Many people are concerned enough about the fate of their family pet or companion animal that they attempt to provide for the animal’s welfare in their will or by means of a trust. Seventeen states recognize these wishes by allowing in some form the use of pet trusts, which provide for care, feeding, and housing of Fido or Fluffy for the rest of the animal’s life.
Uncle Sam, however, is not so understanding, and decrees via the tax code that an animal cannot be the beneficiary of a trust since an animal is property, and one piece of property cannot hold title to another. Aside from the fact that this is far from the way many people feel about their pets (some of whom actually help ill owners live longer and have better quality of life), this interpretation of law prevents people’s last wishes and provisions for companion animals from being carried out, thus denying them control over a portion of their own property.
Congressman Earl Blumenauer (D-OR) is attempting to do something about the situation. Blumenauer has introduced a bill, H.R. 1796, the Pet Trust Bill, that would allow pet owners to provide for companion animals by funding a trust for their care and welfare. At the end of the animal’s life, the remainder of the trust must go to a recognized charity. Says Blumenauer, “What we should be doing is encouraging people to be responsible for pets, property, and family, and this is one area where you could make an argument on the basis of all three.” In a previous incarnation in local government, says Blumenauer, he saw the results “in human health and safety and animal welfare issues” of the failure of society to care for the pets of people who have died.
J. Alan Jensen, a tax attorney with Holland & Knight in Portland, Oregon, says that the way the bill is structured these pet trusts are “absolutely anti-abusive in the sense of no tax gimmick. The charitable remainder pet trust is not tax exempt. It pays tax on any income it receives.” If property is transferred into such a trust and then sold to provide for the pet, capital gains tax will be due on the sale, unlike the situation for human beneficiaries. “The pet trust would pay the tax,” says Jensen; “the trust is structured so that there would not be a whisper of abuse”–so that such trusts cannot be used to avoid estate tax or income tax.
And there is another benefit to the trust–a legitimate charitable deduction. Explains Jensen, “If a person is in a jurisdiction like Oregon and sets up a trust for the life of the pet with the remainder going to the American Cancer Society, there is not an estate tax deduction for the remainder interest going to the American Cancer Society. If they had set it up for [a human beneficiary], there would be. The charity is getting the money, but arcane arguments [about the nature of the pet's life] make it an invalid deduction. The IRS is not going to recognize it. This legislation would allow the deduction.”
Kim Bressant-Kibwe, trusts and estate counsel for the ASPCA, points out that there are other safeguards. While there is no minimum or maximum that must be placed in the trust, as the bill is currently being considered, there is a requirement that the remaining interest to be transferred to the charitable organization be at least 10% of the full market value of the original assets transferred to the trust. No payments may be made at the end of the pet’s life to anyone other than the charity named in the trust. And “pet” is defined to include certain species of companion animal. Animals not covered by the definition are not eligible to be beneficiaries of the trust.
So if your clients are concerned over the welfare of companion animals in their household, even though you can currently construct a perfectly legal trust in many states or insert provisions in the clients’ wills to resolve the situation, to plan adequately for the situation you–and they–need to look to representatives in Congress.
Senior Editor Marlene Satter can be reached at firstname.lastname@example.org.