Does Your Pet Need a Trust?

An article in today's online Wall Street Journal addresses the question whether you should set up a trust for your pet.  At first glance that may seem like a preposterous idea.  But think about it.  Many pets are practically family members.  A pet is property, and will be treated as such in the eyes of the law, meaning if there is no one to care for it, it could be treated as abandoned property.  That could result in the pet being sent to the pound or even euthanized.

Since a pet isn't a human, it can't receive an outright bequest of money.  If you want to leave money to your pet you will need to establish a trust and appoint a trustee.  The trust should give direction to the trustee how to care for the pet and specify how much money is being left to the trust for the benefit of the pet.  You might also want to make a "no contest" clause in your will.  That clause deletes an heir's share if that heir challenges the will.  Such a clause could discourage one of the human heirs from challenging grandma's bequest of her estate to her cat.

A Trust as an Estate Planning Tool

Many people think that because they are not wealthy, a trust isn't for them. In fact, a trust can be an effective estate planning tool, especially for families with younger children. A testamentary trust (see last week's post) can allow the trustee the flexibility to provide for the needs of the young children should something happen to the parents. Without a trust, any money (such as life insurance proceeds) would pass to the children. However, because they are minors, a guardianship would have to be established. The guardian's role is to preserve the money until the children reach the age of majority. This means a guardian lacks the ability to provide anything more than basic necessities. For example, if a child shows exceptional musical talent, a guardian may not be able to tap into the money to provide for private lessons. A trustee, on the other hand, given appropriate instructions and flexibility by the trustors, could do that very thing.

Don't assume that just because you aren't "wealthy" a trust isn't for you.

What Types of Trusts are There?

As we discussed last week, a trust is just a way of holding and disposing of assets. I like to think of a trust as a basket to put things in. In general, there are four main types of trusts: Revocable, irrevocable, inter vivos, and testamentary. A trust is either revocable or irrevocable, and either inter vivos or testamentary, though it's possible for an inter vivos trust to be either revocable or irrevocable.

A revocable trust is one that can be revoked by the maker, usually called the trustor or settlor, at any time. An irrevocable trust is one that is permanent; it cannot be revoked once made. An inter vivos trust is a trust made during the trustor's life ("inter vivos" means "during life"). A testamentary trust, on the other hand, is one that is created by the trustor's last will and testament, and doesn't arise until after death. Because of this fact, a testamentary trust is of necessity an irrevocable trust.

A trust is a contract between the maker, the trustor, and another person, the trustee, who holds property given to him by the trustor for the benefit of third persons, called the beneficiaries. The trust agreement sets out the powers and duties of the trustee and usually specifies the conditions on which the trustee can use or give the trust property to the beneficiaries.

What Is a Trust?

If you talk to anyone about estate planning, you're likely to hear the word "trust." What is a trust and what does it mean in estate planning?

A trust is simply a vehicle to hold assets. The reasons for creating trusts are varied, but usually including wanting to protect assets and avoid probate. Probate is the legal process by which title to assets are transferred upon the owner's death. By putting the assets into a trust during your lifetime, you can avoid probate.

However, merely creating a trust isn't enough. You still have to fund the trust, which means putting title to the assets in the name of the trust. Too often people create a trust but never fund it. In that case, the trust is like an empty basket. It would be more useful if there was something in the basket.

Whether or not a trust is right for you, and, if so, what kind, are questions best asked of a competent estate planning attorney.