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Monday, March 27, 2017

Estate Planning for Pets - Part 4

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.

Drafting a Conditional Bequest to the Caretaker

The pet owner may simply make a gift (either in a will or a revocable living trust) of the pet and the caretaking funds to the intended caretaker. This approach may be entirely appropriate in situations where the caretaker is very trustworthy or it is highly unlikely that the pet will outlive both the pet owner and the caretaker.

If this is the case, the pet owner should consider imposing a condition upon the gift of the caretaking funds – that the funds will actually be used for the care of the pet. To be sure, it is practically unlikely that a condition of this type may be enforced after the estate has been distributed, but for what it is worth, it does impose a moral obligation.

Furthermore, the pet owner should explicitly indicate whether the condition is a “condition precedent” (i.e., the caretaker does not receive the funds unless the pet outlives the pet owner) or a “condition subsequent” (i.e., the caretaker receives the funds regardless of whether the pet outlives the pet owner). If the sole purpose of including an express gift in the estate planning document is to provide for the care of the pet, then the pet owner would probably prefer the former.

Finally, many of the pet trust statutes provide that a gift will be liberally construed to impose a statute pet trust upon the caretaker (as discussed previously). If this result is not intended, then the drafter should prepare a provision that to expressly remove the conditional gift from the statutory scheme.

Drafting a Statutory Pet Trust

If an outright bequest of the pet and any caretaking funds is not desirable, it will be because the pet owner, for one reason or another, is not entirely confident that the designated caretaker will be willing and able to care for the pet for its lifetime in the manner the pet owner would like. In this case, the use of either a statutory pet trust or a traditional legal trust for a pet may be appropriate.

As an initial matter, establishing an effective statutory pet trust or traditional legal trust necessarily includes designating, at a minimum, the following two parties:

  • A caretaker who is willing and able to care for the pet (i.e., the beneficiary under the traditional legal trust, and the trustee under the statutory pet trust); and
  • A third party who can enforce the trust against the caretaker (i.e., the trustee under the traditional legal trust, and the untitled “individual” granted certain powers in the pet trust statutes).
In addition, the settlor may want to designate yet another party as remainder beneficiary (i.e., to receive any remaining trust funds upon the death of the pet) who, in avoiding conflicts of interest, should be someone other than one of the above parties.

This series of articles does include sample language. Nonetheless, because of the inherent uncertainties and limitations surrounding the use of a statutory pet trust, some experts recommend avoiding use of a statutory pet trust altogether. As such, a discussion of drafting the terms of a statutory pet trust has been omitted in favor of the following more detailed exposition pertaining to provisions for traditional legal trusts.

Drafting Trust Provisions for the Care of a Pet

The following is a list of recommended provisions for inclusion in a trust for pets. However, note that the list is not specifically applicable to a statutory pet trust, although many of the terms pertaining to the “caretaker-beneficiary” below could be applied to the “trustee” of a statutory pet trust, and the terms pertaining to a “trustee” below could be applied to a designated third party enforcer under the statutory pet trust. (See discussion regarding the use of statutory pet trusts above.)

  • Identifying the pet. The terms of the trust should identify the pet in a way that will, at very least, permit third parties to identify the pet after the settlor’s death, and preferably, prevent the caretaker from replacing the original pet with a new one to fraudulently perpetuate his or her right to distributions. An adequate identification of the pet depends on the circumstances involved. In most cases, merely identifying the pet by unique physical attributes is sufficient. In other cases, the pet may not be distinguishable from other animals of the same species, and the settlor may want to consult a veterinarian about having a microchip implanted in the pet or obtaining DNA “fingerprinting”. Such precautions are relatively inexpensive and may also prove to be very useful if the pet is lost.[1]
  • Identifying subsequent pets acquired by the settlor. Of course, including future pets in the terms of the trust saves the effort of having to formally amend the trust whenever a new pet enters the picture. On the other hand, defining the scope of covered pets too broadly may undermine the purposes of sufficiently identifying the pet, as discussed above.
  • Setting the amount of caretaking funds. If the trust is a traditional legal trust, setting the amount of caretaking funds passing to the trust should not be the issue that it is in the case of a statutory pet trust, whereby the court is authorized to reduce the amount to what it thinks is reasonable. Practically speaking, however, the larger the amount of caretaking funds passing to the trust – the more likely that disgruntled heirs will challenge its terms. One way to mitigate this potential problem, without reducing the amount of caretaking funds, is to designate a remainder beneficiary who would never make such a challenge (as discussed below).
  • Identifying any other assets to be used to care for the pet animal (e.g., a cage, a house, etc.)
  • Designating the caretaker-beneficiaries. The individuals or organizations that are willing and able to care for the pet should be named as caretaker-beneficiaries. That is, the terms of the trust should designate a successor caretaker-beneficiary in the event that the initial caretaker is unable or unwilling to serve. In addition, the trustee should be authorized to appoint a new caretaker-beneficiary (other than him or herself) in the event that the designated caretaker-beneficiaries are unable or unwilling to serve. In any event, as with fiduciary appointments, before the documents are executed, the settlor should be advised to discuss the matter with the proposed caretaker to ensure that he or she is willing and able to provide the same standard of care for the pet as the settlor did.
  • Designating the trustees. The trustee will oversee the caretaking funds, watch over the caretaker-beneficiary, and take care of any other matters pertaining to the trust (e.g., filing any fiduciary income tax returns). As such, the settlor should choose a party (other than the caretaker-beneficiary) who is willing and able to perform these functions. In addition, the settlor should designate a successor trustee, in case the first choice is unable or unwilling, or at least provide a mechanism for appointing a successor trustee without the necessity of court intervention. In any event, as with the caretaker-beneficiary, the settlor should discuss the matter with the proposed trustee before the documents are executed.
  • Defining the powers of the trustee over the caretaker-beneficiary. One of the primary purposes of using a trust is to provide a check upon the caretaker-beneficiary – if the caretaker- beneficiary is not providing adequate care for the trust, then he or she may be removed and replaced by the trustee without the necessity of court intervention. Therefore, the trustee should be given the power to remove the caretaker-beneficiary if the latter, in the opinion of the trustee, is not providing the level of care for the pet that is directed in the terms of the trust. That said, the trustee should not be permitted to appoint him or herself as a replacement caretaker-beneficiary, since this would undermine one of the primary purposes of the trust.
  • Defining the duties of the trustee. Because one of the primary roles of the trustee is to watch over the caretaker-beneficiary, the trustee should be charged with both the right and the duty to make periodic checks on the pet and the premises where the pet is housed. Depending on the size of the trust and the relationship of the parties involved, the settlor may desire to relieve the trustee of certain fiduciary duties that would normally apply. For example, the terms of the trust could exempt the trustee from having to post bond or other security.
  • Providing for distributions to the caretaker-beneficiary. There are a number of ways to structure distributions to the caretaker- beneficiary. The most simple method is to simply state a flat amount distributable on a consistent basis. But if this amount is too small, the caretaker-beneficiary may not have enough to cover the expenses for the pet, and if this amount is too large, the caretaker-beneficiary may end up being stingy in expending funds for the pet which he or she is already entitled to receive once the pet is gone. At very least, the terms of the trust should provide for distributions to reimburse the caretaker-beneficiary for out-of-pocket expenditures made for the care of the pet. In addition, the terms should cover any income tax liability of the caretaker-beneficiary – even if the only distributions he or she is receiving are reimbursements. The sample language presented on this series of articles uses a combination of both approaches, providing the caretaker-beneficiary with a fixed sum plus reimbursement of expenses.
  • Defining the standard for care for the pet. At very least, the terms for distributions to the caretaker-beneficiary should permit expenditures for food, shelter, medication, veterinary care, toys, boarding or pet-sitting while the caretaker-beneficiary is away on vacation, and costs for the respectful disposition of the pet’s remains. The settlor may also want to set more specific standards for such care – e.g., what type of food, how often the pet is to receive check-ups by the vet, how often the pet is to be walked. As long as the directions are not unreasonable in light of the amount of caretaking funds and leave enough flexibility for unforeseen contingencies, the settlor can be as creative as he or she wants.
  • Providing guidance for euthanizing the pet. One potential issue of controversy is euthanasia, especially if the caretaker-beneficiary’s interest in the trust ends with the death of the pet. That is, the settlor should clearly set forth the circumstances when euthanizing the pet would be appropriate – e.g., the veterinarian certifies that the pet has a terminal illness or will experience significant physical suffering for the rest of its life. In the alternative, the settlor should clearly indicate who has the discretion to make that decision – the trustee, the caretaker-beneficiary, or both.
  • Providing directions after the death of the pet. In most cases, the settlor has particular ideas about the disposition of the remains of the pet after its death – e.g., cremation of the animal and burial of the remains in a particular place. The terms of the trust should expressly include such provisions.
  • Designating the remainder beneficiary. The trust should designate a remainder beneficiary or beneficiaries or, at very least, provide a mechanism for the trustee to designate a remainder beneficiary (other than him or herself).[2] In considering this decision, the settlor should realize that the remainder beneficiary’s financial incentives run counter to the pet living a long life with the benefit of the trust funds. For this reason, the settlor should consider defining the class of remainder beneficiaries as nonprofit, tax-exempt organizations that have a stated purpose of caring for animals. Presumably, such organizations would be bound by law (if not principle) to refrain from challenging the generosity of the amount of caretaking funds or the liberal use of such funds by the trustee or the caretaker-beneficiary in spoiling the pet. Moreover, if all else fails, there will be yet another eye with legal standing to look out for the pet’s well-being.
  • Terminating the trust. The terms should provide that the trust is to terminate upon the earlier of: (a) the death of the pet and disposition of the pet’s remains; (b) the exhaustion of the funds of the trust or a determination by the trustee that the amount of the funds renders continued administration uneconomical; or (c) the expiration of the perpetuities savings period. That is, if the trust is to be administered in a jurisdiction that retains the rule against perpetuities (in whatever form), the trust should also include a perpetuities savings clause to the effect that the trust must terminate within the applicable perpetuities period. (The sample language includes a perpetuities savings clause that is in compliance with the common law rule against perpetuities.) Of course, this means that the trust could conceivably terminate before the pet dies, and as such, the terms should include a provision directing who is to receive the pet in this situation.

[1] For a good discussion of the various pet identification methods, please see www.lostpetfoundpet.com/Proper%20ID.htm .

[2] Allowing the trustee to designate him or herself not only creates a potential conflict of interest, but may also have unintended income, gift, or estate tax consequences to the trustee. See IRC §§678, 2041, 2514.

Drafting for Pet Care in the Event of Incapacity

Estate planning for pet care should always include a discussion of what would happen to the pet in the event that the pet owner is incapacitated. Planning for this contingency may be accomplished by one or more of the following documents:

1. Durable power of attorney

One of the primary tools used in planning for incapacity is the durable power of attorney, which permits an appointed “agent” (or “attorney-in-fact”) to conduct certain transactions and attend to financial affairs on behalf of the “principal”, regardless of whether the principal is incapacitated. The appropriate terms of a durable power of attorney vary with the circumstances involved, and a sufficient discussion of all of the potential issues surrounding the use of durable powers of attorney is beyond the scope of this series of articles. Suffice to say, the drafter should begin the process of preparing a durable power of attorney by consulting the law of the jurisdiction where the individual principal lives.

In any event, if a durable power of attorney is used in the estate plan, the document should include provisions directing the agent to care for the principal’s pet and expend amounts necessary to provide such care. Including an express provision to this effect is entirely appropriate because the pet itself is legally classified as tangible personal property of the principal, and in some jurisdictions, making such expenditures for the benefit of the pet might be construed as violating the presumptive duty of the agent to expend sums only for the benefit of the principal.

This series of articles includes sample language for a durable power of attorney that could also be modified for inclusion in a revocable trust, as discussed below.

2. Revocable living trust

One of the benefits of a funded, revocable living trust is that it may include provisions for a successor trustee to take over management of trust assets for the care of an incapacitated settlor without the necessity of instituting conservatorship proceedings. Ideally, portions of the trust dedicated to this contingency should also include provisions for the care of the settlor’s pet.

If, for one reason or another, the pet owner does not desire to establish and fund a revocable living trust to hold all the assets of his or her estate, he or she should still consider establishing and funding a more narrow revocable trust for the benefit of the pet that includes provisions to take effect upon incapacity. The terms of such a trust would include a declaration that the pet is owned by the trustee of the trust and opening an account in the name of the trust to hold the trust funds.

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

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