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Feb 22, 2017 | Divorce

Who Gets the Family Oil and Gas Money in a Divorce?

Central Texas divorces can involve oil and gas leases on land passed down through generations.

When there is a divorce and multi-generational oil and gas land is involved, the entire family (not just the divorcing couple) may be concerned about how divorce will affect the family mineral interest.

How will divorce affect the family land?

In Texas, ownership of land includes both the surface of the land (surface interests) and the minerals below the surface (mineral interests). In an oil and gas lease, the owner maintains the right to use the land’s surface, but leases the mineral interests to an oil and gas company.

Both surface interests and mineral interests are considered real property interests. Accordingly, they are governed by the same family law principles as any other type of real property, such as a family home.

Real property will be treated as either separate property or community property in a divorce. A spouse’s separate property includes property brought into the marriage, as well as property acquired during the marriage by gift, will, or inheritance. Community property is everything else acquired during a marriage, such as wages.

Each spouse will be awarded his or her own separate property in a divorce, but community property is subject to “just and right” division between the spouses (typically somewhere around 50/50).

When oil and gas land is involved in a divorce, the rule is that both the surface interests and the mineral interests are considered the separate property of a spouse who either (i) owned the land before the marriage or (ii) received it during the marriage by gift, will, or inheritance. However, the most common exception to this rule is triggered when the land is a gift to both spouses, in which case each spouse is awarded a one-half separate property interest in both the surface and mineral interests.

The result is that divorce will not affect family land ownership in most cases involving oil and gas leases. The reason is that most spouses receive multi-generational oil and gas land by gift, will, or inheritance, and it will be treated as that spouse’s separate property during a divorce as a result. The land, including both the surface interest and the mineral interest, typically stays in the family.

How will divorce affect oil and gas leases on the family land?

As a general rule, any income earned from separate property during marriage belongs to the community, and it is subject to “just and right” division between the spouses upon divorce.

However, the general rule does not apply when a spouse leases a separate property mineral interest to an oil or gas company. Instead, most payments made under an oil and gas lease will be treated as that spouse’s separate property.

Owners of land who lease their mineral rights to oil and gas companies in Texas are compensated in three primary ways: (i) a bonus payment upon lease signing; (ii) delay rentals when drilling has not begun by a certain deadline; and (iii) royalty payments for oil and gas production.

In Texas, bonus payments and royalty payments (but not delay rental payments) are separate property if the mineral interest is classified as separate property, which is most often the case.

This means that a spouse who receives land with an oil and gas lease by gift, will, or inheritance will be awarded not only the surface interests and mineral interests as his or her own separate property in a divorce, but all bonus payments and royalty payments will be classified as his or her separate property too. Delay rental payments, however, will be treated as community property.

The result is that Texas marital property law affords significant protection for spouses who receive family land with oil and gas leases by gift, will, or inheritance, whether before or during a marriage that ends in divorce. The spouse with the mineral interest does need to make sure to hire a lawyer who ensures that the presumption of community property is properly rebutted, and the mineral interest is indeed confirmed as separate property.

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