By Luke Thomas

Descendants, close relatives, friends and care-givers aren’t the only ones for whom you can leave something behind when your time comes. There are also your furry, feathered and scaly companions to think about.

Washington is one of a handful of states that permits the creation of trusts for the benefit of pets. The pertinent statutes governing Washington pet trusts can be found at RCW ch. 11.118 et seq. It should be noted that a trust may not be created for just any pet; only “nonhuman animal[s] with vertebrae” are qualified beneficiaries.1 Therefore, while pet trusts can be created for mammals, birds, fish and reptiles, some common aquarium-bound pets such as tarantulas, scorpions and hermit crabs are not qualified beneficiaries.

Design Considerations
Deciding how much money to set aside for the future care of a pet is one of the most difficult decisions in establishing a pet trust. This decision, while taking into account the client’s net worth and over arching desires, requires that several specific factors be considered.

Principally, the client should consider annual food costs, veterinary costs and the general life expectancy of the species. The costs associated with the lifetime care of a favorite horse are dramatically different from those of a favorite hamster, so the trust should be funded accordingly. In addition, if the client wishes to provide for extraordinary medical care should the need arise, there must be adequate funds for the trustee to carry out the client’s directives. Many clients also may wish to pay a custodian a stipend, which also requires additional funding appropriate for the animal’s life expectancy.

Caution should be used when drafting the terms of a pet trust to guard against inappropriate distribution of funds. Where the custodian is to be paid a stipend or fee for taking care of the pet, precautionary measures ensure that those fees are not continued after the pet dies.

Pet custodians have been known to fraudulently extend the duration of a trust by obtaining look-alike animals after the original animal dies. If the pet has no distinguishing characteristics, clients should consider whether microchip implantation (a relatively inexpensive and common pet identification process) and required annual confirmation of the pet’s identity by the pet’s veterinarian might be appropriate to ensure appropriate use of trust funds.

It also is prudent to name different individuals to serve as the caretaker and the remainder beneficiary of the trust. Where the caretaker is also the remainder beneficiary, the likelihood of the pet coming to an untimely demise is significantly increased.

Selection of a Trustee
Given the size and nature of most pet trusts, clients should consider appointing a private party to serve as both trustee and the custodian of the pet. It also may be possible to name a corporate trustee.

While many banks and trust companies will not serve as trustee of a pet trust, a few (Wells Fargo being one example) will accept such appointments under the right circumstances. Some nonprofit organizations will also accept such a fiduciary appointment. One such nonprofit organization in the Pacific Northwest that accepts fiduciary appointments for dogs and cats under the right circumstances is the Progres-sive Animal Welfare Society (“PAWS”).

Nonprofit organizations that accept fiduciary appointments usually do not have the time or resources to handle such matters unless an additional gift to the organization itself is provided for. Therefore, the organization selected by the client should be contacted early in the estate planning process to ascertain: 1) if they accept such appointments; 2) what terms they will require in the trust instrument; and 3) whether a gift to the organization is necessary and how it will be made, either through an additional outright gift, annual compensation paid from the trust, or through a vested remainder interest in the trust assets.

Taxation
The IRS has clearly ruled that no estate tax deduction will be allowed for a valid pet trust, even if the trust instrument names a charity as the exclusive remainder beneficiary. The IRS’s rationale is that because the regulations promulgated under I.R.C. ¤ 664 require that the payments from a charitable remainder trust be paid to a specifically named person or persons, and because the definition of “person” under I.R.C. ¤ 7701(a)(1) does not include any type of animal, pet trusts do not meet the requirements of a charitable remainder trust.2 Thus, the full value of a pet trust will be included in a decedent’s taxable estate, and no estate tax deduction will be permitted under I.R.C. ¤ 2055.

The income tax issues associated with the administration of a pet trust are much the same as with other testamentary trusts. Because it is unusual for a pet trust to require the distribution of all income, such trusts ordinarily are classified as “complex trusts.” As such, the trustee of a pet trust must file a Form 1041 income tax return for years in which the trust’s income exceeds $100. Because animals are not required to pay income tax, the no distributable net income deduction is permitted for distributions for the benefit of the pet.3 The trust itself must pay all required income tax.

Enforcement
Because animals cannot bring legal actions to enforce their rights, RCW 11.118.050 gives standing to the following individuals to bring enforcement actions: a person designated for that purpose in the trust instrument, the person given custody of the pet or a person appointed by the court following a petition by any person. This aspect of Washington law is absent from the laws of several other states (including California, Tennessee and Wisconsin) that have declared pet trusts to be valid but do not permit their enforcement.

Such trusts often are referred to as “honorary trusts” because their existence and operation rely upon the trustee’s honor to administer the terms set forth in the trust instrument. In light of the rights created by RCW ¤ 11.118.050, a client may wish to appoint a third party to monitor the operations of the trust and ensure that the client’s wishes are carried out. n

1 See RCW ¤ 11.118.010.

2 See Rev. Rul. 78-105.