Every once in a while, we hear a story about people leaving money to a pet. Fashion icon, Karl Lagerfeld, left money to his cat, Choupette. It has been reported that singer Michael Jackson left $2 million for the care of his chimpanzee Bubbles, and Leona Helmsley (a famous hotel magnate) left $12 million to her precious dog, Trouble. However, you can’t really leave money to your pet. After all, an animal can’t open up a bank account or invest in stocks. In reality, if you want to provide for your beloved pet, you should set up a Pet Trust.
Which States Allow Pet Trusts?
Currently, all 50 states and the District of Columbia authorize the creation of Pet Trusts. (Source: ASPCA – Pet Trust Laws) However, this is a recent phenomenon. Until a few decades ago, if you wanted to leave money to a pet, you actually had to leave it to a trusted friend and just hope that they would honor your wishes. It was known as an honorary trust.
Unlike the beneficiaries of most other trusts, pets cannot communicate their needs and desires to the Trustee. Accordingly, the Grantor of the Pet Trust (i.e. the pet’s owner) must clearly indicate what level of care should be given to the surviving pet. The document should also clarify what payments may be made to the pet’s caretaker.
Consider the Jurisdiction of the Trust
Some states, like New Jersey, only allow a pet trust to exist for 21 years. However, many animals like horses, birds, and turtles live longer than 21 years. Depending upon the type of pets you own, it may be worthwhile to establish the Pet Trust in a jurisdiction that will allow the trust to continue for as long as your pets live.
Who Will Manage the Pet Trust and Care for your Pet
Pet owners can set up a Pet Trust by having one person act as the Trustee, the caretaker, and the investment advisor. Alternatively, the trust can be divided so that all three of those roles are managed by different people. Accordingly, if you have one person who you know will be great with investments, another who will be a good communicator and make good decisions on spending the trust funds, and one who will love and take care of your pet, it may be a good idea to divide the three roles if there are enough funds to justify it. Many people will even hire a corporate trustee to manage the funds and act as the trustee.
Where Should the Trust Funds Go After your Pet Dies
A remainder beneficiary should always be considered. Many people will often name a charity as the final beneficiary after the pet dies. However, some people wish to name the caretaker as the remainder beneficiary. We do not recommend naming the caretaker as the final beneficiary as it does not give the caretaker a reason to truly care for your pet.
Other Items to Consider
- If you will be leaving real estate to your pet, can anyone else (like a caretaker) live in the property? Should the property be sold? If so, where should the pet live?
- Consider if you want to establish a stipend for the caregiver, or if you wish to leave that up to the discretion of the trustee.
- Don’t forget to clearly identify your pet(s) to prevent fraud!
Estate and Inheritance Tax Aspects of a Pet Trust
Some states have an estate tax or an inheritance tax when you die. Generally, there are exemptions to these taxes. However, for the most part, a bequest to a pet trust will not qualify for any such exemption. Accordingly, be aware that a “Death Tax” might be triggered when leaving funds to a pet trust upon your passing. In New Jersey and Pennsylvania, this can be as high as 15-16%!
One of the ways to mitigate against the estate and inheritance tax is through the use of life insurance. Some states, like New Jersey and Pennsylvania, exempt life insurance from the inheritance tax. (Be careful though. In New Jersey, you should directly name the pet trust as the beneficiary of the life insurance in order to avoid this tax. Life insurance should NOT pass through the estate!)
Income Tax Aspects of a Pet Trust
For income tax purposes, a Pet Trust is taxed as a complex trust that has not made any distributions. Revenue Ruling 76-4876.
In general, a trust’s income is subject to graduated income taxation at the same rates as individuals with the highest marginal rate of 37%. However, trusts have a compressed bracket. This means that the highest rate kicks in after only $14,450 (for 2023) of income. This causes a significant detrimental income tax effect. Accordingly, from an investment standpoint, it may be worthwhile to invest in a tax efficient manner.