Water is Wet - Owning Water Rights and Water Shares in a Trust
One of the great debates that my 15 year old son likes to enter into is whether or not water is wet. He is the son of two attorneys, so there seems to be an innate desire to argue - even about silly things. His theory is that water is not wet, but only makes other items wet. On the other hand, it seems obvious to me that the water and everything it comes in contact with is, in fact, wet. So what difference does that make for estate planning? In this blog we have talked a lot about the importance of having your trust funded. Meaning the trust owns, or will be a beneficiary of assets in order that the trust controls the management and distribution of those assets. Some common assets here in the west are water rights and water shares. For many reasons, including the proper funding your trust, it is important to understand the difference between these two different types of assets.
Ownership of both water rights and water shares should be held in the name of your trust. As always, make sure the full and correct name of the trust is clearly stated. Water rights are rights granted by the state where your property is located to use a specified amount of water, in a specified place, for a specified time, and for a specified purpose. To change any of these things usually involves a lengthy process with the agency in your state that oversees water rights Water rights are appurtenant to a parcel of real property and automatically transfer with the property when the property is deeded into the Trust. Even though the water right transfers automatically, it is still important that the records of the appropriate agency in that state be updated in the manner required by the state so any notices go to the actual owner and not a prior owner. But, the failure to do so would not result in a probate so long as the chain of title can be proven through deeds.
With water shares, a company owns the actual water right and then issues shares to its shareholders to use a certain amount of the water right subject to the rules of the company. Transfer of the shares is normally accomplished by executing an assignment or bill of sale and endorsing the stock certificate over to the Trust. The trustee should then have the company issue a new stock certificate with the Trust listed as the owner and update the company record books. Water shares DO NOT automatically transfer with real property. They are personal property and, subject to the rules of the company, may be owned separate and apart from any real property. If you have not taken the steps to properly transfer the water stock, probate may be necessary to deal with them after your death.
So if you think water is wet like I do, think about the fact that with a water right you actually own that wet water. With water shares, it is the company that owns that water and there is nothing wet about the paper. Proper funding of assets is vital to the success of your estate plan, if not, your family may end up all wet.