When a trust document does not say how to handle oil and gas royalty income, how are the royalty proceeds divided between principal and income?

Texas AG Opinion JM-559: Trust Royalty Split

Plain-English summary

A district attorney asked how a charitable trust should handle income from oil, gas, and mineral royalties. The trust was created by the will of Annie B. Laird for the benefit of the Roy H. Laird Memorial Hospital in Kilgore, and its assets included stocks, bonds, certificates of deposit, and mineral royalties. The trustee had been paying out the ordinary investment income but treating all of the royalty proceeds as principal, keeping them in the corpus rather than paying them to the hospital. The question was whether that was right, or whether the royalty proceeds should be split between principal and income under section 113.107 of the Texas Trust Code. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0559.pdf

The AG concluded the proceeds must be split. Section 113.107 says that when part of the principal is a right to receive a royalty or similar mineral interest, 27.5 percent of the gross proceeds (but no more than 50 percent of the net after expenses) is principal and the rest is income. The controlling rule for reading a trust is the creator's intent, but the Laird will did not spell out how to apportion royalties; it just directed that "income" be paid annually to the hospital. When a trust instrument is silent on that point, the Texas Trust Act supplies the answer. The will also said its trusts should be administered under the Texas Trust Act "as amended," which showed Annie Laird understood that a perpetual charitable trust would be governed by changing trust law over time. So the current section 113.107, not the 1954 version in effect when she signed the will, governs the split. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0559.pdf

Currency note

This opinion was issued in 1986. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. The Texas Trust Code's allocation rules for principal and income have been revised since then. Treat this page as historical context, not current legal advice. Verify the current statute before relying on the 27.5 percent figure or any specific rule mentioned here.

Common questions

If a trust just says to pay out "income," who gets the mineral royalties?

Both the principal and the income share of the trust get a piece. The AG read the Laird will's direction to pay "income" to the hospital together with section 113.107, which splits royalty proceeds. The trustee could not treat all royalty proceeds as principal; the income beneficiary (the hospital) is entitled to the income portion the statute defines. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0559.pdf

How much of a royalty check goes to principal versus income?

Under section 113.107, 27.5 percent of the gross proceeds is principal, but that principal share cannot exceed 50 percent of the net after deducting expenses and carrying charges on the property. Everything left over is income. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0559.pdf

The will was signed in 1954. Why does a later version of the trust law apply?

Because the will said its trusts should be administered under the Texas Trust Act "as amended." The AG treated that phrase as recognition that a perpetual charitable trust would be subject to changing trust law, and as intent that the changes apply. So the current section 113.107 governs, not the version that existed in 1954, even though both provided for apportioning royalty proceeds. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0559.pdf

Background and statutory framework

Section 113.107 of the Texas Trust Code, part of the Property Code, sets a method for allocating the proceeds of a royalty, overriding or limited royalty, working interest, delay rental, or other mineral interest (other than timber) between the principal and income of a trust. Subsection (d) fixes the split: 27.5 percent of the gross proceeds, capped at 50 percent of the net after expenses and carrying charges, is principal, and the balance is income. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0559.pdf

The AG applied the settled rule that a trust is construed to give effect to the intent of its creator, citing Beaty v. Bales and Jewett v. Capital National Bank of Austin, with intent ordinarily drawn from the language of the instrument. When the instrument does not provide for allocating proceeds from producing mineral interests, the Texas Trust Act governs the apportionment, a point supported by Beaty v. Bales, Commercial National Bank in Nacogdoches v. Hayter, and St. Marks Episcopal Church v. Lowry, 271 S.W.2d 681. The Laird will did not specify how royalty proceeds were to be apportioned; it directed that the corpus be kept intact and the income paid annually to the hospital, and it provided that all trusts created by the will be administered under the Texas Trust Act "as amended." The AG treated the "as amended" language as evidence that the current statute, section 113.107, should govern the apportionment for this perpetual charitable trust. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0559.pdf

Citations and references

The opinion cited the following authorities. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0559.pdf

Statutes:

• Tex. Trust Code § 113.107 (part of the Texas Property Code; allocation of mineral royalty proceeds between principal and income)
• Texas Trust Act (predecessor statute incorporated by the will "as amended")

Cases:

• Beaty v. Bales, 677 S.W.2d 750 (Tex. App. - San Antonio 1984, writ ref'd n.r.e.)
• Jewett v. Capital National Bank of Austin, 618 S.W.2d 109 (Tex. Civ. App. - Waco 1981, writ ref'd n.r.e.)
• Commercial National Bank in Nacogdoches v. Hayter, 473 S.W.2d 561 (Tex. Civ. App. - Tyler 1971, writ ref'd n.r.e.)
• St. Marks Episcopal Church v. Lowry, 271 S.W.2d 681 (Tex. Civ. App. - Fort Worth 1954, writ ref'd n.r.e.)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-0559
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0559.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

October 10, 1986

Honorable Carter Beckworth
Criminal District Attorney
P. O. Box 3403
Longview, Texas 75606

Opinion No. JM-559

Re: Construction of charitable trust established on behalf of the Roy H. Laird Memorial Hospital

Dear Mr. Beckworth:

You seek construction of a charitable trust created by the will of Annie B. Laird for the benefit of the Roy H. Laird Memorial Hospital of Kilgore, Texas. The trust corpus is comprised of stocks, bonds, certificates of deposit, and royalties on minerals. You indicate that the trustee has been disbursing income received on the stocks, bonds, and certificates of deposit but has been allocating all of the proceeds from the royalties to principal. You ask whether the proceeds from royalties should be attributable solely to principal or to principal and income pursuant to section 113.107 of the Texas Trust Code, a part of the Texas Property Code.

Section 113.107 provides a method of allocation of royalty proceeds between the principal and income of a trust. This section provides, in part:

(a) If part of the principal consists of a right to receive a royalty, overriding or limited royalty, working interest, delay rental, or other interest in minerals or other natural resources (other than timber) in, on, or under land, the proceeds of the right shall be allocated to principal and income in accordance with this section.

Subsection (d) of this section allocates royalty proceeds as follows:

Twenty-seven and one-half percent of the gross proceeds, but not to exceed 50 percent of the net, after deducting the expenses and carrying charges on the property, is principal, and the balance is income.

You suggest that this allocation should apply to the royalties held in trust for the Roy H. Laird Memorial Hospital. Assuming that the producing mineral interests in question are correctly characterized as royalties, this conclusion is correct.

The fundamental rule governing the construction of trusts is to give effect to the intent of the creator of the trust. Beaty v. Bales, 677 S.W.2d 750, 754 (Tex. App. - San Antonio 1984, writ ref'd n.r.e.); see Jewett v. Capital National Bank of Austin, 618 S.W.2d 109, 112 (Tex. Civ. App. - Waco 1981, writ ref'd n.r.e.). If the trust instrument fails to provide for the allocation of the proceeds received from producing mineral interests, the Texas Trust Act governs the apportionment of the proceeds to principal and income. Beaty v. Bales, 677 S.W.2d at 755; Commercial National Bank in Nacogdoches v. Hayter, 473 S.W.2d 561, 564 (Tex. Civ. App. - Tyler 1971, writ ref'd n.r.e.); St. Marks Episcopal Church v. Lowry, 271 S.W.2d 681, 684 (Tex. Civ. App. - Fort Worth 1954, writ ref'd n.r.e.). Intent is ordinarily determined from the language of the instrument which creates the trust.

In the instant case, the instrument which created the trust does not specify how royalty proceeds shall be apportioned. It simply states that "income" from the trust shall be paid annually to the hospital. The copy of the Annie B. Laird will which you submitted to us provides, in part:

As to the property herein devised to the First National Bank of Longview, Texas, as Trustee for the benefit of Roy H. Laird Memorial Hospital, Kilgore, Texas, the corpus shall be kept intact and the income paid annually to said Roy H. Laird Memorial Hospital, and used only for the maintenance, expansion and operation of said hospital.

Page 7 (Will dated July 16, 1954; probated in Cause No. 4769, Gregg County Probate Court; recorded in Vol. 169, at 389). Accordingly, the aforementioned legal authorities indicate that the Texas Trust Act governs the apportionment of royalties on this trust.

Moreover, the will specifies that

[e]xcept as herein otherwise provided all trusts created by this will shall be administered in accordance with the Texas Trust Act, as amended.

Page 8. Like section 113.107 of the current Texas Trust Act, the version of the trust act in effect when the Laird will was executed in 1954 also provided for an apportionment of proceeds from royalties between principal and income. Further, the inclusion of "as amended" in the above-quoted provision of the will evidences a recognition that a perpetual charitable trust may be subjected to changing trust laws, and, therefore, the intent that the changes apply to the trust. Consequently, section 113.107 of the current Texas Trust Code should govern the apportionment to principal and income of proceeds from royalties or mineral interests held in trust for the Roy H. Laird Memorial Hospital.

SUMMARY

Section 113.107 of the Texas Trust Code, part of the Texas Property Code, should govern the apportionment to principal and income of proceeds from royalties on minerals held in trust for the Roy H. Laird Memorial Hospital pursuant to the will of Annie B. Laird.

Very truly yours,

Jim Mattox
Attorney General of Texas

JACK HIGHTOWER
First Assistant Attorney General

MARY KELLER
Executive Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Jennifer Riggs
Assistant Attorney General