New technology has made the Bakken shale in North Dakota/Montana very valuable mineral interests. Many donors with new-found wealth now have a greater interest in charitable giving. But how should they give? What are the rules? Should the gift be outright or in trust? Who is a qualified appraiser?
The owner of a mineral interest has the right to exploit, mine and/or produce any or all of the minerals lying below the surface of the property. The varying degrees of ownership make gifts of oil and gas interests to charity complex. Some donors own land with oil or gas deposits while others own only the mineral rights. Both types of owners may lease their mineral interests to an energy company that will extract the minerals in exchange for royalty payments. Oil and gas interests are transferred to charity by deed or, in the case of a testamentary transfer, by will.
Donor Owns Land with Minerals
If the donor owns the land with oil or gas under the surface, the donor cannot contribute less than the donor’s entire interest. Contributions of partial interests in property are not deductible. However, under an exception to the partial interest rule, a deduction is permitted for a gift of an undivided portion of a donor’s entire interest in the property. The donor must gift the land together with the minerals (oil or gas) to permit a charitable deduction.
The donor must own the interest for more than one year to take a deduction based on fair market value. If the fair market value of the interest is $500 or more, Form 8283 must be included with the donor’s tax return to permit a charitable deduction. The gift of an interest over $5,000 in value will require a qualified appraisal, otherwise the charitable deduction may be denied.
The gift of land with oil or gas under the surface may be made outright to charity or to fund a life income arrangement, such as a charitable remainder trust (CRT) or charitable gift annuity (CGA).
Donor Owns Only Mineral Interest
If the donor only owns the mineral interest, the donor can gift the minerals alone to charity or to a charitable trust. Because the donor is gifting his or her entire ownership interest, the partial interest rule is not implicated.
The deduction is based on fair market value if the interest is held for more than one year. The general rule of thumb in the oil and gas industry is that the value of a mineral interest equals the annual income produced by the interest multiplied times four. The filing of Form 8283 and a qualified appraisal will be required if the property exceeds the thresholds noted above. There may be additional issues for life income gifts.
Donor Leases Mineral Interest for Royalties
Even if the donor has leased the mineral interest, he or she may assign the royalty stream to charity. There is no issue of income avoidance because a royalty is not earned income. Since the royalty payment is assigned, the donor avoids income tax on the payment.
The Foundation for Community Care can answer questions on how you can leave a a gift of mineral interest. We invite you to contact us at 406-488-2273, go to our website http://www.foundationfor communitycare.org, or stop by our office at 221 2nd St. NW, Sidney. Of course, there is never any cost or obligation for the information and service we provide and it is in no way designed to replace the counsel of your personal advisors.
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