By J. Corey Reeder
When estate
planning lawyers discuss gifting as an estate planning strategy with
clients, there are a few very important components to this discussion
that must be reviewed in order to most effectively leverage gifting as
an estate planning strategy. Pursuant to the Tax Relief, Unemployment
Insurance Reauthorization and Job Creation Act of 2010 (the "Act") that
President Obama signed into law last December, each person has a five
million dollar exemption for lifetime gifting over the thirteen thousand
dollar per person annual exclusion. What this means is that under the
Act a person may make gifts over the annual exclusion of up to five
million dollars without incurring gift tax. That being said, the Act is
only in effect for 2011 and 2012 and with 2011 almost over, there is not
a lot of time for a person to take advantage of this exemption.
The most important
part of the gifting discussion centers on what type of asset is most
suitable for gifting. In many situations, this discussion will focus on
assets that are expected to appreciate in value after the gift is made
such that the growth of the asset gifted will be outside of the person's
estate who made the gift. In the case of a gas lease, an interest in
natural gas may be a very attractive asset to consider gifting. This
analysis focuses on the timeline of the gas lease because the value of a
natural gas interest is usually lower the earlier one is in the
timeline.
This makes sense
because determining the value of a natural gas interest will take into
account (among other factors) the "bonus payment" that the owner of the
interest would receive for the right of a gas company to drill for
natural gas and as well as the "royalty" payment once the well is put
into production and natural gas is being extracted. Consequently, if a
gift of a natural gas interest is made prior to these two factors (in
addition to many others) the value of the natural gas interest will not
be realized until after the gift is made and thus may be removed from
the estate of the person making the gift.
Another important
factor to consider is if there are any "discounts" that can be taken
against the value of the asset being gifted so as to reduce its value
and the ultimate amount of annual or lifetime gift exclusion that a
person must utilize. In the case of a natural gas interest, there are
many discounts that can be applied to the value of the asset, however,
these discounts are based on many factors and many of those factors are
time sensitive. A few examples of discounts related to natural gas
interests would be the percentage ownership of the natural gas interest;
the classification of the natural gas reserve pursuant to IRS
regulations; location of the property to active producing wells;
location of the property to mid-stream pipelines; and how many wells can
the acreage support. Clearly the aforementioned list is not exhaustive
and is very generic in nature, but it should highlight that there are
many factors that should be considered when doing a valuation, and given
that the valuation will have to pass IRS scrutiny, it is imperative
that a client engage a valuation firm that utilizes techniques and
methods that are in line with the IRS regulations and Tax Court
holdings.
Further, it should
be noted that a valuation is a time sensitive study which means that
one should not engage a firm to do a valuation unless the client is
prepared to make gifts of the natural gas interest so as to not spend
funds for the valuation only to have it become worthless because of the
passage of time.
In conclusion,
with the current gift tax environment, the gift of a natural gas
interest at the proper time could allow a client to pass significant
wealth to the next generations free of any estate or gift tax provided
an appropriate and well documented valuation is obtained.
© 2011 McNees Wallace & Nurick LLC
McNees Insights is presented with the understanding that the
publisher does not render specific legal, accounting or other
professional service to the reader. Due to the rapidly changing nature
of the law, information contained in this publication may become
outdated. Anyone using this material must always research original
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applicability to specific legal matters. In no event will the authors,
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