Woof! Woof! I Might Need a Trust, Too!

As most people can tell from my newsletters, I tend to travel off the beaten path to find my topics. The internet is filled to the brim with basic wills and trusts advice, so I want to hit on issues that most people do not recognize as an estate planning issue, even though that issue might be staring them right in the face. I say that because my current inspiration is currently laying at the bottom of my feet…my dog. The question I raise is: who would provide the care for him and how would that care be paid for, if I am no longer around?

The simple answer is a pet trust. Similar to a regular trust, a pet trust is established to provide for the continuing care and well-being of a particular animal or animals. If you think this cost is atypical, consider in 2008 Americans spent $43 billion on feeding and caring for their pets and a growing number of people are taking the steps to plan for their pets after their demise. The most famous pet trust to date, with a value of $12 million, was established by Leona Helmsley upon her death in 2007 for the care of her Maltese, named Trouble. I’ll get back to her pet trust in a minute.

A growing number of lawyers are specializing in drafting pet trusts which have their own quirky set of rules because most states view pets as property instead of as a person with their own rights. Like all estate planning issues, understanding the problems that might arise before taking action can minimize the upfront costs and negate potential legal problems down the road. For example, the executors of Helmsley’s estate had to petition a New York Surrogate Court to reduce the amount of the trust to $2 million to reduce estate tax liability. The other basis of the executors’ petition was that under New York pet trust statute a court can reduce the amount passing to a pet trust if it determines that the amount substantially exceeds the amount required for the intended use. In this case, $12 million for one pet was found excessive. Most states apply some type of number to determine the “excessive” equation for pet trusts.

Not every state has a pet trust law allowing a person to establish a pet trust. In the local area, Virginia and Washington, DC allow for pet trusts, but Maryland does not. According to www.Animallaw.info, 39 states currently have some form of pet trust code language providing various powers and restrictions on grantors and trustees of pet trusts.

If your state does not yet have a pet trust code, there are a couple of steps you can take in your estate planning documents. A person may be able to give money to a specific person through their will, with the condition that the money be spent for the care of the pet. A second solution is to bequeath your pet, which is considered property, to a specific person, along with money to care for the pet. However, the inheriting person can disclaim the bequest and not accept the pet meaning someone else will have to take the animal. Also, the “inheritor” becomes the owner of the animal with all rights of ownership, including the right to take the animal to a veterinarian to be euthanized. Of course, that is a worst case scenario, but making sure the “beneficiary” of the pet trust truly wants the responsibility is essential.

Another concern is making sure you fund your pet trust with enough assets to care for your pet while not being excessive, like in the Helmsley case. Most dogs and cats only have a life span of 20 years, but some parrots can live to 80-90 years, which could raise issues of whether the trust would fail the “rule against perpetuities” which forbids trusts that last forever. Further, if it is a large animal, like a horse, it could have high maintenance costs. The funds in your trust should reflect those expenses. In some cases, grantors have even put a residence in the trust thinking that will be the only way to ensure funding and proper care for the animal.

Because a pet is not considered a “person” by the IRS, tax consequences of the income generated by the trust also needs to be addressed. Income generated from a pet trust can be taxed to one or more of the following: the settlor (the pet owner) if the trust is inter vivos (while living), the beneficiary (typically the pet’s caregiver), or the trust as a taxable entity itself. In the first two instances, typically income is taxed at the same rates as the settlor’s or the beneficiary’s tax rates. In the third case, and depending on the language establishing the trust, the tax rate for the pet trust would generally be taxed at the trust tax rate according to §1(e) of the Internal Revenue Code.

Another concern for drafting a pet trust is the specifics instructions on caring for a pet and who will do the caring. A trust should be very specific on care because the settlor is the one that knows the animal the best. Specific issues to address in a pet trust for pet care include what type of food your pet prefers, exercise routines, like walks at the dog park, how often your pet visits the vet, vet maintenance routines, and any chronic health conditions for which your pet must take medication or receive regular health treatments. Also, the settlor of a pet trust should ensure that the person that will end up with the pet truly cares for the pet and an alternative “beneficiary” should be named if the first person refuses or is unable to take the pet.

For many people, pets have become like a quiet family member, or in my case a loud barking one. People creating a pet trust simply want to ensure that their “forgotten” children are cared for after their passing. Like all estate planning issues, taking the time up front describing how you want your pet treated and cared for in a pet trust will prevent a great deal of suffering and distress by your loved ones – two and four legged ones.

Last month, I discussed the basic differences between a revocable and an irrevocable trust. This month, I thought I would continue on trusts and provide the first of a couple of factors in a basic guideline for determining if someone should set-up a living trust for their assets. Over the next couple of months, I’ll provide several additional factors when a living trust makes sense and then provide guidelines for when it might be better to not create a living trust.

The reason for the growth of living trusts has been simple probate avoidance. Probate is an expensive and time consuming process (see below) that can be mitigated by setting up a trust. A trust would remove a person’s assets from their estate and quickly transfer assets to a beneficiary. Otherwise, probate could drag on for years and might require heavy court involvement. The other main reason for the growth of living trusts is that it is much easier for a trustee to control the assets of an incapacitated person in a living trust than it is when those assets are in the incapacitated person’s control and there is only a weak power of attorney.

Many of the factors to elect to transfer assets into a living trust compliment each other. For example, one reason is that there is an older settlor and another reason is the settlor is in poor health. Old age and poor health, regrettably, go hand-in-hand when thinking about whether a living trust makes sense. Sometimes I see clients that are young in poor health, sometime I see elderly clients in great health, and, unfortunately, many times I see clients that are older and in poor health but they all need to consider a living trust.

The question becomes what would be considered poor health or old age to consider a living trust. The answers are somewhat surprising. A person over the age of 50 needs to think about establishing a living trust and over 60 considering a living trust should be an automatic. While 50 does not seem that old, it is the age when diagnosis of many long term illness start to appear. If there is a family history of major illness, like some type of cancer or heart disease, the need for a trust further increases. If a person has the “right” medical history, I would even recommend a living trust be created immediately for someone under the age of 40.

For someone in poor health the analysis is much easier. If someone is diagnosed with a life threatening or life ending disease, a living trust makes sense because a trustee can manage a settlor’s assets and prepare the estate for a quick transfer on the settlor’s death. Other health factors for analysis are a family with high incidence of cancer, previous diagnosis of cancer or other debilitating illness or simply evidence of a body starting to breakdown from some type of physical or mental stress or trauma. In these situations, a living trust should be an immediate estate planning need.

Another reason a person might want to establish a trust is the privacy a living trust bestows. During the probate process, a will needs to be probated, or in layman’s terms, submitted to the court for review. That will becomes part of the public record for any person to see and review. Anyone, after a little research, can know the amount and type of assets a beneficiary received. Scam artist can approach beneficiaries and them hit up for money or make them susceptible to fraud. As sad as it might seem, there are also inheritance search firms that search the public records for large estates and seek out potential heirs to file claims against an estate. A majority of the time, the “surprise” heirs appear in estates going through the intestate process, but also can occur in probated wills. While a will with a living trust is still probated, those wills are very basic and grants no real information on the assets in a person’s estate negating the public knowledge a will without a living trust provides.

Next month, I will provide additional factors to consider when it makes sense to use a living trust including out of state real estate, your desire to protect your family, your current estate status, complexity of a person family, or the size of your estate as it nears certain taxable levels. 

I have an update on February’s Estate of the Month – Steve McNair. Earlier this month his wife, and personal representative, had to file a petition with the Tennessee probate court asking for funds to be released from a frozen trust account to pay federal and state estate taxes.

I estimated that McNair’s estate would have to pay at least $8.85 million in federal taxes and it looks like I am on the low side. McNair’s estate filed for a release of $3.72 million to pay for state and federal estate taxes that were due this month. For those that do not pay estimated taxes, that payment was likely a quarterly payment on the yearly taxes owed by McNair’s estate. Three additional payments might also need to be paid. Extrapolating a tax bill of $14.88 million or more would be owed for state and federal estate taxes.

While the tax amount is incredible for the average person to comprehend that tax payment does not even include the professional fees accrued to make the payment. First, the petition to unfreeze assets would cost a considerable amount in legal fees due to its extreme nature. In all likelihood, additional petitions will have to be filed to unfreeze more assets to pay costs down the road until McNair’s estate exits probate. McNair’s estate will likely be in probate for at least two years. I will also speculate that McNair’s legal counsel is not the cheapest firm in town, further driving up the costs.

Second, there would be additional professional fees for accountants, appraisers, and financial advisers that could have been avoided. The initial inventory of McNair’s estate was a shade under $20 million. A low ball guess on the professional fees generated by a contentious probate matter, like McNair’s, would be about 10 percent of the value of the estate. That works out to about $2 million in legal, accounting and other professional fees. Just a simple will could have avoided most of these costs and perhaps a good portion of the taxes McNair’s estate has accrued.

As I said, no one will shed a tear over the millions left in McNair’s estate but taking a couple of simple steps would have left millions of dollars in his estate instead of going to the government or professionals that are having to deal with the mess he left behind.

Estate of the Month – My Grandfather

In this month’s Estate of the Month, I thought I would get away from what could be perceived as “famous” people’s estate problems and go into how the lack of estate planning foresight can impact the average person. In this case, it is my grandfather and how his inappropriate planning has impacted my family.

I only have a faint hazy memory of my mother’s mother since she passed away over 30 years ago, but I do know my step-grandmother. A few years after my grandmother’s passing my grandfather remarried. His new wife was only a few years older than my mother but they had a close relationship. My step-grandmother also had a daughter from another marriage. Everything would be perceived to be fine right up until the time my grandfather passed away. That is when things drastically changed.

My grandfather was lucky enough to come from a family that owned a small ice cream manufacturing business that had been passed down through several generations to my grandfather. He sold that business leaving him with a taxable estate at the time he passed. His will provided some bequests to my mom and uncle but the bulk of his estate passed to his wife, my step-grandmother, without any other real estate planning provisions. It is not unusual for most of an estate to pass to the spouse of the second marriage but it is atypical to not take steps ensuring the “family” property passes to blood relations after the second spouse’s passing.

The strife was enhanced since my step-grandmother’s will was not as cleanly delineated and, essentially passes the residual of my grandfather remaining estate down to her daughter. In effect, my mother and uncle are cut off from their “family property. Now, this might not seem like a big deal, but his estate included numerous family heirlooms and treasures that will pass outside of our family likely never to be seen again. This has caused a great deal of family turmoil resulting in no one talking to my step-grandmother. In fact, if my mother and her aunt had not insisted on taking some of my grandmother’s heirlooms, with my grandfather’s permission, during his lifetime, most of those items would have found their way to various flea markets and Craigslist™ instead of my mother’s house.

The problems my grandfather’s estate raise are not unusual. Approximately fifty percent of all marriages end in divorce resulting in millions of second marriages in America and second marriages place undue stress on family dynamics similar to my grandfather’s estate. That stress only blossoms when adult children from a first marriage attempt to “look out” for their newly married parent and expect to inherit what they feel is owed to them.

A large concern for these adult children is the subconscious knowledge that a loved one is being replaced by another person. However, many times, adult children are simply fighting to preserve their legacies in an environment that grants them very few rights. In fact, in most states, children can be disinherited via a will, though, generally, not under the intestacy laws. Considering also the recent stock market losses impacting most people’s lives, litigation in trust and estate law has exploded.

To prevent what happened to my mother and uncle and to protect other families going through the tension of second marriages, a range of steps can be taken prior to the passing of the testator. A little planning and effort can minimize the strain on familial relationships over inheritance. Basic suggestions include not getting married, having a prenuptial agreement executed indicating where inheritance should be bequeathed by the second spouse or creating what is called a qualified terminable interest property trust or “QTIP” trust. I will save the specifics on a QTIP trust for another month but, simply, a QTIP trust creates a trust from the deceased spouse’s estate establishing the surviving spouse as the sole beneficiary. At the passing of the surviving spouse, the QTIP trust is dissolved and assets are transferred according to the will of the spouse establishing the trust.

Unfortunately, what happened in my family is not a rare occurrence and steps could have been taken during my grandfather’s life that would have mitigated the situation. I have no doubt my grandfather would not have wanted his estate creating a large rift in his family…