Understanding the valuation of mineral interests is crucial for Medicaid eligibility for long-term care services but is useful in other regards as well. This asset can be easily overlooked as clients might not be aware of the sometimes significant attributed value. This article provides a comprehensive overview, from the basic valuation formulas to the specific exclusions that can affect eligibility. It highlights the importance of accurate documentation and understanding the potential value of both producing and nonproducing mineral interests and aims to clarify the process for attorneys working in elder law, estate planning, oil and gas and other areas.

Applying for Medicaid benefits for long-term care is a complex and time-sensitive endeavor. Families often face special challenges in assisting loved ones during difficult times, especially when medical considerations contribute to stress and urgency. Whether records are well maintained or not, even organized files can require supplementation when applying for Medicaid. This is where a guide or “roadmap” can be very helpful. It not only explains and eases the frustrations applicants and their families might experience, but it also streamlines the application process, increasing the likelihood of initial approval. It can also help ensure that tasks associated with the mineral interest valuation process are accomplished efficiently and effectively, making it more manageable for everyone involved. Even with such a roadmap, unexpected speed bumps can pop up along the way. The roadmap set forth herein will address both guideposts and speed bumps – an understanding of which can be helpful in getting clients from application to valuation while reducing friction and making the journey less stressful along the way.

For Medicaid eligibility, all mineral interests are considered to have value. Mineral interests owned separately from real property are attributed a resource value as part of the Medicaid eligibility determination process in Oklahoma – a fact that sometimes surprises applicants, especially those who own only nonproducing or open (unleased) interests. On this path, it is helpful to assist applicants in developing an understanding of why all mineral interests – whether leased, royalty-producing or open (unleased) – have value and why appropriate documentation must be submitted for each interest owned.

Applicants may provide appraisal valuations from established professionals who are knowledgeable in the area or may request that Oklahoma Human Services provide a resource valuation based on the submittal of documentation of mineral interest ownership information. For the purposes of providing such valuations, Oklahoma Human Services addresses three basic categories of mineral interests and applies a set formula for valuing each. Being aware of these valuation formulas and potential resource exclusions can make the valuation process much easier to navigate. Beginning with exclusions and proceeding through specifics for each valuation category, guideposts, pathways and speed bumps follow.

GUIDEPOST 1 – EXCLUSION OF MINERAL INTERESTS AS A RESOURCE 

Exclusions of mineral interest resource value fall into two basic categories: 1) exclusion associated with location and 2) exclusion associated with status.

Exclusions Associated With Location

Home property exclusion. In the home property exclusion, mineral rights associated with the home property are considered along with the surface rights and are excluded as a separate resource.[1] Their valuation is concurrent with that of the home property, such that if the home property is valued as a resource, the value of the mineral interest is already considered included; if the home property is excluded as a resource, so is the mineral interest.

Tribal lands exclusion. In the tribal lands exclusion, for any individual (and spouse, if any) who is of Indian descent from a federally recognized Indian tribe, any interest in land that is held in trust by the United States for an individual Indian or tribe – or that is held by an individual Indian or tribe and can only be sold, transferred or otherwise disposed of with the approval of other individuals, their tribe or an agency of the federal government – shall be excluded from resource determinations.[2] 

Exclusions Associated With Status

Royalty-producing mineral interest exclusion (up to $6,000). In the 6%/$6,000 royalty-producing interest exclusion, up to a $6,000 resource value of the mineral interest is excluded from consideration. Mineral rights not associated with home property that are income-producing are considered in the same way as income-producing property.[3] Where mineral rights are nontrade or nonbusiness property, up to $6,000 of the equity value is excluded as a resource if the property produces a net annual return equal to at least 6% of the excluded equity, and any portion of the property's equity value in excess of $6,000 is a countable resource.[4] (This exclusion applies to royalty-producing mineral interests, but not mineral interests that are leased and have never been royalty producing.)

Legal impediment exclusion. In the legal impediment exclusion, only those resources available for current use or those that the member can convert for current use (no legal impediment involved) are considered countable resources. Legal impediments include but are not limited to clearing an estate, probate, petition to sell or appointment of legal guardian and present subject assets to exclusion from resource calculations, with the caveat that, “Generally, a resource is considered unavailable if there is a legal impediment to overcome. However, the member must agree to pursue all reasonable steps to initiate legal action within thirty (30) days. While the legal action is in process, the resource is considered unavailable.”[5] Especially with regard to mineral interests in which ownership may be extensively divided into very small interests over the years, it is important to note that if a determination is made and documented that the cost of making a resource available exceeds the gain, the member will not be required to pursue action to make it available.

GUIDEPOST 2 – EXTERNAL PROFESSIONAL MINERAL INTEREST VALUATION 

Applicants have the opportunity to present mineral interest valuations from professionals knowledgeable in the area, pursuant to the Oklahoma Administrative Code, which designates not only that “since evaluation and salability of mineral rights fluctuate, the establishment of the value of mineral rights are established based on the opinion of collateral sources,” but also, “actual offers of purchase are used when established as a legitimate offer through a collateral source.”³

When considering this path for valuation, it is also important to weigh the investment of client funds in a paid valuation from an external professional against the anticipated attributable resource value expected in accordance with Oklahoma Human Services’ current formulas for calculation. 

GUIDEPOST 3 – AGENCY MINERAL INTEREST VALUATION

When an applicant does not supply an external mineral interest valuation, they may submit mineral interest ownership documentation so that Oklahoma Human Services may provide them with a valuation. These valuations employ formulas for calculating the fair market value of mineral interests in three categories or, for the purposes of this article, “pathways.” Valuations take into consideration not only the interests’ current production but also the future potential for production. Because of this, open (or unleased) mineral interests that have never produced are often attributed a higher resource value than some currently producing. This can be quite surprising to applicants, especially those who have held mineral interests for several decades with no offers of lease or purchase.

Pathway 1 – The Royalty-Producing Mineral Interest Valuation Formula

Fair market value = (gross royalties/12) x 36. For example, a single mineral interest wholly owned by an individual applicant documented by a Form 1099 to be producing royalties of $1,200 in the most recent year would be viewed as having a fair market value of $3,600 ((gross royalties/12) x 36 = fair market value) but would result in an attributable resource value of $0 due to the 6%/$6,000 exclusion for nonbusiness income-producing property.

On the other hand, a single mineral interest wholly owned by an individual applicant documented by a Form 1099 to be producing royalties of $4,000 in the most recent year would be viewed as having a fair market value of $12,000 and an attributable resource value of $6,000 (assuming no other nonbusiness income-producing property contributed countable income toward the $6,000 exclusion limit).

Important documentation required for pathway 1: documentation that contains the legal description of the mineral interest, the Form 1099 issued by the oil company in the year preceding the client’s application or the year preceding the annual review and documentation of any royalties currently held in suspense.

Pathway 2 – The Open (Unleased) Mineral Interest Valuation Formula

Fair market value = (most common lease bonus per acre x number of net mineral acres). On the other hand, for open (unleased) mineral interests, the fair market value is determined by multiplying the number of net mineral acres and the most common lease bonus for the county as reported by the corresponding issue of the U.S. Lease Price Report. For example, a 40-net-mineral-acre interest that has never been leased in a county with a most common lease bonus of $1,200 would be evaluated to have a fair market value (and attributable resource value) of $48,000.

A similar never-leased mineral interest in another county, however, with a most common lease bonus of $25 per acre, would be evaluated to have a fair market value (and attributable resource value) of $1,000.

For the calculation of fair market value of open mineral interests, providing accurate documentation of the number of net mineral acres is especially important. It is not uncommon for mineral interests to be acquired through estate and familial distribution leading to divisions into smaller and smaller interests and for transfer documents to be silent in regard to the number of net mineral acres being transferred. Locating and providing this information can require additional work but can prove worthwhile. For example, if the 40-acre mineral interest in the county with the $1,200 lease bonus was actually inherited by and divided equally among 10 heirs, this would reduce the number of net mineral acres to four each and consequently reduce the applicant’s associated resource value to $4,800 rather than $48,000.

Important documentation required for pathway 2: documentation that contains the legal description of the mineral interest, inclusive of the number of net mineral acres. Presenting accurate information regarding the number of net mineral acres is especially important for accurate valuation in this type of interest.

Pathway 3 – The Leased Mineral Interest Valuation Formula

Fair market value = (gross lease bonus x 1.5). For leased mineral interests, as a general rule, the fair market valuation formula is the product of 1.5 times the most recent lease bonus. (The agency might retain the ability to exercise some discretion in contemplation of the occurrence of a zero-dollar lease bonus, though this has not been well established as of the writing of this article.) In general, a mineral interest wholly owned by an individual applicant most recently leased for $1,600 would be evaluated to have a fair market value (and attributable resource value) of $2,400.

The 6%/$6,000 resource value exclusion does not apply to mineral interests that are leased but have never paid royalties.

Important documentation required for pathway 3: documentation that lists the legal description of the mineral interest and the Form 1099 issued by the oil company in the year the lease bonus was paid.

A Road Less Traveled – The Life Estate Impact Valuation Formula

Fair market value = (full resource value x life estate decimal amount). Notably, if an applicant owns only a life estate in a mineral interest, the evaluated fair market value is reduced by a specified formula multiplying the fair market value of the mineral interest by the decimal amount listed for the age of the applicant in accordance with the State Medicaid Manual – Life Estate and Remainder Interest Table.[6]

For example, if Ms. Jones, age 78, owns only a life estate interest in an open mineral interest that would otherwise have a fair market value of $10,000 and the corresponding decimal amount for age 78 is 0.47049, the resulting resource value for this interest would be $4,704.90.

ADDITIONAL MAPPING FOR ALL PATHS

Situations do sometimes occur in which valuations are submitted on behalf of applicants that are actually higher than what the agency-determined resource value would have been. For this reason, reviewing current valuation standards and, if applicable, the relevant U.S. Lease Price Report can be of significant benefit to applicants. Additionally, collection and submission of associated documentation should be started as early as possible in case challenges in finding information, such as the number of net mineral acres, should arise.

Should an applicant disagree with an evaluated mineral interest resource value, they may submit an external valuation or additional documentation for review or, if the valuation negatively impacts their eligibility for benefits, request a fair hearing.

AVOIDING SPEED BUMPS

• Written documentation of the legal description is necessary for each mineral interest (e., leases, deeds, wills, division orders). Copies are often obtainable from the county clerk or online at www.OKCountyRecords.com.
• Resource valuation is based on royalty production. So even when there is no Form 1099 issued, if royalties were produced, documentation should be obtained and supplied.
• Royalty owners’ accounts can go into “suspense” if they fail to cash their checks, meaning the company might stop sending the royalty checks. For example, if someone moves, checks may be marked “do not forward,” preventing them from being delivered even if a change of address has been filed with the Postal Service. A change of address is generally required to be submitted directly to the oil and gas company. Accounts may even have thousands of dollars in suspense that, if discovered, may be distributed to an applicant.
• Requests for information from oil and gas companies can be made via email, often with quick response.[7]
• Communication with oil and gas companies is often most effective and efficient when done by email.[8]
• Oil and gas companies do respond to owner inquiries, but they often work with thousands of (or more) royalty owners. Sometimes it takes time, but almost always, a response should be obtainable. In unusual circumstances where a company is unreachable, contacting the Oklahoma Corporation Commission for additional information can often be helpful.

CONCLUSION

Oklahoma’s history is steeped in stories of families pulled out of hard times – some even catapulted to wealth – through mineral interest ownership. Interests are often passed from generation to generation in hopes that the legacy will someday be a producing well, and mineral interest ownership is not uncommon in our state, even for those with modest resources. Understanding the valuation of mineral interests is crucial for Medicaid eligibility for long-term care services, but it is useful in other regards as well. Through this comprehensive overview, practitioners can help clients navigate a path ensuring their mineral interests are managed well.

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ABOUT THE AUTHOR

Shannon D. Smith is a former Oklahoma Human Services Medicaid programs analyst responsible for reviewing mineral interest resource valuations for long-term care applicants. She is an Oklahoma attorney practicing in the area of e-discovery and is currently completing the nine-month MIT Professional Education Professional Certificate Program in Digital Transformation. Her recent experience includes work with large-scale litigation involving artificial intelligence, mergers and acquisitions, competition law, international terrorism, government defense contracting and biotech hedge fund arbitration. She also serves as an assistant district attorney for Comanche County for civil matters.

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ENDNOTES

[1] Oklahoma Administrative Code 317:35-5-41.1 (a)(9).

[2] Oklahoma Administrative Code 317:35-5-41.12(c)(3).

[3] Oklahoma Administrative Code 317:35-5-41.1. (b)(1).

[4] Oklahoma Administrative Code 317:35-5-41.12 (c)(3).

[5] Oklahoma Administrative Code 317:35-5-41 (6)(b).

[6] Oklahoma Administrative Code 317:35-5-41.1 (b)(10)(A).

[7] For easy reference, refer to the article “Long Term Care (LTC): Letter to Oil / Gas Company (Mineral Rights).” Available at https://bit.ly/3U6Lxor.

[8] A partial list of oil and gas company email addresses can be found at https://bit.ly/3vId85L.