Trusts for Pets
It took months, but your clients are ready to sign their basic estate planning documents. Included is a revocable trust which, if properly funded, will avoid probate and guardianship proceedings. A credit shelter trust was structured to take advantage of the exemption against the estate tax. Any amount in excess of the exemption against the estate tax will go into a qualified terminable interest trust just in case the surviving spouse has some pending creditors. The client’s documents provide for distributions to their children at varying ages, thereby increasing the likelihood that your client’s life long efforts to accumulate assets will not be dissipated all at once. A guardian has been named for the clients in the event of their incapacity, along with a guardian for any minor or incapacitated children. You also have prepared durable powers of attorney, a health care surrogate, and a living will. Their documents provide for some charitable gifts and ensure that the family heirlooms will pass to specifically named individuals least likely to sell them two days after the funeral. There is even a provision for a colorful disposition of the client’s last remains. The basics are covered. Your clients can rest assured that when they pass away, their assets will be distributed to their family in a tax-efficient and timely manner with some minor asset protection planning.
The clients are just about to sign their documents, when they suddenly ask you about Max and Louie. Max and Louie? Who are Max and Louie? You frantically look at your client intake sheet and note there are no beneficiaries named Max or Louie. Are Max and Louie estranged cousins who will act as default beneficiaries? No, Max and Louie are their beloved golden retriever and African gray parrot, respectively.
Pets are an important part of the lives of many individuals. A recent study found that 73 percent of dog owners and 65 percent of cat owners consider their companion animals to be akin to a child or other close family member,1 and many treat their pets as a member of their immediate family.2 Considering the close bond between pet owners and their pets, it is not surprising that a substantial number of clients want to make provisions for the care of their pets should they be unable to do so themselves. Until recently, the lack of a statutory mechanism made it difficult for clients to provide for their pets after their death. F.S. §737.116, (2004), however, provides for the creation of an enforceable trust with a pet as a primary beneficiary.
Historically, bequests in favor of animals were frustrated. Even when testators conscientiously made a specific bequest for their pets, disingenuous beneficiaries often diverted the bequest for their own benefit. Although prior to January 1, 2003, Florida persons could set aside money for the care of their pets, these trust arrangements were honorary, meaning that Florida courts could not enforce the provisions of the trusts if the pet’s caretakers decided to use the money for their own purposes rather than for the care of the animal. Courts reasoned that an animal was not considered a beneficiary that could be identified in definite and certain terms; thus, the trusts became known as “honorary trusts.”3
Moreover, courts routinely held that the bequests in favor of the pets violated the rule against perpetuities, which generally provides that an interest in property must vest, if at all, no later than 21 years after the death of a measuring life.4 Since the life of the pet is what would affect the vesting of an interest in a pet trust, such trusts violated the rule against perpetuities.5 Louie the African gray parrot, for example, might live 50 years after his benefactor’s passing.
In 1990, the National Conference of Commissioners on Uniform State Laws changed the Uniform Probate Code (UPC) to allow for pet trusts.6 Some states have adopted the UPC, or a modified version, and have made the trusts valid for the lifetime of the pet. In addition, a growing number of jurisdictions, including New Jersey, Delaware, Alaska, South Dakota, Wisconsin, and Idaho have abolished the rule against perpetuities. The UPC does not eliminate the rule against perpetuities; it simply creates an exception to the rule.
Florida recently joined the ranks of those states7 permitting the establishment of trusts for pets. Under F.S. §737.116 (2004), a trust may now be established for the pet’s lifetime to provide for the care and maintenance of the animal. If more than one animal is being cared for out of the trust, the trust does not cease to exist until the last animal is deceased. The trustee can either be designated in the instrument creating the trust, or a fiduciary may be appointed by the court. Additionally, the settlor of the trust can also appoint a trust protector who has the power to enforce the trust, and thereby ensure that the funds are spent for the pet and invested properly.8
F.S. §737.116, reads:
(1) A trust may be created to provide for the care of an animal alive during the settlor’s lifetime. The trust terminates upon the death of the animal or, if the trust was created to provide for the care of more than one animal alive during the settlor’s lifetime, upon the death of the last surviving animal.
(2) Except as provided in this section, the law of this state regarding the creation and administration of express trusts applies to a trust for the care of an animal.
(3) A trust authorized by this section may be enforced by a person appointed in the terms of the trust or, if no person is so appointed, by a person appointed by the court. A person having an interest in the welfare of the animal may request the court to appoint a person to enforce the trust or to remove a person appointed. The appointed person shall have the rights of a trust beneficiary for the purpose of enforcing the trust, including receiving accountings, notices, and other information from the trustee and providing consents.
(4) Property of a trust authorized by this section may be applied only to its intended use, except to the extent the court determines that the value of the trust property exceeds the amount required for the intended use. Property not required for the intended use, including the trust property remaining upon its termination, shall be distributed in the following order of priority:
(a) As directed by the terms of the trust;
(b) To the settlor, if then living;
(c) Pursuant to the residuary clause of the settlor’s will if the trust for the animal was created in a pre-residuary clause in the settlor’s will;
(d) If the settlor is deceased, pursuant to the residuary provisions of the inter vivos trust if the trust for the animal was created in a pre-residuary clause in the trust instrument; or
(e) To the settlor’s heirs.
(5) This section applies to trusts created on or after January 1, 2003.
When drafting a pet trust, either as part of a will, a revocable trust, or a stand-alone inter vivos trust, various factors should be given consideration.
Tax Implications of a Pet Trust
As with most estate planning provisions, pet trusts raise tax issues. In Re Seabright’s Estate, 95 N.E.2d 779 (Ohio Ct. App. 1950), was the result of a dispute with the Ohio Department of Taxation as to whether an honorary trust was subject to inheritance taxes. In this case, the decedent bequeathed the sum of $1,000 for the care of his dog, which was to be paid to the dog’s caretaker at the rate of 75 cents per day. In determining the inheritance tax due from the estate of the decedent, the trial court found that the statute authorizing the levying of a tax on successions to property did not authorize the levy of a tax upon the succession to property passing to an animal; that the $1,000 bequest to the dog was therefore not taxable; and that the remainder of the $1,000, if any, after the death of the dog was taxable in the hands of the remaindermen. The appellate court held that a tax based on the amount expended for the care of the dog could not lawfully be levied against the monies so expended, since it was not property passing for the use of a “person, institution or corporation.”
Any amount passing to a pet trust by reason of the settlor’s death will generally be included in the gross taxable estate. Under Revenue Ruling 78-105,9 the IRS has ruled that no portion of the amount passing to a valid trust for the lifetime benefit of a pet qualifies for the charitable estate tax deduction, even if the remainder beneficiary is a qualifying charity. The client, however, should consider howthe estate taxes attributable to such a trust should be paid.
A problem also arises in the income taxation of a pet trust. An animal is not a beneficiary recognized by the IRS and, therefore, cannot be taxed. A caretaker of the animal could not be charged with the tax liability because the caretaker serves only as an agent of the animal and does not consume the distributions for his or her own benefit (similar to a court appointed guardian of a minor or incapacitated person). This could create a lucrative tax loop because no one would be left with the obligation to pay the income taxes on the trust’s income. The IRS quickly recognized the problem, and in Revenue Ruling 76-4876 held that an enforceable pet trust established under a state statute would be taxed on all of its income, regardless of any distributions made for the benefit of the pet beneficiary.10 The result is that the trust is taxed as a complex trust that has not made any distributions.
This gives rise to another complication. In general, a trust’s income is subject to graduated income taxation at the same rates as individuals. However, unlike individual taxpayers who typically do not pay income taxes at the highest marginal tax rate until their income exceeds $319,100, a trust’s income is subject to income tax at the highest marginal rate after only $9,550 of income, a significant detrimental income tax effect.11 The IRS has softened this negative effect by taxing pet trusts at a rate comparable to married individuals filing separate returns, a marginal rate that is lower than that of the average trust.12
Designate Animal Caretaker
When setting up a pet trust, the client should carefully consider who will physically assume care of the pet after the client’s death, as this caretaker will ultimately receive the funds from the trust for the benefit of the pet. The person chosen should be someone who is willing and able to care for the pet in a manner consistent with the love, affection, and care the client provided during their lifetime. The client should make sure the potential guardian is willing to accept this responsibility and has the resources available to care for the pet (i.e., an active dog should not be bequeathed to a person residing in a one bedroom apartment).
Another consideration when selecting a caregiver is whether the pets will be separated after the client’s death. Pets that have bonded with one another should be kept together.
The client should also select a successor caretaker in the event the first caretaker is unable or unwilling to care for the animal. They may also wish to consider giving the trustee the power to select a good home for the pets in the event that all the designated caretakers are unavailable.
Nominate Trustee/Trust Protector
The caretaker and the trustee should not be the same person. The trustee should be a person willing to administer the trust for the benefit of the pet. The trust may provide for payment of a fee to the trustee, but there should be enough funds in the trust so that the trust corpus is not consumed in the payment of trustee fees. As with the caretaker, the client should name successor trustees.
In addition to the trustee, the statute also provides for the appointment of a trust protector. This person, other than the trustee and the caretaker, has the power to enforce the trust and to ensure that the trust funds are being spent for the benefit of the pet. Consideration should be given to granting the trust protector the power to remove the original trustee in the event that the trustee ceases to administer the trust for the benefit of the pet or otherwise violates its fiduciary duties.
Bequeath Animal to Trustee in Trust
In order to ensure that someone is responsible for the pet at all times, the client should bequeath the animal to the trustee, in trust, with instructions to deliver the pet to the beneficiary or caretaker. Separating responsibility for the pet and the money creates a system of checks and balances.
Determine Amount of Property to Transfer to Trust
The amount used to fund the trust and, thus, available to care for the pet, should be carefully reviewed. Yearly costs to maintain a pet can vary significantly depending on the type of animal.13 The following factors should be considered: the standard that will be used for providing for the pet (i.e., what kind of dog food, shelter, grooming, etc.); whether any fiduciary (the trustee, protector, or caretaker) is to receive compensation; whether reserves will be provided for contingencies; type of pet, its health, yearly cost of maintenance, and life expectancy.14
Describe Type of Care
Significant consideration should be given to the type of care desired for the pet. The client should leave detailed instructions in the trust document regarding food, housing, grooming, medical care, and burial or cremation.15 Some pets may require special care such as skin soaps or special food. Upon the death of the pet, the client may have specific instructions for the disposition of the pet. They may want the pet cremated or buried in a pet cemetery. The cost for a pet burial can range from $250 to $1,000, while pet cremations are less expensive. Several Internet sites offer online burial grounds where an obituary or eulogy can be posted.16
Specify Distribution Method
The client should also determine the method of distribution from the trust to the caretaker. Distributions can be fixed (monthly, quarterly, annually) or left to the trustee’s discretion. Whichever method is used, the amount distributed should equal the amount deemed necessary so that the caretaker does not receive a windfall if the expenses are less than expected. On the other hand, the amount should be enough so that the caretaker does not have to absorb the costs if the expenses are more than the distribution. Provisions should be in place to provide for reimbursement of the caretaker for any out-of-pocket expenses that might be greater than the distribution. The caretaker should also be required to submit receipts to the trustee to assure that the expenses are appropriate. To the extent that a fixed sum is to be distributed, provisions should be in place to adjust those sums for inflation (especially in the case of a pet with a long projected life span).
Designate Remainder Beneficiary
As with any trust, the remaining property needs to go to someone. Therefore, the client should name a remainder beneficiary to receive any residual property upon the death of the pet or termination of the trust. As noted previously, if a charitable organization is named as a remainder beneficiary, the client should be aware that no charitable deduction is permitted.17
Identify Animal to Prevent Fraud
To prevent fraud, the client should clearly identify the pet for which the trust is created. A variety of methods can be used to identify the pet. An inexpensive method is to create a file for the pet including pictures, a short biography of the pet, description of markings, scars, or distinct characteristics, and veterinary records. A more sophisticated method is to implant a microchip in the pet or have a DNA sample taken. Another option is to tattoo the pet in a place where the tattoo cannot be easily removed, such as an inner lip or belly.
The trustee should be required to inspect the pet on a regular basis to ensure the pet is being cared for properly and to verify that the pet is still alive.
As with all estate planning documents, the trust document should be reviewed periodically to ensure that the appropriate pets are cared for (i.e., add new pets acquired after the documents were executed and remove pets that may have passed away).
Conclusion
Until recently, it was difficult for clients to ensure their pets would be provided for following their death. F.S. §737.116, however, creates the opportunity for clients to create an enforceable trust with a pet as a primary beneficiary. It is undeniable that many people treat their pets as relatives, and often care about their pets as much as the human members of their family. Not everyone is fortunate enough to have a family member or friend who will care for their pet after their death. For these people, estate planning that includes provisions for their pet should be encouraged. Pet trusts are now a viable alternative for such planning and provide pet lovers the peace of mind that comes with knowing one’s pet will be loved and cared for throughout its life.
1 American Pet Products Manufacturers, 2001-02 APPMA National Pet Owners Survey, at xxxiii (2002) (reporting data from 2000); Aaron Honori Katcher, How Companion Animals Make Us Feel, Perceptions of Animals in American Culture 113, 121 (R.J. Hoage ed., 1989). Reference is to cats and dogs kept as pets.
2 Gerry Beyer, Pet Animals: What Happens When Their Humans Die?, 40 Santa Clara L. Rev. 617, 618 (2000).
3 Phillips v. Estate of Holzmann, 740 So.2d 1 (Fla. Dist. Ct. App. 1998); In re Seabright’s Estate, 95 N.E. 2d 779 (Ohio Ct. App. 1950); Dep’t of Taxation of Ohio v. Miller, 87 Ohio App. 417 (Ohio Ct. App. 1950).
4 In re Howells’ Estate, 260 N.Y.S.2d 598 (N.Y.Sur. Nov. 26, 1934); In re Mills’ Estate, 111 N.Y.S.2d 622, 625 (N.Y.Sur. Feb 13, 1952), In re Filkins’ Will, 120 N.Y.S.2d 124, 126, 203 Misc. 454, 456 (N.Y.Sur. Dec 19, 1952).
5 Florida now permits trusts to extend for 360 years. Fla. Stat. §689.225(f).
6 Unif. Prob. Code §2-907, (1990).
7 Other states having pet trusts include, Alaska, Arizona, California, Colorado, Michigan, Missouri, Montana, New Mexico, New York, North Carolina, and Utah.
8 It is important to note that in addition to the trust, the client should provide separately for a caretaker who will physically posses the pet.
9 Rev. Rul. 78-105, 1978-1 C.B. 295.
10 Rev. Rul. 76-4876,1976-2 C.B. 192.
11 I.R.C. §1(e).
12 Bette Heller, Trusts for Pets, 26 Colo. Law. 71 (March 1997).
13 The average yearly cost of maintaining a bird is $250; a ferret $180; a dog $600; and a cat $400. See www.snailxpress.com/mvhs/costyear.htm.
14 For example, dogs and cats have typical life spans of eight to 20 years. A bird can live anywhere from two to 100 years, depending on the species. A fish can live anywhere from a few months to as long as a few decades. See www.snailxpress.com/mvhs/lifetime.htm.
15 Gerry Beyer, Pet Animals: What Happens When Their Owners Die, 40 Santa Clara L. Rev. 661 (2000).
16 See www.MyCemetery.com, www.VirualPetCemetery.org, www.In-Memory-of-Pets.com.
17 I.R.C. §170(f)(2); Rev. Rul. 78-105, 1978-1 C.B. 295.
Darin I. Zenov is a shareholder at the law firm of Buchanan Ingersoll, PC in Miami. Mr. Zenov concentrates his practice on domestic and international estate planning, pre-immigration tax planning, probate, guardianships, charitable planning, and prenuptial, postnuptial, and domestic partnership agreements. He advises clients on developing estate and financial plans integrating income tax planning, estate tax planning, philanthropy, creditor protection, and family succession.
Barbara E. Ruiz-Gonzalez is an associate at the law firm of Buchanan Ingersoll, PC in Miami. Ms. Ruiz-Gonzalez concentrates her practice on estate planning, tax planning, probate, and guardianships. She advises clients on developing estate and financial plans integrating income tax planning, estate, and gift tax planning.
