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Monday, March 27, 2017

A Legal Primer on Estate Planning for Pets - Part 1

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.

Pets in the Estate Planning Process

Drafting estate planning documents to provide for the care of a pet first involves designating a party who is willing and able to take care of the pet when the owner dies or becomes incapacitated. For this reason, the clause delineating the beneficiary to receive the pet may resemble a clause appointing a trustee or other fiduciary. In any case, in drafting language designating the “caretaker” for the pet, remember that a pet animal is considered tangible personal property, which can be disposed of in a person’s estate plan in the same manner as a car, furniture, jewelry, and the like.

The second issue concerns how the pet will be financially provided for after the pet owner dies. The most common approach is to place the burden upon the caretaker, either explicitly or implicitly. Practically speaking, this is an acceptable alternative if the caretaker also receives a significant portion of the estate and is completely trustworthy. However, if the caretaker is a specific individual or organization who would not otherwise be a beneficiary of the estate, then the pet owner should also consider gifting an additional amount of money for caretaking expenses and/or compensation of the caretaker (referred to herein as the “caretaking funds”). Depending on the circumstances, an outright gift or bequest may not be appropriate. What if the primary caretaker is rendered unable or unwilling to take care of that pet? What if the primary caretaker is a spendthrift? Worse still, what happens if it becomes apparent only after the owner’s death that the primary caretaker was incompatible with the pet? The only legal mechanism that can adequately address these issues is a trust, as discussed in the next section.

The Law of Trusts for the Care of Pets

There are several legal issues that must be considered in drafting a trust for the benefit of a pet animal. The following is a general discussion of the two problems most often associated with attempts to establish such trusts under the common law and how recent statutory changes in some states have addressed these issues.

A.    Enforceability of pet trusts

The primary practical problem with establishing a valid and enforceable trust solely for the benefit of a pet is that no human beneficiary exists with standing to enforce the terms against the trustee. That is, who could step into court to stop the trustee from simply expending the pet trust funds for his or her own benefit?[1]

1.    Common law solution
One way to avoid the enforceability problem under the common law is to simply designate a human being or organization as beneficiary of the trust and provide that party with a proper incentive to enforce the terms of the trust.

2.    Statutory solutions
Over the last decade, several states have enacted statutes expressly addressing the problem of enforceability. These statutes tend to fall into one of two categories.

(a)    Honorary trust statutes
An “honorary trust” may arise whenever a gift or bequest of funds or other property is made for a specified purpose, but there is no human beneficiary to enforce the terms against the donee or devisee, who is, in this context, the “trustee”. The legal effect of a so-called honorary trust is that if the trustee does not use the funds for the specified purpose, then a “resulting trust” This means that if the trustee fails to use the trust funds for the intended purposes (i.e., the care of the pet), the trust funds would pass to the person who would have received such assets if no trust had been established to begin with.

Under the common law, an honorary trust could arise in a number of different contexts, such as the maintenance of a monument. Over the last few decades, California, Missouri, and Tennessee have all enacted statutes providing that a pet trust will be considered a honorary trust – i.e., the trustee must either use the funds to carry out the terms of the trust as intended or distribute the funds to the remainder beneficiary. In addition, Wisconsin has a very general honorary trust statute that would presumably cover pet trusts.

Relying on the existence of an honorary trust for the benefit of a pet has its shortcomings. Obviously, if the designated caretaker-trustee is also the remainder beneficiary after the pet dies, then this type of trust offers no protection at all. Even if there is a third-party remainder beneficiary of the trust, it is unlikely that such a beneficiary would compel the caretaker-trustee to spend more of the trust funds on the pet.[2]

(b)    Third party enforcement
The modern statutory trend is manifested in the Uniform Probate Code (UPC), and more recently, the Uniform Trust Code (UTC). Section 2-907 of the UPC, provides that a “pet trust” 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 is by an individual.”[3] Section 408 of the UTC, promulgated by the National Conference of Commissioners on Uniform State Laws in 2000, similarly provides that a pet trust may be enforced by “a person appointed in the terms of the trust or, if no person is so appointed, by a person appointed by the court.”[4] The same is true even in states such as Florida, Iowa, New Jersey, New York,[5] Oregon, and Washington, which have not adopted either of these uniform laws.

In essence, such statutes add a level of protection for the pet that a true honorary trust does not have – i.e., virtually anyone has standing to enforce the terms of the trust against the caretaker trustee. Query whether a person designated to enforce the trust under the terms of the governing instrument has an affirmative fiduciary duty to do so.

B.    Validity under rule against perpetuities

The majority of states retain the infamous “rule against perpetuities”, which was originally intended to keep property from being tied up too long in trust. Several jurisdictions retain the common law rule against perpetuities – a beneficial interest in a trust must vest or fail within 21 years after the death of a human being living at the time the trust is created and is irrevocable. Many states have enacted an alternative statutory rule against perpetuities – e.g., all interests must vest or fail within 90 years after establishment of the trust. Some statutes have provisions for implied construction to avoid a violation of the rule or have adopted a “wait-and-see” scheme. Generally speaking, however, if the rule against perpetuities could be violated, within the realms of logic (as opposed to reality), at the time a beneficial interest in a trust is established, then the interest is invalid from its inception. In this regard, the life of a pet animal is not a measurable life in being for purposes of applying the rule, and as such, a trust for the life of a pet logically violates the rule against perpetuities.

For example, consider a bequest of caretaking funds “to X for the life of the pet, remainder to Y”. Depending on the particular application of the common law rule against perpetuities, either the remainder interest to Y or the entire bequest would be invalid because Y’s interest might not vest within 21 years after the death of some human life in being. To be sure, this is an extreme example, but it does illustrate the need for the drafter to be familiar with the applicable rule against perpetuities in preparing documents.

1.    Common law solution
In reality, the problem with the rule against perpetuities can be easily addressed within the terms of a trust. That is, most trust agreements contain a so-called “perpetuities savings clause” providing that, regardless of what the rest of the trust agreement says, all beneficial interests in the trust must terminate or be distributable no later than some designated period in compliance with the applicable rule against perpetuities. If carefully drafted, such a provision would not practically effect the duration of the trust. For example, if the settlor has a large family, the trust agreement contains a provision requiring all beneficial interests to be distributed within 21 years after the death of the last living descendant of the settlor’s grandparents.

2.    Statutory solutions
States with pet trust statutes directly address this problem by simply providing that the pet trust is valid notwithstanding the existence of a common law and/or statutory rule against perpetuities. Of course, this only begs the question of how long the pet trust is permitted to last, and in this regard, the various statutes take different approaches.

The original 1990 version of UPC §2-907 simply placed the pet trust within the common law perpetuities period and provided that a pet trust terminates upon the earlier of: (a) the death of the last animal covered by the pet trust; or (b) 21 years after the establishment of the pet trust. While this statutory accommodation may be sufficient for a dog or cat, it would clearly create problems in trusts for pets with longer life expectancies, such as parrots and certain reptiles. In the Official Comment, the drafters of the original version of the UPC Code provision recognized this issue and suggested that if a state intended to remove the 21-year limit, it could do so by changing the wording. Although no state has modeled its statute on the original Uniform Probate Code provision, the same approach is reflected in statutes enacted in Missouri, New York, and Tennessee.

In 1993, UPC §2-907(b) was amended to simply provide that a pet trust terminates when no living animal is covered by the trust. This approach is also reflected in the recently-enacted statutes of several other states that have not expressly adopted the amended version of the Uniform Probate Code.

[1] Note that this legal issue regarding the right to enforce the trust is independent of the equally important practical issue of determining who has the willingness to police the caretaker of the pet.

[2] This issue of counterproductive incentives could be addressed by designating a remainder beneficiary that is a nonprofit organization that already has a legal duty to provide shelter and prevent cruelty to animals.

[3] UPC §2-907(c)(4) (as amended in 1993); UPC §2-907(b)(5) (before 1993 amendment).

[4] UTC § 408(b) (2000).

[5] Note that although the New York statute is entitled “Honorary trusts for pets”, it provides that the pet trust may be enforced by an individual designated in the trust instrument or appointed by the court upon petition.

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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