Pet Trusts – They're Not Just for Crazy Billionaire Tax Evaders
Joseph J. Ecuyer | JUN 22, 2016
A couple of weeks back, our Daily Tax Report published a story regarding pet trusts. According to the story, Minnesota became the final state to enact legislation allowing individuals to use trusts to pay for the care and maintenance of animals that survive their owners. The first person that came to my mind was Leona Helmsley. As you may recall, Leona Helmsley, dubbed the Queen of Mean, was a billionaire who inherited a string of posh hotels from her late husband, Harry Helmsley. Leona later went to jail for tax evasion. During her trial, it was alleged that she once stated, “Only little people pay taxes.”
When Leona passed away in 2007, she became famous for another unusual act — she left $12 million in trust for the care and maintenance of her beloved Maltese, Trouble. Leona’s will also provided: “I direct that when my dog, Trouble, dies, her remains shall be buried next to my remains in the Helmsley mausoleum.”
While some may question Mrs. Helmsley’s sanity, those of us who truly believe that their pet is a part of their family can relate to Leona’s wishes — if not her generosity.
I got my dog, Moochie, about four years ago. He had been a stray and was put up for adoption. An elderly woman in Louisiana adopted him from a local shelter. He was a little too wild for her and he allegedly caused her to fall and break her hip. Her family decided that they needed to take him back to the pound if they could not find another home for him. The woman’s granddaughter was my sister’s childhood friend. My sister received a mass e-mail appealing (for the second time) for someone to adopt Moochie before they took him back to the pound. My sister forwarded me the e-mail and I could not resist him. See the picture below.
In time, Moochie has really become a part of my family. For a while, I thought about setting up some kind of pet trust so that, in the event that anything should happen to me, Moochie would be provided for and whomever would agree to take care of him would not have to worry about the expenses that go along with adopting a middle aged or elderly dog. Additionally, given that he has been uprooted several times, I want to make sure that he leads a relatively comfortable life as an “inside dog” who has access to outdoor activities via a “doggie door,” as he currently has.
So, I read the Daily Tax Report article with great interest. As the article mentions, there was federal legislation proposed in 2007 that attempted to treat pet trusts in a similar manner to charitable remainder trusts. Unfortunately, that legislation was never brought up for a vote. From a federal standpoint, there are few advantages to setting up a pet trust. Further, one must look solely to state law to determine how to set up a pet trust, and the advantages of doing so.
The Daily Tax Report article really did not get into the mechanics of setting up a pet trust, so I decided to do a little research into the area. One of the first articles I found was a very recent and excellent law review article by one of the leading practitioners in the animal law area. The article points out a number of things to consider in setting up a pet trust. While the article goes into great detail on the setting up of pet trusts, I will just focus on a few of the points made in the article that I found interesting.
There are three types of pet trusts: (1) the Statutory Pet Trust: a pet trust triggered by a clause in a will; (2) the freestanding Pet Protection Agreement® pet trust; and (3) the Freestanding Pet Trust.
With respect to the Statutory Pet Trust, the author notes that it is easy to implement and is cost effective – all that is needed is a sentence in the will. However, a will distributes property, but cannot give directions on how to use the property or care for an animal. Further, a court has an obligation to review it and has the right to revise it. This may take some time, and animals, unlike real property, need immediate attention. The author goes into great detail on the following disadvantages to a Statutory Pet Trust: (1) it is not valid during the owner’s life; (2) instructions can be disregarded; (3) there are inconsistencies between states; (4) expiration dates vary between states; (5) courts may appoint pet guardians if a will does not identify one; (6) the named pet guardian may not be aware of or accept his or her responsibilities; (7) the funds are at the discretion of the court; and (8) the funds are disbursed in one lump sum. Although I do like its simplicity, there seemed to be more disadvantages than advantages to having a simple Statutory Pet Trust.
The other two types of pet trusts, the freestanding Pet Protection Agreement® pet trust and the Freestanding Pet Trust, are not created by a will. These trusts stand alone, are valid in all fifty states and the District of Columbia, and are legally enforceable when signed by at least two individuals or entities – the Pet Owner and the Pet Guardian. These trusts offer the advantage of covering all animals owned by the Pet Owner, as well as any future pets the Pet Owner may adopt, and they are valid during the Pet Owner’s lifetime, during any disability, and after the Pet Owner’s death. According to the author, by answering many of the following questions, one can ensure that a stand alone pet trust is correctly prepared: (1) Who is the Pet Owner? (2) Is the Pet Owner currently of sound mind and free of mental illness? (3) Who is the Pet Guardian? (4) Who is designated as the organization of last resort? (5) Who are the pets covered? (6) What about future pets? (7) What instructions do the pet trust provide regarding care and maintenance of the pets? (8) Are you leaving funds to cover the cost of care for your pets? (9) Would you like to appoint a distribution representative for funds left for the care of your pets? (10) What end of life decisions are warranted? and (10) Who should receive any remaining funds after your pets have passed away?
Although these two types of pet trusts are very similar, the author notes the difference between the freestanding Pet Protection Agreement® pet trust and the Freestanding Pet Trust. Basically, the Freestanding Pet Trust requires an attorney, requires a trustee, requires funds to be set aside, and may name a trust protector. On the other hand, the freestanding Pet Protection Agreement® pet trust is designed to incorporate the best features of a trust, a contract, and a will, without their disadvantages. Basically, as a freestanding trust, the funds will pass outside of probate so there is no need to get a judge’s approval for the care and maintenance of your pet. Further, like any contract, it includes consideration and acceptance and survives legislative edict. Finally, like a will, it can disburse property upon the death of the Pet Owner.
Ms. Hirschfeld also points out some tax advantages of the pet trust. The Pet Owner can structure the pet trust so that he or she can make annual tax-free gifts up to yearly limit ($14,000 in 2016 or $28,000 for married couples). The “beneficiary” of the pet trust is the Pet Guardian named in the trust. Since the Statutory Pet Trusts cannot be funded until the Pet Owner’s death, these gift tax rules are only applicable to the two types of Freestanding pet trusts.
Doing this research really got me to thinking about what I would like to have in a pet trust for Moochie. Before I read the article, I just assumed that I would leave directions in my will for Moochie’s care. After reading Ms. Hirschfeld’s article, I realize that may not be the best approach. For my purposes, there are certain things that I would like to see Moochie have if he survives me. Obviously, first and foremost, we would all like for our dogs to go to loving homes. But, there are other things I would like to see as well. As I mentioned above, I would like for him to be an “inside dog” with access to the outdoors via doggie door. I also feed him rotisserie chicken from Costco every day and would like a Pet Guardian to continue that. At this point, I am not sure what other directions I will incorporate into his pet trust. However, for those of us who love our pets and consider them to be family members, these are personal decisions that require a great deal of thought and planning.