Bonanzas That End Badly: Cautionary tales from Marcellus Shale
windfalls
Sudden wealth can bring unexpected legal consequences
Pittsburgh Post-Gazette
30 May 2011
By Tim Grant,
Stuart "Buzz" Hutchison III, an estate and trusts lawyer at K&L
Gates, has advised families who have sold or are considering selling
Marcellus Shale drilling rights.
Farmers who used to barely get by are now collecting sizable royalties
from natural gas producers that have purchased drilling rights on their
land. But in some cases, the sudden wealth has created a whole new set
of challenges and unintended legal consequences.
"None of my clients had even heard of Marcellus Shale until a few years
ago. It simply wasn't on the radar screen," said Stuart "Buzz"
Hutchison III, an estates and trusts lawyer at K&L Gates who
advises several families who either have sold, or are considering
selling, drilling rights.
With millions of dollars potentially at stake, family disputes over
Marcellus Shale drilling rights can get downright ugly. While working
with many of these Western Pennsylvania landowners to create estate
plans, Mr. Hutchison said, he has seen enough strained family relations
to know the windfall riches can be a blessing and a curse.
"We don't know the ramifications of this kind of income being paid to
people who may not have the financial sophistication to know how to
handle the money, because it's so new," he said.
"Like a lottery winner suddenly showered with wealth, history has shown
it often ends badly."
Complicating matters is that many of the farms in this area are
inherited over decades or even centuries, with several heirs owning
fractional shares of the land. Lease agreements often involve getting
several family members to sign off.
In one case he is familiar with, Mr. Hutchison said a family member who
lives outside the state owns a 1/32nd (about 3 percent) share of a
300-acre farm south of Pittsburgh and is objecting to Marcellus Shale
drilling on the property for environmental reasons, although everyone
else in the family wants to move forward.
"What is this family going to do?" Mr. Hutchison asked. "While she has
objections to the Marcellus Shale drilling, she has suggested she might
be willing to sell her interest in the farm to the other owners. But
the figure she has suggested for the sale price is considerably more
than the other members feel her interest is worth.
"I find it somewhat amusing that while she is opposed to the drilling,
she is not opposed to the money," Mr. Hutchison said.
"As long as she gets cashed out, she doesn't care what happens to the
farm."
The lease agreements gas producers are signing with landowners have two
components. The lump-sum payment is a one-time payment, now ranging
from $1,800 to $2,500 an acre. Then landowners receive royalty payments
on the natural gas that is drilled at the site; royalties range from
12.5 percent to 15 percent or more of the profits.
A classic example of a family estate plan being thrown into havoc
because of Marcellus Shale involves a family business that owns
thousands of acres that have been divided into shares of stock owned by
family members, who range in age from the 90s to the mid-20s.
In 1995, Mr. Hutchison said, he recommended to the owners that, for
estate tax planning purposes, they should create a family partnership
with their children. They did that, putting some of their company
shares into the family partnership, and over a period of six to eight
years gifted those shares to their children.
The income from those shares over the last five years has been about
$80,000 a year, split five ways.
"Most of our clients who are considering gifts to their children or
grandchildren do not want those gifts to be a disincentive for the
younger generation to work and become productive citizens," Mr.
Hutchison said.
The $80,000 a year income was not enough to concern the parents.
However, Mr. Hutchison said a major driller has recently made an offer
to the family that will amount to an after-tax windfall of $12 million
to the children.
"This is the law of unintended consequences," Mr. Hutchison said. "The
parents are worried.
"It was absolutely outstanding estate planning. But because of the
unknown factor of the Marcellus money, do the children now have too
much money readily available, and will this windfall affect their lives
in a negative manner?
"The jury is still out on whether this family and others who are
receiving these large payouts are going to be able to address these
concerns."
Tim Grant: tgrant@post-gazette.com or 412-263-1591.