Estate Planning For Pets: Closing Life's Loopholes

     by Maureen Rothschild DiTata, Esq.

     Nassau County Bar Association - March 3, 2011

As estate planning practitioners, our one of our jobs is to help our clients anticipate "the future"and prepare for life's contingencies.  We have become adept at thinking through difficult family dynamics and complex tax strategies.  We grapple with the manner in which property is titled, review retirement accounts to ensure that beneficiaries have been properly designated, analyze insurance contracts and craft intricate documents to assist our clients in carrying out their wishes.  I like to say that we "close life's loopholes."

But sometimes we overlook the obvious.  So many of our clients have pets.  Almost all of those who do would probably say that they care about what will happen to their pets if they die - or become incapacitated and can no longer provide care.  Without the proper planning a pet may suffer, starve or be destined to a fate that its owner would never have condoned.  Sometimes, and because formal arrangements are not made, a pet owner will merely entrust his animal to a close friend or family member by some informal means.  We can all envision how that scenario might play out in the worst of circumstances.  Even in the best of those circumstances, the pet's new caretaker may not be able to keep the pet because of allergies, lack of time, conflict with other pets or a prohibition of pets in the residence. A pet owner's only assurance is to draft legally enforceable documents that will guarantee the pet's future - closing another of life's loopholes!

A pet trust is a legally sanctioned arrangement for providing care and maintenance of pets in the event of the owner's disability or death.  While pet trust provisions can be incorporated in a Will, they only take effect after the executor has been authorized to act on behalf of the estate.  An inter vivos pet trust or, alternatively, an inter vivos trust that contains provisions for the care and maintenance of pets, is valid during the pet owner's life, provides authority to protect the pet if the owner becomes ill or incapacitated, and remains continually effective after the owner's death.  A pet trust usually terminates at the death of the pet or, if it provides for more than one pet, at the death of the last surviving pet.  Pet owners are not advised to leave any part of their estate outright to an animal.  Such a provision would be unenforceable in all fifty states.  A pet trust can and should designate caretakers and successor caretakers, trustees, or fund managers, and their successors; provide instructions as to care of the pet, what happens if the caretaker can no longer care for the pet and the disposition of the pet after its death; control the disbursement of funds for the benefit of the pet; designate the manner in which the funds are to be utilized; and appoint remainder beneficiaries.

Historical Information

Pet owners view their pets as family members.  The law however views them as property.  For this reason, testamentary instructions for the care of a pet do not guarantee the pet's future.  Wills are designed to distribute property after death, not to provide instructions as to the care and management of that property.  So, for instance, if the family automobile is left to the testator's son, the son receives the car but cannot be forced to register or insure it, or to have it tuned up every few months.  Similarly, all to often, a testamentary instruction to care for a pet fails.

Honorary Pet Trusts

Bequests in favor of animals have long been problematic.  The intent of testators who had specifically provided for their pets have been frustrated by beneficiaries who diverted the funds for their own benefit.  Historically, Courts did not enforce the provisions of these trusts for a variety of reasons.  An animal was not considered a beneficiary that could be identified in definite and certain terms.¹  A private trust could not exist without a human beneficiary capable of enforcing it.²  Courts routinely held that bequests in favor of pets violated the rule against perpetuities which provides, generally, that an interest in property must vest, if at all, no later than 21 years after the death of a measuring life.³   These trusts became known as "honorary pet trusts" because the pet's caretakers were "bound in honor" to comply with the trust"s directions as there was no mechanism for Court enforcement.

Traditional Pet Trusts

A person who wanted to provide for his pet could do so in only very limited ways: he could give money and the pet to a humane society, he could make a bequest to an individual that was contingent on care for the pet, or he could give money to an individual with a request to care for the pet.  It was from these efforts that "traditional pet trusts" developed in which the pet owner created a trust in favor of a human beneficiary (the caretaker) and required the trustee to make distributions to the beneficiary to cover the pet's expenses.  Courts, however, were less than receptive to bequests that benefited animals unless they were very carefully drafted which made this approach quite costly and unavailable to pet owners with modest estates.⁴

Statutory Pet Trusts

Forty states plus the District of Columbia have specific pet trust legislation.  In 1996, New York enacted its pet trust statute, permitting the creation of a trust for pets that is enforceable in Court.  This is referred to as a "statutory pet trust."  Article 7, Part 8 of the New York Estates, Powers and Trusts Law is, ironically, entitled "Honorary Trusts for Pets."  It provides as follows:

Section 7-8.1 Honorary trusts for pets.

                   (a)      A trust for the care of a designated domestic or pet animal is valid.  The intended use of the principal or income may be enforced by an individual designated for that purpose in the trust instrument or, if none, by an individual appointed by a court upon application to it by an individual, or by a trustee.  Such trust shall terminate when the living animal beneficiary or beneficiaries of such trust are no longer alive.

                   (b)      Except as expressly provided otherwise in the trust instrument, no portion of the principal or income may be converted to the use of the trustee or to any use other than for the benefit of all covered animals.

                   (c)      Upon termination, the trustee shall transfer the unexpended trust property as directed in the trust instrument or, if there are no such directions in the trust instrument, the property shall pass to the estate if the grantor.

                   (d)      A court may reduce the amount of the property transferred if it determines that amount substantially exceeds the amount required for the intended use.  The amount of the reduction, if any, passes as unexpended trust property pursuant to paragraph (c) of this section.

                   (e)      If no trustee is designated or no designated trustee is willing or able to serve, a court shall appoint a trustee and may make such other orders and determinations as are advisable to carry out the intent of the transferor and the purpose of this section.

As originally enacted, Section 7-8.1 of the Estates, Powers and Trusts Law (formerly 7-6.1) provided that a trust created under its terms could last for no longer than 21 years.  The legislature amended that in 2010 to remove the 21-year limitation and allow a trust to endure for the lifetime of the beneficiary or beneficiaries, the pet(s). 

Establishing a Pet Trust

A pet trust can be a testamentary trust, created under the terms of a Will, or an inter vivos trust, created and effective during the lifetime of the pet owner.  If the trust is created under the Will, it takes effect only after the Will is admitted to probate.  If a dispute arises during the probate process, the delay in effectuating care for the pet may be indefinite.  An inter vivos trust can be crafted to afford immediate care at illness, incapacity or death of the pet owner thereby preventing a gap in funds being available between the owner's death and the appointment of an executor of the estate. 

If the trust is revocable, it can be amended, from time to time during the owners life, to reflect the number of pets, their needs, the funds necessary to care for them and to alter the fiduciaries, if necessary.  If the trust is irrevocable, it can, theoretically, form part of a Medicaid asset protection plan.  Five years after the trust is funded, the assets should not interfere with the pet owner's eligibility for Medicaid benefits.  Under this scenario, the funds intended for the care of the pet could be spent, by the trustee, on the pet and not utilized to pay for the pet owner's custodial care.

The trust terminates at the death of the last pet covered by the trust.  Upon the expiration of the trust the remainder is paid, by the trustee, in accordance with the trust's terms.  If the remainder beneficiary is the caretaker, there may be a concern that the caretaker attempt to preserve assets rather than spending them on the pet.  It may be advisable to name a remainder beneficiary other than the caretaker to avoid a conflict of interest.  However, a remainder beneficiary who is not sympathetic to the pet may be more likely to contest the size of the bequest or the needs of the pet in Court.  For this reason, some estate planning professionals recommend naming a shelter, charitable or not-for-profit organization, pet sanctuary, humane society or other institution as a remainder beneficiary.  If the trust fails to name a remainder beneficiary, the remainder is paid to the estate of the original pet owner/testator.

Selecting the Fiduciaries

When developing a pet trust it is important to identify the fiduciaries: the trustee, the caretaker and the trust enforcer. 

A trustee is named in the instrument to manage the funds and use them for the directed purpose, so this individual should be fiscally responsible.  It could be an individual or a corporate trustee.  If an individual is designated, it is important to name at least one successor or alternate trustee.  The statute makes it clear that if no trustee is designated, or willing and able to serve, a Court will appoint a trustee.

Where the trustee is not expected to take physical possession of the pet, a caretaker is named.  The caretaker will have control of the pet.  This is the person to whom the trustee makes payment.  It is important to ensure that the caretaker knows the pet, has cared for this pet or another, is familiar with the responsibilities involved and has agreed to act in this capacity.  Payment to the caretaker could cover expenses for the pet only or could provide additional financial or other benefits.  For instance, the trust can afford compensation to the caretaker by way of salary or a life estate in a house where the caretaker and pet reside.  Often, it is in the best interests of the pet that the caretaker is comfortable with the financial arrangements and not inconvenienced or disadvantaged.  The trust should also specify instructions for removing or replacing the caretaker.

The job of the trust enforcer is to ensure that the trust assets are used for the benefit of the pet.  Under the statute, no portion of principal or income may be converted to a use other than for the benefit of the covered pet unless it is expressly stated in the trust.  The trust can name an enforcer or, if none is named, an enforcer can be appointed to, inter alia, secure the assistance of the Court to enforce the trusts provisions, remove the trustee or order an accounting.

When drafting pet trust provisions, it is important to ensure that the trustee and caretaker are not burdened or disadvantaged by the responsibility for caring for the pet.  The more the drafter knows of the financial arrangements, the easier it is to craft language that ensures the best interests of the animal.  What if the pet owner has noone to name as caretaker for the pet?

Alternative Care Arrangements

If the pet owner can not name an individual to whom the pet will be entrusted, the pet can be left in the care of a shelter, pet sanctuary or retirement home.  There are charitable and not-for-profit  organizations that will provide perpetual care programs for pets and others that will place the pets in foster care homes.  Many programs will accept a pet if there is an accompanying cash bequest to cover care and expenses.  Some programs require advance enrollment and monetary contributions.  Often the suggested contribution is high because the cost of care is expected to be paid for from the income earned on the contribution.

For instance, North Shore Animal League America offers a program called "Safe Haven Surviving Pet Care."  It claims to provide food, shelter and state-of-the-art medical care to enrolled pets for as long as it takes to find a new home.  The minimum bequest is $15,000.00 for the first pet and $7,500.00 for each additional pet.  If paid at the time of enrollment, the minimum bequest is $10,000.00 for the first pet and $5,000.00 for each additional pet.

Bideawee, Inc. is rolling out a new program this year in late April or May.  It is entitled, "For the Life of Pets," and pledges that it will provide care of enrolled cats and dogs when the owner dies or can no longer care for them.  This program carries an application fee of $2,500.00 for the first pet and $1,000.00 for subsequent pets.  Official enrollment will require a minimum contribution of $50,000.00 for the first pet and $45,000.00 for additional pets, subject to "applicable inflationary adjustments at time of actual admission."

Kent Animal Shelter, Inc. was originally established as a no-kill shelter in Calverton, New York in 1968.  Today it operates a rescue program, an adoption program, a low-cost spay/neuter clinic and a cat retirement home for cats who outlive their owners.  A donation in the amount of $7,500.00 is required for the lifetime care of a cat regardless of its age.  

Animal Haven is a no-kill adoption program which operates out of a shelter in Queens, a mobile adoption program and adoption center at 251 Centre Street in Manhattan.  This program sends hard to place dogs and cats to the Animal Haven Acres Sanctuary and Rehabilitation Center in Delaware County, New York.

We have discovered that these programs are constantly changing and developing.  The fees increase over time and some programs can service only a certain number of pets at a time.  Before selecting a program, the pet owner should inquire as to the kind of care that will be afforded, whether the pets are caged, the extent of veterinary care the pets receive and the screening program for adoption.  If a client wishes to incorporate this planning or enroll their pets in such a program, we recommend that they investigate carefully, visit the facility, check with Guidestar or the Better Business Bureau to ensure that the program has a history of complying with its promises before any application is submitted o fees are paid.

Appropriate provisions must be specified in the estate planning documents.  Some sample language is provided at the end of this article.

Additional Considerations

Because pet trusts can be as varied as the pets for whom they are created, the draftsperson should encourage the pet owner to consider as many issues as possible.  The more time and attention that is devoted to the planning stages, the greater the likelihood of success.  What follows is a list of questions that may serve as a guide:

How will you identify the pet or pets to include in the trust?

This can be done by microchip number, photographs, registration papers or simply a written description.  The trust can specify a particular pet or all pets owned at the pet owner's death.

If the trust is to provide for more than one pet, must they remain together?

Some pet owners want their pets to remain together.  This, of course, makes it more difficult to identify caretakers, adds to the complexity of the trust and makes the planning - and periodic review of the plan, more important.  Depending on the number of pets, special arrangements may have to be made or a residence may have to be provided to the caretaker.

What type of care will be afforded for the pet?

Will the trust specify medical/veterinary treatment, emergency care, daily care, grooming, boarding, walking or other services that must or should be provided for the pet - or those that are to be avoided. 

How much money will fund the trust?

This depends on the breed, size, age, health and lifestyle of the pet.  Consideration must be given to the pet's life expectancy as well as its special needs.  Calculate the current monthly costs for food, shelter and veterinary services and multiply by the life expectancy - then add a hefty sum for the unexpected. Will the trust pay for pet insurance?

Is there a limit on the money or property that can fund the trust?

While there is no established limit,  the larger the sum, the greater the likelihood of challenge by the family or the Court.  Who can forget Leona Helmsley's twelve million dollar bequest to a trust for the benefit of her dog Trouble or the battle that ensued over the fact that she left so much less to her human family members?⁵  Under the New York statute, the Court may reduce the amount if it determines that it substantially exceeds the amount required for the intended use.

Is there a plan if all else fails?

Some pet trusts provide the trustee with authority to make alternate arrangements if the caretaker and successor caretaker are unable to accept responsibility for the pet.  Perhaps, in these circumstances, the assets intended for the caretaker's use in caring for the pet can be used to fund perpetual care or make arrangements for the pet's adoption. 

What arrangements should be made when the pet passes away?

A final disposition should be planned for the pet upon its death, including instructions for burial, cremation or a memorial ceremony.

Taxation of Pet Trusts

Whether pet trusts are created during the pet owner's lifetime or after death, they are typically funded.  Money and other property is transferred to the trust to provide for the pet's care.  The transfer of assets to the trust is not considered income to the trust and will not trigger an income tax.  After the trust is funded, the trustee is obligated to make the property "productive," meaning it should earn income or appreciate in value.  When income is received or accrued, it is necessary to consider who is responsible for the income tax.  The usual rules for taxing income earned by trust assets apply to pet trusts.

Generally, trust income is taxed in one of three ways.  (1) The pet owner pays. If the pet trust is revocable, during the pet owner's lifetime, trust income will be taxed to the individual creating the trust.  (2) The trust pays. If the trust assets earn income that is retained in the irrevocable trust, for instance, after the death of the pet owner or if the trust is created under the terms of a Will, the trust will owe income tax.  Typically, trusts will pay more tax on a given amount of income than an individual or a married couple would pay.  (3) The beneficiary pays. If the irrevocable trust makes distributions to a beneficiary, the beneficiary is obligated to pay income taxes on the income, up to the amount of what is known as the distributable net income of the trust for the year. This means that the beneficiary might pay tax on all or part of the money received. That taxable income will be over and above the beneficiary's other income for the year so it presumably will be taxed at his or her highest tax rate.  Thus, the income tax rules for pet trusts are similar to those for many other types of trusts.

What makes the taxation of pet trusts different? Consider the following example. A pet owner, Mary, transfers $25,000 into a pet trust for her dog, Tycho. The pet owner names Larry as trustee and Kim as beneficiary of the trust. Mary knows that Kim is a pet lover who will care for Tycho if she is unable to care for him for any period, limited or extended.  Kim will assume the role of caretaker in addition to her role as beneficiary of the trust. The trust income this year is $1,000 of ordinary income.  Larry, as trustee, distributes $1,000 to Kim, the beneficiary. Kim uses that $1,000 to pay for Tycho's food, medical bills, and other expenses. If this is the case, Kim will have to recognize $1,000 of ordinary income from the trust distribution this year. Assuming an effective 30% tax rate (state and federal), Kim would owe $300 in income tax for taking care of Tycho. If larger amounts are involved (say, for an expensive veterinary care), Kim would have a larger tax obligation. 

Pet owners and their advisor's need to take such tax consequences into consideration when the pet trust is drafted. Income tax planning would help to minimize or eliminate taxable income from the trust assets. If the trust assets produce no taxable income, no tax obligation will be passed through to the beneficiary.  Another option is to have the trust pay the expenses incurred for the pet directly instead of first distributing funds to the caretaker. In that event, the caretaker will not have to recognize any taxable income. Instead, any income tax associated with the trust's income will be paid by the trust. Revenue Ruling 76-486 provides that an enforceable pet trust is liable for tax on the income earned but is not credited for distributions made for the benefit of the pet beneficiary. Because trust income tax rates are higher than personal income tax rates, all income, whether distributed or not, is taxed at the higher rate. Therefore, if this alternative is chosen income tax planning is important to minimize any trust income taxes.

Gift tax. Just as the usual income tax rules apply to pet trusts, the usual gift tax rules for transfers to trusts apply to gifts to pet trusts.  Most transfers to irrevocable trusts are not transfers that qualify for the annual exclusion ($13,000 per recipient in 2011).  Instead, gifts to pet trusts can be covered by the pet owner's lifetime gift tax exemption ($5 million until December 31, 2012).  If the pet owner already has used up his or her lifetime exemption, transfers to pet trusts will incur a gift tax. Gift tax planning techniques exist to at least lessen the tax burden if not totally eliminate it.

Providing For Pets During the Probate of a Will

If the pet owner has not created an inter vivos trust and the provisions for the care of the pet are set forth within a Will, arrangements must be made to care for the pet during the period between the owner's death and the issuance of letters testamentary.  This may prove problematic as, technically, no one has authority to take possession of the testator's property until at least limited or preliminary letters testamentary are issued.  However, the pet owner should arrange access to the home to permit care and feeding of the pet.  The caretaker may need written instructions authorizing entry into an apartment or other residential community.  Funding can be provided through the utilization of a joint bank account or an account that is payable on death.  The executor should be given a copy of any instructions or authorizations and should be advised, in advance as to the arrangements that have been made.

During Illness or Incapacity: the Durable Power of Attorney

A durable power of attorney is a document that appoints an agent to manage financial, business and property interests on behalf of a principal.  It survives the incapacity of the principal.  For the pet owner who has not created and funded an inter vivos trust, a durable power of attorney is an essential element of estate planning for pets.  This can provide the only mechanism for caring for a pet during any period of incapacity or until the pet owner's death.

After the Plan is in Place

Once the estate planning documents have been prepared and signed or executed, the client should be advised to leave detailed care instructions for the caretaker.  The instructions should include eating habits, grooming habits, sleep and exercise routines, idiosyncracies of the particular pet or breed, the name and contact information of the veterinarian, groomer, walker and other professionals with whom the pet has regular contact.  In addition, some pet owners carry a wallet card to let others know, in case of an emergency, that there is a pet at home that needs care.

Directing Euthanasia for Pets

Some pet owners believe that no one will be able to provide adequate care for their pets if they are no longer able to care for them.  While a pet owner may feel it is important to protect a pet from subsequent mistreatment, provisions in a Will directing that an otherwise healthy animal be euthanized upon the death of its owner have been invalidated by the Courts.⁶

If you have any questions or are looking to help protect your pet's future, we welcome you to contact our New York pet trust attorneys, who service Long Island, NYC and nationwide clients.