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.
Basics of Estate Planning: To Trust or not to Trust…that
is the Question? – Part I
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
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.
Estate of the Month – Update on Steve McNair’s
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 –
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…
Law Office of Christopher Guest
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Washington, DC 20006
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