Puppies for sale or dog training ads which appear on the Boxers 101 blog do not necessarily represent either businesses or actions recommended by Boxers 101. For information about Boxer breeders and training Boxers, please visit the Boxer Crazy forum.

Monday, March 27, 2017

Estate Planning for Pets - Part 2

This series of articles was originally published online by The Estate Planning for Pets Foundation, copyright © 2003. The Foundation appears to be now defunct and the website where these articles were published is now owned by a private legal firm in southern California. The articles were reprinted with permission in the Michigan Boxer Club newsletter, The ChatterBoxer, from June - August 2004 and are being revived here, with a few updates to applicable tax issues and website links, under that same reprint permission.

Statutory Pet Trusts

Several states have enacted statutes recognizing “valid” pet trusts, as opposed to mere honorary trusts. Seven states (Alaska, Arizona,[1] Colorado, Michigan, Montana, North Carolina, and Utah have enacted the 1993 version of the Uniform Probate Code (UPC) §2-907, and the Illinois legislature is currently considering enactment.[2] Six states have enacted the recently promulgated Uniform Trust Code (UTC) §408 (Arizona, Kansas, Nebraska, Nevada, New Mexico, and Wyoming), and the legislatures in three other states (District of Columbia, Maine, and Tennessee) are currently considering enactment. Six other states (Florida, Iowa, New Jersey, New York, Oregon, and Washington) have enacted independent statutory schemes.

Nonetheless, in addition to the statutory provisions discussed dealing with the duration of pet trusts and the rule against perpetuities, the following is a discussion of several common features to most (if not all) of these statutes:

  1. If there is no caretaker-trustee willing or able to serve, the court may appoint a successor. The pet trust statutes expressly provide for the appointment of an alternative caretaker-trustee in the event that the settlor has not designated one.[3] However, the statute requires court action and does not address the practical issue of who would be willing to step forward to take on this role. 
  2. The terms of the pet trust and/or its intended uses may be enforced against the caretaker-trustee by any individual designated in the instrument, or if none, by any individual appointed by a court.[4] Of course, as discussed above, the pet trust statutes do not address the issue of determining who may be willing to take action against the caretaker-trustee. This potential problem is aggravated by use of the term “individual” (in some statutes) to describe potential enforcers. In these states, it would appear that the ability of a settlor or a court to designate an animal welfare organization to watch over a caretaker-trustee is restricted.[5] 
  3. The court may reduce the amount of caretaking funds initially passing to the pet trust if it substantially exceeds the amount reasonably required for the intended use.[6] The drafters of the June 2004 Page 9 pet trust statutes intended to protect the human heirs from a presumably improvident bequest to an animal. However, from another point of view, this statutory provision gives any disgruntled heir additional subject matter for litigation that apparently cannot be drafted around.
  4. Except as expressly provided in the terms of the pet trust, no portion of the pet trust funds may be used for any purpose other than the care of the pet. The pet trust statutes attempt to tie the hands of the caretaker-trustee. That said, many of these statutes appear to preclude the use of one important incentive for ensuring that the caretaker-trustee will take adequate care of the pet - the payment of reasonable compensation. In this regard, only two states (Oregon and Washington) expressly provide that the caretaker-trustee is entitled to compensation. Therefore, if the settlor intends to allow for compensation, an express provision must be included in the terms of the pet trust.
  5. Except as required by a court or the terms of the pet trust, the caretaker-trustee is excused from making filings, reports, registration, periodic accountings, separate maintenance of funds, appointments, or fees normally associated with a fiduciary relationship.[ 7] The pet trust statutes place more trust in the caretaker- trustee than a trustee of a traditional trust, perhaps based on the assumption that pet trusts will be modest in amount and should not be burdened with the expense of meeting such duties. Nonetheless, whether this statutory relief is appropriate depends on the settlor’s intent – i.e., how much the settlor trusts the designated caretaker-trustee.  
  6. Except as expressly provided in the terms of the pet trust, any assets remaining after termination of the trust are to pass to the beneficiaries of the estate of the settlor.[8] As noted above, this provision gives disgruntled heirs an opportunity and standing to reduce the amount passing to the pet trust and make any other challenges to the trust. To close this door to litigation, the settlor should consider expressly designating a remainder beneficiary of the pet trust with interests that would not be adverse to expending monies for the care of the pet, such as an appropriate nonprofit organization. 
  7. Instruments are to be liberally construed to find a valid pet trust, as opposed to an honorary trust or precatory language. One of the primary purposes of these statutes is to bring poorly drafted bequests within the statutory pet trust regime based on the rebuttable presumption that the settlor’s primary intent in gifting the pet and any funds to an individual is to provide for the care of the animal. UPC §2-907, as well as statutes in several other states, go so far as to render extrinsic evidence admissible to determine the settlor’s intent.[9] What this means is that if the pet owner intends to make an outright bequest of a pet and a sum of money to a beneficiary within a jurisdiction that has a pet trust statute, then the provision should expressly state that a statutory pet trust is not intended.
Even in the jurisdictions with the most elaborate and contemplative statutes, the statutory pet trust schemes leave several issues unaddressed. Specifically, the drafter should consider the following:

  • Who owns the pet? The pet trust statutes do not address the question of who owns the pet – the caretaker as trustee or the caretaker as beneficiary? This ambiguity could create sticky legal issues if the need arises for a third party to take physical possession and custody of the pet away from the designated caretaker-beneficiary.[10]
  • How much money can be transferred to the pet trust? Under most of the pet trust statutes, the courts are authorized to reduce the amount of the property transferred if its determines that amount substantially exceeds the amount required for the intended use, and the amount of this reduction, if any, passes in the same manner as if the pet trust terminated. As noted above, if disgruntled beneficiaries (who could be heirs) and the court do not agree that the pet should have as high a standard of living as the settlor, then the amount passing to the pet trust may be reduced. The drafter should be cognizant of this possibility and the potential for litigation by disgruntled heirs and, if advisable, insert a clause providing that if a court determines that the designated amount is too much, then the excess will be distributed such that the challenging parties would not benefit (e.g., to a nonprofit organization).
  • Can the statutory pet trust be enforced if the caretaker-trustee moves into a jurisdiction that does not recognize such trusts? This is a question that deals with the complex issues of conflict of laws and trust situs. Without going into the potential outcomes in detail, it should be noted that the sample language for a statutory pet trust includes a governing law provision and a provision expressly stating that by accepting the benefits, the caretaker-beneficiary consents to the application of the desirable pet trust statute regardless of the trust situs.

The statutory pet trust statutes are intended to make the best of a poorly-drafted instrument. As such, relying upon these statutes in creating well-drafted documents may not be the best course of action under the circumstances.

[1] Note that although Arizona has adopted UTC §408, effective on January 1, 2004, the corresponding provision of the UPC has not yet been repealed by the Arizona legislature.

[2] Note that the original 1990 version of UPC §2-907 was promulgated in 1990, but revisions were made in 1993, and it is the amended version that has been enacted by the state legislatures listed above with minor modifications.

[3] Note, however, that the statutes in Florida and Iowa do not contain an express provision to this effect. Although UTC §408 does not expressly address this issue, UTC §708 provides for the appointment of successor trustees to fill any vacancy.

[4] Some statutes, including UTC §408, allow any person “having an interest in the welfare of the animal” to make such a request to the court.

[5] The term “individual” is used in the New York statute and the statutes in states (other than Arizona) that have adopted the 1993 version of the UPC §2-907. However, the other pet trust statutes use the term “person”, which, in the case of the Uniform Trust Code, includes a “corporation” or “association”. UTC §103(9).

[6] Note, however, that the statutes in Oregon and Washington do not contain this express limitation.

[7] Note, however, that under the Florida statute, the third party designated to enforce the pet trust is treated as a beneficiary entitled to receive accountings, notices, and other information from the caretaker-trustee.

[8] Under UPC §2-907, if the residue of an estate or trust was left to the pet without any provision for a remainder beneficiary, the intestate heirs would receive the excess over the amount needed for the pet. By contrast, UTC §408 merely refers to the settlor’s “successors in interest.” UTC §408(c).

[9] Note, however, that the UTC §408 does not include a provision for liberal construction. Furthermore, UTC §112 provides that the same rules of construction that apply to wills also apply to trusts, which, in most states, would preclude the admissibility of extrinsic evidence to contradict the plain language of the document.

[10] This concern may be academic since most of the pet trust statutes permit the court to order the transfer of property to another trustee if required to assure that the intended use is carried out.

Articles in this series:

Part 1 - Introduction and Legal Issues
Part 2 - Statutory Pet Trust
Part 3 - Traditional Legal Trusts and Tax Considerations
Part 4 - Drafting Estate Planning Documents
Part 5 - Sample Language
Part 6 - Resources and Further Reading

No comments:

Post a Comment