Independent Oil Companies Have Opportunity for Estate and Succession Planning

Laura Mossman, Hinkle Law Firm LLC
Mitch Caddell, BKD

With recent declines in oil and gas prices, owners of family-owned, closely held energy companies have the opportunity to transfer significant wealth to the next generation or to key employees at reduced prices. Whether you’re transferring entity interests and individual holdings or funding trusts for the benefit of a spouse or heirs, now may be a good time to consider establishing a succession plan to transfer value from your estate to the next generation or key employees of your company.

Valuations of oil and gas properties and oilfield equipment continue to decline as energy prices lower. This period of lower prices has been in place for almost a year, marking one of the longest declines in recent history. While no one knows exactly how long the decline will last, it’s critical to start the process now to take advantage of these lower values. Estate lifetime exemptions continue to increase. Currently, $5.43 million is the 2015 maximum that can be transferred tax-free either during life or at death. A married couple can transfer nearly $11 million of wealth without incurring gift tax.

Minority interest and lack of marketability discounts also can help lower the value of minority interests. In addition, closely held entities can offer families opportunities to cost-effectively move assets among the generations. Newly proposed regulations would limit the use of these discounts, making it prudent to act sooner rather than later.

The most difficult aspect of succession planning is starting the process. First, families should assess the asset and income requirements of the senior generation, which likely will need assets or cash for health care and retirement needs. This also may lead the family to consider diversifying family assets outside the energy markets. Once this assessment is made, the family can determine how much value it is comfortable shifting to the next generation or other parties and which specific assets should be utilized. To increase the estate tax benefits, the goal would be to shift low-value assets with high growth potential to the next generation.

The next step is meeting with your attorney and your accounting advisor to discuss a plan of action and determine the best direction for your individual situation. This may include discussing a plan with beneficiaries or key employees to include them in the overall objectives and details of the plan. Determine who has an interest in participating in the family business, how leadership roles may shift in the future, and ultimately communicate a vision for the future with family members or key stakeholders.

A specific plan could include direct transfers, transfers to trust, creation of a family partnership, a bargain sale, stock purchase plans, employee stock ownership plans, deferred compensation plans, sales with trusts or numerous other options. Valuations by qualified business valuation professionals may be needed, and legal documents may need to be drafted and executed according to the plan.

Every business and every family is unique, so a team of professionals is necessary to help plan for the future and realize gift and estate tax benefits.

For more information, contact your tax advisor or attorney.

Summary
With recent declines in oil and gas prices, now may be a good time for family-owned or closely held energy companies to consider establishing a succession plan to transfer value to the next generation or key employees.