Pet Trusts: A Bit More Complicated Than We Think

A pet trust is a unique type of trust more technically called a purpose trust. At common law they were called an honorary trust. A conventional trust has three requirements: (i) a trustee; (ii) property; and (iii) a human beneficiary. Even if humans may only incidentally benefit from the purpose trust, e.g. the caretaker of the companion pet, that individual’s incidental benefit does not convert that individual into the trust beneficiary. The upshot is that due to the absence of a human beneficiary, a purpose trust can only exist if it is permitted by statute.

Statutory Authority: Michigan has two (or perhaps three) statutes that authorize and regulate a pet trust. Article II of the Estates and Protected Individuals Code (EPIC) which pertains to wills and testamentary trusts contains specific provisions that address the care for a companion or domesticated animal:

“(2) Subject to this subsection and subsection (3), a trust for the care of a designated domestic or pet animal is valid. The trust terminates when no living animal is covered by the trust. A governing instrument shall be liberally construed to bring the transfer within this subsection, to presume against the merely precatory or honorary nature of the disposition, and to carry out the general intent of the transferor. Extrinsic evidence is admissible in determining the transferor’s intent.” MCL 700.2722 (2)

The following subsection also relate to the care of an animal held in trust, which includes the following provisions:

“(3)(a) Except as expressly provided otherwise in the terms of the trust, no portion of the principal or income may be converted to the use of the trustee or to a use other than for the trust’s purposes or for the benefit of a covered animal.”

(3)(d) The intended use of the principal or income may be enforced by an individual designated for that purpose in the terms of the trust or, if none, by an individual appointed by a court upon petition to it by an individual (apparently anybody can file the petition.) A person (anybody like the next door neighbor?) having an interest in the welfare of the animal may request the court to appoint a person to enforce the trust or remove a person appointed.

(3)(f) The court may reduce the amount of the property transferred if it determines that that amount substantially exceeds the amount required for the intended use. The amount of the reduction, if any, passes as unexpended trust property under subdivision (b).”

Statutory Interpretation Questions: Some interpretive questions with regard to this statute before we move on include:

Duration?: Subsection (1) which deals with a generic purpose trust, and not a pet trust which is covered under Subsection (2), is clear that the purpose trust must be “performed by the trustee for 21 years, but no longer, whether or not the terms of the trust contemplate a longer duration.” Thus, if a client owns an antique auto or art collection that he/she wants to hold in a perpetual or dynasty purpose trust that trust will fail after 21 years.
Arguably a pet trust established for a turtle or parrot which can live to be over 100 years probably passes muster under the statute if the animal is determined to be a pet (which is not defined in EPIC and carries with it subjective connotations.)
Domesticated Pets?: If the owner gives his/her turtle a name, will that be extrinsic evidence needed to demonstrate that the owner considered the turtle to be a pet? Subsection (2) specifically refers to a ‘designated domestic or pet animal.’ If someone had a pet bear or python, albeit non-domesticated, could a trust be created for that animal? If the animal is non-domesticated like a python, does the trust still have to end in 21 years? Does the python get a pass on the 21 year limitation if the owner treated the python as a pet, since the disjunctive ‘or’ is used in the statute?
Offspring? More limiting is the statute’s use of the word ‘designated.’ Consider a trust that provides: ‘This trust shall provide for my cat Fluffy for the rest of Fluffy’s life, and any off-spring that Fluffy may produce after my death.’ Fluffy is designated, or identified, so that is not an issue. But continuing the trust to provide for Fluffy’s offspring, since Fluffy was an outdoor cat, is problematic since Fluffy’s offspring, if any, are not identified in the trust instrument. Anticipating and providing for offspring would be important if a race horse is held in the trust.
How to Identify the Pet? A practical concern that I never had to deal with directly is identifying animals that will be the subject of the pet trust. I confess that I never met a client’s pet, and even if I had, I doubt that I would be able to identify the pet after the client’s death. Do we rely on the name on the dog collar when we enter the deceased settlor’s home- if it says ‘Fluffy’ do we naturally assume that the dog wearing the collar must be ‘Fluffy’ and end the inquiry? What if Fluffy dies three years into the pet trust, and the caregiver living in Fluffy’s home goes out and finds a much younger dog that looks just like Fluffy, in order to perpetuate the pet trust. Probably the vet could detect the pet-switch, but if the caregiver takes the new-Fluffy to a new vet, no one is the wiser. Should there be some direction in the trust instrument that the trustee needs to place a microchip in the animal, or a tattoo, so that the animal to be protected can be easily identified by a third party?

Trust Code: There are a couple of provisions in the Michigan Trust Code that deal with pet trusts, but generally they circle back to MCL 700.2722. For example, the rules to be followed to create a valid trust indicate that a trust must have a definite beneficiary or it must be “A trust for a non-charitable purpose or for the care of an animal, as provided in section 2722.” MCL 700.7402 The other relevant Trust Code provision is MCL 700.7404 which simply states: “A trust may be created only to the extent its purposes are lawful, not contrary to public policy, and possible to achieve.” It is the possible to achieve condition that sometimes courts exploit to find a purpose trust to be invalid from its inception. [Example: the noted author George Bernard Shaw tried to establish a trust for the purpose of developing a new alphabet. His trust instrument contained the entire process to accomplish that objective, and it directed the trustee to determine, among other things, how many persons spoke or wrote English in the world. Shaw’s trust failed because ‘a court could not enforce the trust if its purpose could not be accomplished with certainty.’ The court concluded that ‘this direction to the trustee could never be realistically accomplished.’]

Quick Take-Aways: To summarize the points gleaned from these relevant EPIC sections, in order for a pet trust to be valid under Michigan law the trust must address each of the following:

The trust must identify a party to enforce the trust; otherwise there is no way to ensure that the settlor’s intent is carried out by the trustee. Unlike a charitable trust, which by law grants the Michigan Attorney General- Charitable Trust Division the ability to petition the probate court to enforce the charitable trust, a pet trust is not a charitable trust, so the Attorney General has no involvement in or monitoring responsibilities for the pet trust [not to mention the reality that Division is grossly understaffed and underfunded.]
The trust’s provisions or purpose must not be against public policy. A trust to conduct an illegal activity, like pit-bull fighting, would be declared void from inception.
The purpose of the trust must be attainable, not impossible. A simple trust directed to care for a companion animal’s lifetime should easily meet this standard.
The trust must not be capricious or wasteful. Hence the EPIC provision which gives the presiding judge the right to lower the amount held in the pet trust if it is more than sufficient to care for the animal’s lifetime. Picking a dollar amount when the trust is drafted is a bit like throwing darts and hoping to hit a bulls-eye. In my later years of practice I resorted to a ‘word formula’ where the trust instrument directed that the trustee to use its discretion to determine the appropriate amount to fulfill the purpose of the pet trust, taking into consideration the age and health of the animal(s), the frequency of mandated vet visits each year, if boarding the animal, or retaining the dwelling was required for the pet to continue its routine, were all features of the pet trust. While in the end the identified amount is still a guess by the Trustee, at least it is an informed guess as opposed to trying to maintain the pet trust with a stale and inadequate amount identified years earlier in time.

Taxes: How can there be a discussion about trusts without also mentioning taxes?

Trust Income Taxation: Since the pet trust is not a charitable trust, it will pay income taxes like any other irrevocable trust. That means that after $12,400 a year in accumulated income, the trust will pay federal income taxes at the 39.6% marginal tax bracket. While Michigan and 38 other states have pet trust statutes, the IRS still refuses to recognize pet trusts for tax purposes. The IRS’s position is that a pet trust is a trust described in IRC 641 and it should be taxed accordingly. Rev. Rul. 76-486, 1976-2 C.B. 192 While the trustee of the pet trust can deduct expenses incurred in connection with its performance of duties of administration, e.g. trustee fees and professional fees, the IRS will disallow any deduction for expenses incurred in the care of the animal because the animal is not, usually at least, an income-producing asset and it is not likely [race horses maybe an exception] linked to the normal business of administering the trust. Thus, inasmuch as the pet trust does not have an individual as its beneficiary with a social security number, only an animal and the trust cannot claim any distribution deductions.
Caregiver Income Taxation: Making things more complicated is that any distributions made by the pet trust to the caregiver to pay for the animal’s food, vet care, shelter, etc. will be taxed to the caregiver. IRC 641(e). Consequently the well-meaning caregiver who receives distributions from the pet trust to buy cat food, to pay for veterinary services, pet grooming, or to board a horse, will receive from the Trust reportable taxable income at the end of each calendar year, even though the distributions were all spent by the caregiver for the animal’s welfare.
Observations: (i) Since the pet trust is a separate taxpayer, consider adding an express trust provision, if not direction, that the trustee is to invest the trust corpus in tax exempt bonds, so that the trust’s confiscatory marginal federal income tax bracket can be avoided. (ii) If trust distributions are directly made to the caregiver to care for the animal [food, shelter, vet care, dog-walkers, etc.] then distributions either need to be ‘grossed up’ to cover the caregiver’s hidden income tax liability arising from those trust distributions; (iii) or, the trustee needs to be authorized under the trust instrument to reimburse the caregiver for any income tax liability incurred by the caregiver arising out of their role in administering the pet trust.

Estate Taxes: If the pet trust provides that the remainder beneficiary of the trust on the pet’s death is the Humane Society, the IRS will still not grant a charitable estate tax deduction for the value of that remainder interest. Rev. Rul. 78-105, 1978-1 C.B. 295 Even if a charitable organization is named as the remainder beneficiary of the pet trust, there will be no charitable estate tax deduction. Some lawyer think [no authority, they just think] that if the trust instrument provides for an annual distribution payment to a tax exempt entity for the benefit of the pet, the IRS might treat the trust’s remainder interest as a charitable deduction. As I said, there is no authority for this optimistic interpretation.

Fine-Tuning a Pet Trust: Practical questions to ask a client who considers creating a pet trust include:

Does the pet’s home, i.e. the settlor’s dwelling or barn, go into the trust so that the pet‘s routine is not disrupted by a move to an unfamiliar environment? I had a lady who [aside: the well-known charitable giving attorney Conrad Teitell used to call this habit of lawyers starting off with that statement as the ‘yodeling attorney’- I had a lady who—but I digress] directed that her pet trust was to hold title to her home for her 12 cats, with the directive that the designated caregiver was to live in her home to provide daily exercise for the cats. I hope the caregiver liked cats! In my house the cats never exercised- they just slept- but maybe her cats were different. If the house stays in the trust, consider the expenses associated with maintaining a dwelling, including utilities, and property taxes.
Following my real-life example, I advised that client that the caregiver who was to live in her home as a condition of serving as the caregiver was indirectly benefited because that individual was permitted to live in the home rent-free. That requires the trustee to treat the caregiver as having received indirect compensation from the trust- the right to live in the dwelling rent free. The caregiver needs to be alerted to this tax treatment arising from their rent-free living.
Are the caretakers, and alternate caretakers, clearly identified? Is there any criteria in the trust to select an alternate or replacement caretaker, or will any live-body suffice? If special experience or exposure to animals is required, that needs to be spelled out in the trust, or an addendum to the trust.
Is the animal’s veterinarian identified? Is the caretaker directed to take the animal for semi-annual trips to the vet’s office? I used to prepare pet trusts where I gave the animal’s vet legal standing to enforce the trust, meaning if the vet thought that the animal was mistreated, underfed, etc., presumably the vet would be one of the first persons to identify the animal’s deteriorating condition. As part of the trust instrument I directed the trustee to send to the vet a copy of the trust and highlight the trust’s provisions for the animal’s care and the authority given to the vet to ‘blow the whistle’ whenever the vet deemed warranted, including the reimbursement of the vet’s legal fees to file that petition.
There will be a need to address what is to be done if the pet trust runs out of money but the pet is still alive and needs to be cared for by someone.
A difficult but necessary topic that also should be addressed with the client is the possible need to euthanize the pet, especially if an acceptable replacement home cannot be found in a reasonable period of time if the trust terminates. A companion question is who decides when the trust needs to be terminated and/or the animal euthanized: the caregiver, the trustee, or maybe the vet?
The trustee should be given the authority to periodically inspect both the animal as well as the conditions where the animal is maintained along with access to the vet’s medical records.
The pet owner should include instructions for the final disposition of the animal when the animal dies.
If there are multiple pets there should be some statement in the trust instrument if the settlor intends that the trustee is to keep the pets together.
It is probably best to attach a schedule to the trust instrument that provides specific instructions for the care of the pets, including medications, grooming routines etc. As the pet ages, these instructions will need to be periodically updated. Following these instructions will ease the pet’s transition.
Consider naming a Trust Protector to the trust and give that individual the authority to amend the trust, remove the caregiver [but add standards to guide the protector’s discretion if the decision is to remove and replace a caregiver] and possibly give the authority to terminate the trust while the animal is still alive, which avoids the need to incur the expense of petitioning the probate court to modify or terminate the pet trust.
Since pet owners love animals, it is expected that they may acquire additional pets long after the trust is signed. Rather than just name Fluffy in the trust, consider using expansive language like “All my pets living at the time of my death, including my dog Fluffy.”
It is probably best to use a revocable trust to create a ‘stand-alone’ pet trust and not use a will with a testamentary pet trust, inasmuch as there are built-in delays before a will is formally admitted to probate, yet the animal needs care from the moment its owner dies.

Cool Pet Trust Cases: While reading legal decisions is usually pretty tedious, often pet-trust cases can prove to be highly entertaining, such as-

Unusual Purchases: One court determined that the caretaker was acting in an unreasonable manner when he purchased an automobile to transport the dog; yet the court stated that it was a matter of opinion whether the caretaker’s purchase of a washing machine to launder the dog’s bed clothing was reasonable.
Final Disposition: Wilbert’s testamentary trust provided: “Upon the death of my pets they are to be embalmed and their caskets are to be placed in a Wilbert Family Vault at Pine Ridge Cemetery.”
Failure to Describe: In one California case a trust was established to provide for a ‘black cat’ to be cared for by the deceased owner’s maid. Inconsistencies in the reported age of the pet tipped off authorities to the fact that the maid was on her third black cat, the original ‘black cat’ having died years earlier.
The Queen of Mean: Perhaps the most notorious pet trust decision in recent years occurred on the death of Leona Helmsley, a New York hotel chain-owning socialite, notorious for her cranky demeanor and chronic disputes with her family members and her former husbands. To the dismay of her children (I suspect Leona was sending them a message of who was really important in her life with her trust provision] Leona left $12 million in trust for the care and maintenance of her dog Trouble (given Leona’s reputation, an apt name for her dog.) The children challenged the pet trust as being excessive in amount for Trouble’s After considerable public wrangling in the probate court, the judge reduced Trouble’s trust to $2.0 million, concluding that the initial amount that the pet trust was to be funded with was far too much to reasonably accomplish the trust’s stated purpose, and thus was wasteful. This was a wonderful case to read about in the tabloids, where the rich and famous duke it out in public, with great side- stories about the “queen of mean,” and the observation of many observers that Trouble was not the nicest animal that they had encountered. Even at $2.0 million, Trouble got the last laugh. In re Estate of Leona Helmsley, N.Y. Surrogate’s Court, Docket No. 2968/07, unpublished opinion dated April 30, 2008; “Helmsley Let Dog Billions in Her Will”, N.Y. Times, 7/2/2008

Pet trusts are something that should be addressed with all clients who own beloved pets, but be sure to educate them that these trusts are not as simple as they might think.