Energy makes the world go around and oil and gas royalty trusts can be very lucrative investments. Attractive benefits include a high return on investment (ROI), commodity diversification and tax relief. Discover why you need a professional’s help to determine if this trust is right for you.
What Are Oil and Gas Royalty Trusts?
Oil and gas royalty trusts own the wells and mineral rights thereof, but actual operation must be done by a third party. This type of trust cannot have any employees, but does have shareholders.
Energy Trust Benefits
Unlike other investments, you never have to worry about people becoming tired of oil and gas. This essential energy resource is used by consumers, businesses and governments. Thus, there will always be high demand.
Furthermore, energy is an important communal asset. As a result of this communal benefit, the government is willing to offer lucrative tax benefits.
For example, with this type of trust, the profits are not taxed at the corporate level as long as a certain percentage is distributed in shareholder dividends. This allows you to avoid corporate income double taxation.
Typically, these wells already have their infrastructure built, but might be past peak performance. As a consequence, you don’t need any technical expertise in the energy industry to invest in these trusts.
Who Might Be Interested?
The energy sector is high risk, high reward; with the right investment, you can strike it rich. Therefore, investors must have a high risk tolerance for oil trusts. The energy sector provides a higher rate of return than other sectors.
Unfortunately, you might lack the financial resources to purchase a well yourself. With this type of energy trust, you can purchase a share in the well. So, if you are worried about inflation or rising interest rates, energy investments might be a good choice.
Nowadays, many paper financial investments – such as stocks and bonds – make up the lion’s share of an investor’s wealth portfolio. Unfortunately, if all of these assets are linked together, the fall of one asset might have a domino effect on your entire wealth portfolio. Some financial experts believe that this characteristic of interrelated value threatened the Capitalist System in 2008.
Since then, risk management tools have become more advanced. The best wealth adviser can help you determine your risk tolerance and add assets to your trust that match said tolerance. Wealth portfolio diversification can include commodities such as gold, silver and oil, which offer a number of benefits.
Unlike paper assets, commodities will always have intrinsic value. They can be important raw materials used for production. Commodities are inflation hedges – as inflation increases, the commodity value increases too.
While other asset values are dropping like a stone, commodities might be increasing in value. When investors sell stocks and bonds, they have excess cash on hand. Instead of holding onto this cash, some investors will plough it back into commodity backed gold exchange traded funds, real estate investment trusts or oil royalty trusts to make sure their money is still productive.
Professional financial advisers can explain the details of various trusts and help you determine if they are right for you. Diversifying your financial portfolio with a valuable energy asset can protect your wealth.