Lump sum payment
A lump-sum cash payment can be used more effectively than small monthly royalty checks, and can be used to pay off large bills all at once, or used to fund a college education or retirement account.
“Don’t put all your eggs in one basket” is a saying you have probably heard. If the majority of your current income is derived from mineral rights you are much more vulnerable to the price swings inherent with oil and gas that could drastically affect your income. Selling some or all of your interest would reduce that risk and allow you to put the money from the sale to work in other, more stable investments.
Some owners would rather spend their free time doing something other than managing mineral interests that may not be making them much money. Eliminating the paperwork associated with mineral ownership can also significantly simplify your tax returns each year.
Oil and Gas Interests are “Depleting Assets”
No matter how good a producing well is, it will eventually stop producing when the field it’s in becomes depleted. Once that happens the mineral rights will be virtually worthless. Since it’s hard to predict exactly when a well or field, may become depleted, many people decide at some point to convert some or all of their mineral properties into other assets such as real estate, stocks, bonds and other investments that may hold their value longer, or may appreciate more than their dwindling oil and gas interests.
Some mineral owners in good areas are able to lease their mineral rights many times over the years without a well ever being drilled, and some receive quite a nice bonus every few years from doing so. Eventually however, they too will see a decline in lease bonus rates due to declining opportunities for production in their area. New drilling technologies do occasionally bring an old area “back to life” but once the oil and gas is gone, it’s really gone. This is why mineral rights are classified as “depleting assets.”
Often it is easier to liquidate mineral rights held by an individual while they are still alive, rather than waiting until after their death. If the individual owns mineral rights in more than one state their estate would need to be probated in each of them in order for title to pass to their heirs in most cases. This can result in a lot of expense for an estate, and thus the heirs. It is much easier to distribute cash assets to heirs than it is to divide up property after someone passes away.
As mineral rights are passed from one generation to the next they are often divided into such small amounts that their economic value to each succeeding generation diminishes exponentially. Keeping track of the minerals at that point can become more of a headache than they are worth to the heirs. This is often referred to as the “fractionalization problem” and is one reason many owners end up selling their mineral rights while they are still alive rather than letting them be split into smaller and smaller pieces with each passing generation.