You Can Create a Pet Trust - Just Like the One For Choupette

According to multiple news sources, when the creative director and fashion designer Karl Lagerfeld died on February 19, 2019, he left his famous cat, Choupette, a significant amount of money in trust.

Pet trusts are now quite common, and specifically authorized by statute in most jurisdictions.  Many people consider pets as a part of the family, and want them to be cared for as such.  A pet trust can provide money to pay for a caregiver, food, pet supplies, and a veterinarian.  It can also provide a place for your pet to live (or board), and in the case of Choupette, a personal chef.

Most estate planning attorneys who create pet trusts will provide a check and balance on the trustee, the caregiver, and the remainder beneficiary.  In other words, we do not recommend that the person in charge of caring for the pet be the one managing the money and the ultimate remainder beneficiary when the pet dies, as this would create a perverse incentive for the caregiver to do a bad job in caring for your beloved pet.

For people who do not want to create trust, they can always leave money to a caregiver (or charitable organization) with the hope that the caregiver will maintain the pet properly.  The benefit of a trust is that it makes the arrangement more legally enforceable and provides greater oversight.

New Jersey, Pennsylvania, and Florida have statutes based upon the Uniform Trust Code.  The NJ Pet Trust Statute can be found at:  3B:31-24 Trust for care of animal.  The Pennsylvania Pet Trust Statute can be found at: 20 Pa.C.S.A. § 7738.  Trust for Care of an animal.  The Florida Pet Trust Statute can be found at: Florida Statute 736.0408  Trust for care of an animal.  The State of New York also has a statute specifically authorizing the creation of a pet trust, which can be found at NY Est Pow & Trusts L § 7-8.1 Trusts for pets. 

It should be noted that the NJ statute, enacted in 2015, amended a previous version of the law that limited Pet trusts to 21 years.  It also clarified that a Pet trust could be created under a revocable trust document, not just as part of a trust created under a Will.

It should also be noted that living money to a pet (in trust or to a caregiver) will likely give rise to an inheritance tax in both Pennsylvania and New Jersey. 

Estate Planning with Illiquid Assets

One of the trickiest items that we must deal with as estate planners is to help clients transfer illiquid assets.  Illiquid assets can include: retirement plans, ownership in a family business, real estate, collectibles (such as artwork, baseball cards and comic books), expensive vehicles and even animals (such as thoroughbreds and show pets).

Illiquid assets are tricky to plan with because they almost always have huge built-in gains, sometimes multiple people want the same asset, the asset must often be sold to pay for taxes and they usually require special maintenance or care.  A client can face additional complications when most of a client's wealth is tied up in a single asset and the client wants to benefit multiple heirs. 

  

Each family requires a custom solution, but often the solution can be found in tried an true estate planning techniques, such as a life insurance trust (so that you can give the illiquid asset to one heirs and cash to another heir), a buy-sell agreement (for a family business), a pet trust (to deal with a beloved family pet), promissory notes and even charitable trusts.

While we can not help you decide which of your heirs should receive your assets, a good estate planning attorney can help you make sure that they pass in a practical and tax efficient manner.  

Follow up to Pet Trusts

Following Leona Helmsley's bequest of $12,000,000 to her dog, the USAToday published a nice article about the importance of setting up a pet trust for your beloved animals. I note that the article contains a nice chart detailing which states allow for the creation of a pet trusts.

Animal/Pet Trusts

New Jersey passed legislation a short while ago permitting the creation of a Pet Trust under: N.J. Stat. Ann. § 3B:11-38.

1. The new law states:

a. A trust for the care of a domesticated animal is valid. The intended use of the principal or income may be enforced by a person designated for that purpose in the trust instrument, a person appointed by the court, or a trustee. The trust shall terminate when no living animal is covered by the trust, or at the end of 21 years, whichever occurs earlier.

b. Except as expressly provided otherwise in the trust instrument, no portion of the trust's principal or income may be converted to the use of the trustee or to any use other than for the benefit of the animal designated in the trust.

c. Upon termination of the trust, the trustee shall transfer the unexpended trust property as directed in the trust instrument. If no directions for such transfer exist, the property shall pass to the estate of the creator of the trust.

d. The court may reduce the amount of the property transferred if it determines that the amount substantially exceeds the amount required for the intended use. The amount of any reduction shall be transferred as directed in the trust instrument or, if no such directions are contained in the trust instrument, to the estate of the creator of the trust.

e. If no trustee is designated or if 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 creator of the trust and the purpose of this act.

2. Prior Law - Previously, an animal trust existed as an honorary trust (i.e. there was no judicial enforcement).

3. Planning Points

a. Unlike most other trusts, the beneficiaries of an animal trust literally cannot talk for themselves, so the Grantor/Pet Owner must clearly indicate what level of care should be given to the surviving pet. The document should also clarify what payments may be made to the pet’s caretaker.

b. A remainder beneficiary should always be considered (and it is usually inadvisable to make the caretaker the remainderman).

c. Many animals live longer than 21 years, so a truly trusted caretaker and trustee should be considered. Any animal trust that is in excess of 21 years likely continues as an honorary trust.

d. The animal should be clearly identified to prevent fraud.

4. Tax Aspects

a. A Pet Trust is taxed as a complex trust that has not made any distributions. Revenue Ruling 76-4876.

b. In general, a trust's income is subject to graduated income taxation at the same rates as individuals with the highest marginal rate of 35% taking effect after only $10,050 (for 2006) of income, a significant detrimental income tax effect. Some commentators have reported that the IRS will tax these trusts at a marginal rate that is lower than that of the average trust.