'Gas-fall' Profiting: How to Keep It

Solid advice on managing wind-fall profits from natural gas leases.

Published on: Sep 29, 2008

American Agriculturist's October cover story warned that many farmland owners could make costly financial mistakes with huge windfall checks from natural gas leases. Here's the very important rest of the story on how to handle that new-found wealth – before doing something you'll regret.

Your first major tax challenge could arrive with your next tax filing date, says Kevin Ryan, financial advisor for the Edward Jones brokerage company. But that tax impact can be minimized with sound financial planning, he adds.

"It's like hitting the 'jackpot' with a lottery ticket," says Ryan. "A year after winning, about 94% of lottery winners are less happy than before they won windfalls," cautions the certified financial planner from Littlestown, Pa. Paying Uncle Sam his due isn't the only reason for it.

Get your financial 'act' together

"The smartest move to make may be to do nothing – at least for a while," says Ryan. "Take a deep breath. Allow that emotional rush to pass. Then get organized," he counsels, "with a three- or four-expert team.

An experienced attorney: If you've negotiated a gas lease, you should already have an attorney experienced in gas leasing. That's where membership in a farm organization with a legal referral system quickly pays for itself.

That same attorney may or may not be a qualified estate planner. But you'll need this kind of expertise to help plan your future business and personal goals.

A CPA/tax advisor: A certified public accountant can advise you and work through the latest tax law nuances of local, state and federal tax impact of windfall profits.

A certified financial advisor: This is a person who can pull your financial portfolio together, plus help coordinate and diversify your investments.

Your next step

First, pay off debts that do you no good, says Ryan. By that he means debts that hold no personal or business tax deductibility and those that carry high interest rates. That's first priority.

Next, establish an emergency fund if you don't already have one. It's a fund with enough cash and short-term money market or certificates of deposit to handle a minimum of six months of living and possibly business expenses to meet unexpected needs.

Then, if your windfall is large enough, it's appropriate to consider "game-changing" financial strategies. It might be fixing, expanding or changing your business as you've dreamed. It might be speeding up your retirement timetable, funding long-term care for yourself and/or a loved one, or putting more away for a college education for your children or grandchildren.

Sure as the setting sun, "gas-fall profits" will have tax consequences that you must plan for. "But don't let the tax tail wag your investment dog," emphasizes Ryan. "Don't invest merely to save taxes.

"Diversify your investments while you have the opportunity. That old adage 'Don't put all your eggs in one basket' still stands," he concludes. That's where your financial team will pay for itself.

A windfall comes once in a lifetime. Enjoy it, but don't blow it.