During the North Dakota spring legislative session, Ohnstad Twichell President Marshall W. McCullough, and associate attorney Jacob L. Geiermann, spearheaded an effort of trust and estate attorneys and trust departments from across the state to address a problem with North Dakota law relating to mineral-related receipts received by a trust.
McCullough and Geiermann worked closely with Rep. George Keiser, a legislator from Bismarck, to draft House Bill 1221, which was recently enacted into law. Rep. Keiser served as the Bill’s primary sponsor, while Rep. Sukut, a legislator from Williston, served as co-sponsor. McCullough and Geiermann actively lobbied in support of the Bill, testifying before the House and Senate Energy and Natural Resources Committees.
House Bill 1221 relates to a trustee’s duty to allocate mineral-related receipts (such as royalties, bonuses, and working interest income) between income and principal, which can have a significant effect on the amount that is ultimately distributed to the beneficiaries.
It is common for trusts to contain language requiring the trustee to distribute “all income” to the beneficiaries. Occasionally, trustees are given discretion to distribute “any amount of income.” Under either type of trust provision, the trustee is required to determine the meaning of the word “income.”
Receipts that are not income are considered principal. Trusts may contain provisions allowing for discretionary distributions of trust principal to the beneficiaries. However, many trusts do not include any type of principal distribution provision, allowing only for distribution of trust income.
Ohnstad Twichell attorneys have long recognized the need to discuss this issue of income and principal allocation with our clients, and we regularly include express provisions within trust agreements to address this. Unfortunately, many attorneys often fail to include express provisions, and trustees are then left to administer under the provisions of the default allocation rules.
In short, the previous allocation rule under North Dakota law relating to mineral receipts is very different than what most people would expect. Under the previous provision, 90% of most mineral-related receipts by a trust are considered principal, while only 10% are considered income.
The change within House Bill 1221 was meant to make the default allocation rule more closely reflect what people would likely expect when creating a trust. The new law will now allocate 85% of most mineral-related receipts to income, and the remaining 15% to principal. These allocation percentages are consistent with the approaches taken by a number of other states with substantial oil and gas industries, such as Montana, Texas, and Oklahoma.
The new allocation rule applies only to trusts that have not received mineral-related receipts before August 1, 2015, the effective date of the Bill. While a strong argument can be made that changes are appropriate for older trusts that have already received receipts, this approach was taken to ensure that a drastic and immediate change doesn’t occur, which could create unintended consequences. Fortunately, a provision within House Bill 1221 now allows a trustee to petition a court to adjust the allocation rule in certain circumstances.
Ohnstad Twichell is proud to have been part of helping to make this improvement to North Dakota law. We very much appreciate the leadership of Rep. Keiser, along with the support of attorneys and trust departments from across the state. We believe that the changes within House Bill 1221 will make a meaningful difference to many beneficiaries of North Dakota trusts. In addition, we look forward to utilizing the new provisions of law that now allows a trustee to petition the court to change the allocation provision in certain circumstances.
If you would like to further discuss the recent changes to North Dakota law explained above, or if you are a trustee desiring to change a trust’s allocation provision, do not hesitate to contact your Ohnstad Twichell attorney.
The information provided in this letter is of a general nature and should not be acted upon without prior discussion with your Ohnstad Twichell, P.C., attorney.