There are several ways that attorneys can utilize estate-planning documents to provide for pets upon the death of their owner. One popular method is leaving a sum of money to a caretaker in the pet owner’s will. There are two potential issues to consider with this method of planning: The pet owner has no way of ensuring that the assets will be used to cover pet-related expenses and there may be negative tax consequences to leaving the caretaker a sum of money outright. These same problems can exist when an owner makes a monetary bequest to a pet caregiver towards the end of his or her life.
These factors were overblown in many of the publications I read when preparing my own estate plan. Under today’s $5 million federal estate tax exemption, there are virtually zero federal estate or gift tax implications when a person leaves $5-10,000 to a trusted caretaker. There may be state tax implications in some circumstances and your attorney should discuss potential state taxes with you when considering this option. As for guaranteeing the money is spent properly? Many of my clients have told me that they would not be naming the person to look after the pets if they did not trust them. This issue is a non-factor in these cases and in others it is the primary factor – it depends on the relationship the owner has with the potential caretaker(s).
A second way that pet owners can utilize wills to provide for their pets is by making a bequest to animal organizations that will work to place your pet in a home if you leave assets to the organization. The Oregon Humane Society’s Friends Forever program is an example of one of these programs. The Portland-based shelter adopted out over 17,000 animal in 2010, including all of the animals that came in under ‘Friends Forever’.
If a pet owner makes no provisions for his or her animal, the pet will become part of the owner’s residuary estate and will usually pass to a new owner under the residuary clause of the will. In Oregon the estate may reimburse the caretaker who looks after the animal immediately after the owner’s death.
Attorneys regularly address these (and other) pet planning issues through the use of the pet trust. Pet trusts determine custody of the animal, provide instruction for the caretaker and pay for the animals’ expenses. Pet trusts can be stand-alone documents or they can be incorporated into the pet owner’s will or trust. Pet trusts should be considered very carefully, as they can be surprisingly expensive to administer. If your animal is one that will likely outlive a caretaker or two (a parrot or turtle for example) or is particularly expensive to care for (a horse or a pet with high medical expenses maybe) then a pet trust might be the perfect document for you. If it is just your cat or your dog, carefully consider your pets needs vs. the amount of administration required to maintain the pet trust.
The first question an owner must answer when preparing a pet trust is, “who will look after the animal on a day to day basis?” The caretaker(s) should be familiar with the pets and should receive a copy of the pet instruction letter discussed in my previous blog post. Pet owners should consider the tax implications involved when leaving assets to a caretaker. The owner may consider providing additional compensation to the caretaker to make up for any tax liability imposed due to the financial bequest under the pet trust.
The next individual an owner may name in a pet trust is the trustee. The trustee is in charge of tracking trust expenses, bank accounts and, in some states, preparing trust tax returns and distributing an annual accounting. A pet owner should consider these activities (and their associated cost) when selecting a trustee for their pet trust.
The last person an owner may name in the pet trust is the trust protector. This independent person has no role in the day-to-day operation of the trust. He or she is in charge of monitoring the overall performance of the trust to ensure the pet is being cared for properly. This trust protector checks in on the actions of the caretaker and the trustee. The trust protector holds the other parties accountable when there are questions about the administration of the trust. ORS 130.185 allows for an interested party to petition the court on the pet’s behalf, so if even if the document does not name a trust protector, a friend of family member could petition the court to remove a trustee if the animal was not being cared for as outlined in the trust.
A word of warning: Not all pet trusts are created equal. There is a lot more to a well written pet trust than merely listing the people to serve in the roles outlined above. These documents should also allocate funds, account for expenses of trust administration and occasionally outline investment strategies, among other things. The trust should clearly outline which expenses may be paid from the trust property and tell the reader exactly how these fees are to be paid. A pet trust should also provide for back-ups in the event that the named individuals cannot serve.
The most famous pet trust of them all is the one that belonged to the late Leona Helmsley. This trust provided $12 million to care for her dog and the story garnered media attention around the world. The trust was established to pay for her dog Trouble’s expenses with any remaining assets passing to a charitable foundation at Trouble’s death. Helmsley’s executors petitioned the New York Court to reduce the amount of assets going to the trust, in an effort to minimize the taxes due on Helmsley’s estate. They were successful in their petition and the judge ordered the pet trust funded with “only” $2 million. The remaining assets flowed to the charitable foundation in a $10 million transfer that qualified for the charitable deduction.
The New York judge in the Helmsley case relied on the language of New York’s pet trust statute. In New York, and in states that have adopted the Uniform Trust Code’s pet trust language, courts may “determine the value of the trust property that exceeds the amount required for the intended use”. The courts may then reduce the funding of the pet trust accordingly and direct the excess assets into a resulting trust for the benefit of the settlor’s successor in interest.
The pet trust statutes in Oregon and Washington do not contain language allowing courts to reduce the amount of assets directed to these trusts. Had Leona Helmsley relocated to the Pacific Northwest, Trouble may still be living large off of $12 million. ORS 130.185 specifically states, “Property of a trust authorized by this section may be applied only to its intended use.” Similarly, RCW 11.118.030 provides, “no portion of the principal or income of the trust may be converted to the use of the trustee or to any use other than for the trust’s purpose or for the benefit of the designated animal or animals.”
While most of us will never have to worry about leaving a pet $12 million, there is an important lesson to be learned from Leona Helmsley’s pet trust. The $10 million implications of the seemingly subtle differences in the statutory language highlights the importance of putting together your pet’s long-term plan with an advisor that understands the delicate issues involved.