STEUBENVILLE - If you're one of the fiscally fortunate few who've leased mineral rights to an energy company, there's one important piece of business still to be done before you can settle back to enjoy your newfound wealth.
Pay the tax man.
"The first thing I tell people is to get a good accountant," said Ken Perkins, president of Tri-State Financial Services in Steubenville. "It's all taxable income to them, they didn't sell anything so it's rental income, and that means it's fully taxable, they have no basis in it. They'll have to pay full taxation on it."
Tri-State Financial Services President Ken Perkins, right, offers financial planning services to landowners who lease mineral rights to energy companies. Perkins said leasors need to be wary of spending their lease and royalty money until they’ve seen an accountant and know how much they’ll have to pay in taxes. (Linda Harris)
Most leasors will see 40 percent of their windfall going to taxes 35 percent to the federal government, the other six percent to the state. Essentially, that means if you got a check for $600,000, "you really have $360,000" after taxes, he said.
"I hate to see folks go and spend all their money, then find out they have taxes or future taxes to pay," said Perkins, who advises leasors to avoid spending sprees bankrolled by their windfall, at least until the taxes are paid and they have a realistic understanding of their financial position and a financial plan in place.
"People forget about taxes. Most of these folks have never had an accountant they're farmers and landowners, they've never really had a need before, but now they need one. From there, we talk to them about what they have remaining, ask them about their goals ... a lot of these folks are older and they're going to need income from it so we talk about their goals. Do they want income, do they want to preserve the money for the next generation ... you'd be surprised how many people come in and say they don't really need the money, so we talk about what they want to do for their kids and grandkids. They probably would never have been able to leave them a legacy before, now they can.
Perkins said it can be a life-changer, one most people are ill-prepared for: Things like long-term care become an issue, he said, because you have to spend-down your assets to $1,500 to be eligible for Medicaid. There's also estate planning to consider.
He said leases and royalties typically are long-term opportunities. "They're going to have a lot of assets they've never had before," he said. "Wells will pump out royalties for 20 years or more, so when they pass away they're going to have an estate problem they'd never have had before.
"A lot of these folks have owned their property for a lot of years," he said. "They could be 70 years of age .... The people getting the big checks are the farmers, they have the land. One guy told me his highest earning year ever was $40,000, and he'd just signed a lease for $1 million. They'd lived comfortably, but to come in now, with this kind of money ... a lot of them are just scared to death, they're worried how it's going to change their life. One gentleman just sat here and shook."
While he admits it's a great problem to have, he also understands how it can be a scary situation.
"Sometimes when they walk out I feel bad for them, they're that nervous ... people start thinking about all the bad things that have happened after people hit the lottery, and they freak out a little," he said. "But it's amazing to me how many people in their late 60s and 70s say they're comfortable and they don't need it, they want to give it to their kids and grandkids."