Question: If I establish a Family Limited Partnership to help save income taxes on the royalties I am to receive from my natural gas lease, can the percentages of ownership in the Family Limited Partnership change during the life of the lease?
Answer: Yes. It is possible to change the ownership interest of the Family Limited Partnership during the life of the partnership.
For example, assume that a mother and father have two children and the parents keep 50 percent of the Family Limited Partnership interest and convey 25 percent interest to each of the children. Assuming that the mineral rights were assigned to the partnership before the lease was signed, this means that 50 percent of the bonus monies will be taxed to the parents and 50 percent of the bonus monies will be taxed to the children.
Now, let's assume that the parents want to give a greater percentage of the partnership interest to the children once the bonus monies are received. This certainly can be done, and future royalties will be divided based on the new percentages that the parents and children own.
Likewise, it is possible that if the parents want a larger percentage of the future royalties, they can have the children gift back a percentage of the partnership prior to the royalties being paid. However, this would require the consent of the children. If the children were not willing to give a percentage of the partnership back to the parents, there is nothing that the parents can do to force them to do so.
Question: How can establishing a Family Limited Partnership for oil and gas royalties protect the royalties from long-term care costs?
Answer: A gift of a royalty interest in a lease is in most aspects no different than a gift of any other asset for Medicaid purposes. That is, as long as the transfer of the royalty interest has been made more than five years prior to applying for Medicaid, it will not result in a period of ineligibility for Medicaid. Importantly, it is the effective date of the transfer that should control the date of the gift.
For example, assume that a lease was assigned to a Family Limited Partnership and a percentage of the Family Limited Partnership was assigned to the children. The date of the assignment of the Family Limited Partnership to the children would be the date of the gift. If royalties are received eight years beyond when the assignment of the Family Limited Partnership interest was made to the children, these royalties would not be considered a resource for Medicaid purposes because essentially the parents have not owned these royalties for eight years.
Question: Isn't a transfer of an interest in a Family Limited Partnership to children a gift; and, if so, won't I have to pay gift taxes on the transfer?
Answer: Yes, it is a gift, and, if the value of the gift exceeds $13,000 per donee, a gift tax return will be required. However, under current law, federal gift taxes do not need to be paid until your total cumulative gifts exceed $5 million.
If you would like to submit a question for publication, email it to email@example.com. Jeffrey J. Rokisky is an elder law attorney with offices in Wheeling, Weirton, Elkins, Clarksburg and Robinson Township.