t profitable, it still may have a lifetime of memories for the family. And those are the types of situations where these legal entities should be considered,” Rogers says. “There are lots of circumstances where an LLC or a trust may not be warranted. Every situation is different depending on each family’s individual circumstances.”