Most people remember the late Leona Helmsley as the convicted tax felon famous for uttering the words “only little people pay taxes”, but she is also remembered for having a will that left a $12 million trust fund for her Maltese dog, Trouble. While that is extreme, we all know the strong bond between pet and owner – such that many people refer to a pet as their child. While legally pets are considered property, to their owners, pets may be best friends and family — and in some cases, a pet may be a person’s only friend or family member. Therefore, when a person considers his or her estate planning, the care of pets should be addressed. A pet trust is a good tool to achieve this objective.
Section 408 of the South Carolina Trust Code authorizes the creation of trusts for the care of animals. This is an important provision, because historically, pet trusts failed for a number of reasons, one of which was because such trusts often did not have a person or beneficiary with standing to enforce the trust’s terms.
A properly structured pet trust provides a number of benefits:
- Can provide for the care of an animal in the event of the owner’s incapacity, as well as the owner’s death.
- Can provide protection for pets alive during owner’s lifetime, regardless of whether the pets are alive at the time of the trust’s creation.
- Can provide for the appointment of a person to enforce the terms of the trust. Further to this point, South Carolina’s pet trust statute allows any person concerned with the welfare of the animal to request a court to appoint a person to enforce the trust or to remove a person appointed.
- Can alleviate or mitigate problems involved with an owner’s estate. For example, a pet trust could be helpful if there are estate administration complexities due to will contests or delays in the probate process.
- Even if there are no major problems with an owner’s estate, a separate or stand-alone pet trust can provide seamless care for pets in the event of the owner’s death. The point here is that there is usually a period of time after someone’s death before a will is located and submitted for probate. This time gap leaves open the issue of who owns and cares for the pet during this period.
Here are some important elements to consider in designing any pet trust:
- Custody/Guardianship – Consider naming one or more persons (or organizations) in successive order to care for the pet.
- Funding – While providing funds is optional, it is typically recommended. The question then follows is how much funding is necessary or reasonable. Factors to consider are how many pets are to be included, the types of pets, their ages, and the standard of living they are accustomed to.
- Trusteeship – This could be the person serving as custodian/guardian, but appointing a different or independent person or organization is prudent as it provides further protection for the pet.
- Remainder beneficiaries – Consider naming one or more charities or individuals. While the custodian/guardian can also be a remainder beneficiary, it could lead to a perverse incentive for that person to kill the animal in order to get the remainder of the trust. To guard against this, it may be prudent to leave the custodian/guardian a separate, outright bequest, along with a reasonable monthly stipend from the trust for the care of the pets.
From an income tax standpoint, pet trusts will generally fit into one of the following three (3) categories depending on the structure of the trust and the factual circumstances:
- Pet owner/grantor pays – If the pet trust is revocable, any trust income will be taxed to the pet owner/grantor. Similarly, an irrevocable trust can be structured so that the pet owner/grantor pays any income tax on income earned inside the trust.
- Trust pays – If the trust is not treated as a grantor trust (as in 1. above), then the trust will owe income tax on any income retained in the trust.
- Guardian/beneficiary pays – If the trust makes distributions to the guardian/beneficiary, that person will have taxable income up to the amount of the trust’s taxable income.
While a pet trust may not be a part of everyone’s estate plan, a pet trust is certainly worth considering for those who want to provide for the care and well-being of their animals.