The “Queen of Mean”, Leona Helmsley’s death made headlines not only for the fact that she died, but more importantly for the fact that she left $12 million to care for her beloved dog named “Trouble”. Helmsley is not alone in her desire to care for her loyal companion.
Traditionally, it was not possible to leave money to a pet. Pets were considered the property of their owners. Trusts, which are legal mechanisms that hold money to be used for a specific purpose, were used by pet owners to provide for their family pet after the owner died. Courts held these Trusts to be invalid because the pet, a form of property, cannot be a beneficiary. Based on legal precedent, Trusts required that living persons be the beneficiaries.
Pet owners tried to get around this traditional rule of barring gifts to pets via a Will or Trust by naming a family member or friend as the beneficiary of the gift. The gift would have a condition on it that the human beneficiary would have to take care of the deceased pet owner’s faithful friend until the pet’s death before the human beneficiary would receive the gift. This approach created a problem, however. There was no reward for keeping the pet alive! Furthermore, who would have the right to sue if the Trustee of the Trust was skimming money from the trust fund? A dog or cat can hardly file a lawsuit and testify in court.
As a result of this dilemma, a movement began that resulted in the creation of Pet Trust Statutes around the country.
In Illinois, the Trust and Trustees Act sets forth the general powers, duties, and rules concerning any Trust established in the State of Illinois. As of January 1, 2005, the Trust and Trustees Act of Illinois was amended by the General Assembly to specifically recognize “Pet Trusts”. (See 760 ILCS 5/15.2). The statute specifically rejects the legal precedent established by court decisions over the decades to allow a Trust to be created without the requirement for a human beneficiary.
One quirk is that the income a Pet Trust generates is taxable. “Trouble” is the beneficiary of a $12 million Trust that could easily generate more than $600,000 in income at a 5% rate of return. That money is taxable, but to whom? Will the IRS see a tax return filed by “Trouble Helmsley” come April 15, 2008? No.
Pet Trusts pay tax one of two ways. First, the caretaker of the pet could be responsible for the taxes on the amounts distributed from the Trust. Presumably, the caretaker would be able to deduct the costs of caring for the pet. Alternatively, the IRS will require the “Trouble Trust” or similar Pet Trusts to pay the tax itself. Trust tax returns, whether for a pet or not, are generally required because the Trust is a separate legal entity just like a person or a business. However, it can be quite costly for the Trust to pay the tax because the tax rate for a Trust can be high and the deductions available minimal.
Any estate planning lawyer can discuss options for providing for the family pet upon the owner’s death. A gift as small as a few hundred dollars can be used to ensure that the pet gets some of the medical care that is needed and can pay for any registrations that are required. Pet Trusts are not only for the Leona Helmsleys of the world, but for any animal lover.
Anthony J. DelGiorno is an attorney with Rammelkamp Bradney Law Offices in Springfield practicing in elder law, estate planning, business, real estate, tax, and litigation. He can be reached at 217-522-6000.