Trusts (Book Excerpt)

Various kinds of trusts can be valuable estate planning tools, although trusts probably are not the cure-all for probate problems they sometimes are advertised to be.

Revocable Trusts

Revocable trusts also are known as "living" trusts. Such trusts take effect during the lifetime of the maker of the trust. They can be modified or completely revoked during the lifetime of the maker of the trust. This flexibility makes them ideal for certain circumstances.

If horse owners use a revocable trust, they can place ownership of the horses and funds for the care of the animals in the trust. They will have to name a trustee, who will have a fiduciary duty to manage the trust assets for the economic benefit of the beneficiaries. A successor trustee also should be named who can take charge of the trust if the first trustee is unable or unwilling to serve.

 

A revocable trust takes effect immediately and will not go through the probate process at the death of the grantor. A revocable trust ideally is suited to provide a means for continued operation of a family farm or business. The trust is a separate legal entity and will file its own income tax returns through the trustee, who as noted above acts as fiduciary.

Life insurance policies often are included in trusts as sources of funds, but some readily available cash also should be added. It takes time to receive the proceeds from a life insurance policy, and funds should be provided to care for the animals during the waiting period.

A horse owner also can act as trustee of a revocable trust and thereby retain the right to sell the horses or acquire others in trust during the trustee's lifetime. Spouses can act as co-trustees, and the trust can be written so that either can act alone as trustee or as survivor trustee should only one of them die. Because the trust is revocable, they can change their minds at any time.

If the trust still exists at the death of the trustee, or trustees, the property in the trust will go to the named beneficiary or beneficiaries. A letter of last instructions is important, because it can take some time to transfer legal ownership of the horses and other trust property, even though the living trust avoids the probate process.

Although the revocable or living trust can provide for the care of a grantor's horses without the delay of the probate process, such a trust will not reduce the size of the taxable estate, for estate tax purposes. The Internal Revenue Code contains several sections pertinent to trusts. Only placing assets into a trust over which the trust maker holds no strings will reduce the size of the individual's federal taxable estate.

Because a revocable trust leaves the maker of the trust with the power to alter the terms of the trust or to revoke the trust entirely, such a trust would remain part of a decedent's federal taxable estate. Anyone considering a revocable trust should check with their legal and financial advisers to find out how their state treats revocable trusts.

Irrevocable Trusts

A horse owner also can establish an irrevocable trust. Like a revocable trust, an irrevocable trust avoids the delay of probate. If, however, a horse owner decides to create an irrevocable trust, the grantor will not, as maker of the trust, be able to remove ownership of a horse from the trust. Nor will the grantor be able to remove funds from the trust unless the grantor appoints himself or herself as trustee. A grantor can serve in that capacity, just as with a revocable trust. As trustee, a grantor can exercise all the powers given to the trustee under the terms of the trust. These terms may include, among other things, selling a horse.

But remember those strings in the Internal Revenue Code?

If a grantor acts as his or her own trustee, even though the trust is irrevocable, the grantor will be said to have retained power. In that situation the value of the property held by the trust will be included in the grantor's federal taxable estate. A horse owner should seek professional advice to help decide whether reducing the size of the taxable estate is more important than the flexibility of acting as trustee.

Trusts for Animals

Probate administration is strictly a matter of state law, and as with most things discussed in this book, there often is little uniformity in states' statutes. As a result, the success of a trust for the care of an animal will depend on two things: whether the grantor's state recognizes such trusts and, if so, whether the trust satisfies the requirements of state law.

The National Conference of Commissioners on Uniform State Laws (NCCUSL) is a national body that drafts model laws on a variety of subjects and promotes the adoption of those laws by the states. The idea is an admirable one, uniform laws throughout the states, but the results have been mixed. The National Conference of Commissioners on Uniform State Laws works in an advisory capacity only, and states are not required to adopt any of the group's uniform laws. Some have been adopted; others have not.

Among the uniform laws promulgated by the National Conference of Commissioners on Uniform State Laws are the Uniform Probate Code and the Uniform Trust Code. Both have been modified in recent years to address concerns of animal owners who want to provide for the care of their animals after the death of an owner.

Section 2-907, authorizing trusts "for the care of a designated domestic animal or pet animal," was added to the Uniform Probate Code in 1990. A similar provision, found at Section 408 of the Uniform Trust Code, was added in 2000 to authorize a trust "to provide for the care of an animal during the settlor's lifetime."

To date, some two dozen states have adopted either the Uniform Probate Code or the Uniform Trust Code provisions, while several other states have similar legislation on their books. Drafting a trust that satisfies a state's statutory provisions or that satisfies a state's general probate laws is a complicated task best left to an estate planning professional. The language used in the trust is crucial, especially in states without specific statutory provisions for animal trusts.

Testamentary Trusts

A tempting alternative may be to provide care for horses and other animals by setting up an honorary trust in the owner's will. This type of trust is called "testamentary" because it comes into being after death, as a provision of a deceased's will. Section 2-907 of the Uniform Probate Code specifically authorizes such testamentary trusts, but in states that have not adopted that provision or that lack similar statutory authorization, there may be problems.

Difficulties may arise if a probate court views testamentary trust language providing for the care of an animal as "precatory," meaning that the will provisions merely express what the decedent hopes will happen. If a court refuses to enforce the trust provisions, the recipient of the horses and funds may not be required to care for the animals or even spend the money on their care.

This happens most often when the will of the decedent violates either a statute or some important matter of public policy. Because our entire legal system, including the probate systems of the states, is essentially a system of balances and counterbalances, the court may not honor the intentions expressed in your will if it violates public policy. This can happen even though courts generally give great weight to the intentions expressed in a will.

A rather dramatic example of a situation in which a court might not honor the terms of a trust created in a will might be a document that left funds and assets to care for a horse, while providing little or nothing for a handicapped child. In a situation such as this, an argument could be made that the testator was not in his or her sound mind, invalidating the entire will.

A more likely problem is the potential for violation of some less well-known principle of law. One example is the "rule against perpetuities," an arcane legal principle that has confounded generations of lawyers. This rule makes any testamentary provision invalid if the gift allows the trust property to be used for longer than 21 years after the death of some relevant "life in being" at the making of the trust provision.

Animals generally don't count as lives in being for purposes of satisfying this rule, although Section 2-907 of the Uniform Probate Code authorizing trusts for animal care suggests a similar 21-year limit for the duration of the trust. This is perilous ground for non-lawyers - and for many attorneys as well - and animal trusts should be carefully drafted to avoid potential problems.

Absent violation of statute or some principle of public policy, many courts will at worst declare that an "honorary trust" exists for the care of the animals. In essence, when a court recognizes an honorary trust, it means that the testator hasn't created a legally enforceable trust, but if the named trustee agrees to care for your horses in the manner specified in the trust, the court will allow this to happen.

A final option is simply to give the animals and funds for their care to someone else as a provision in the owner's will. Animals, remember, are the personal property of their owners and are subject to the provisions of a valid will. This can be accomplished without a trust. The will should state that the decedent would like the money or proceeds from a life insurance policy used for the care of the horses while giving the beneficiary of the animals and funds complete and unrestricted power to decide how to spend the money. In this way, a court is likely to interpret that the will provides for a simple gift rather than an honorary trust. It should go without saying that the recipient should be chosen with great care.

The instructions regarding care of the horses impose a moral but not a legal obligation on the recipient.

About the Author

Milt Toby, JD

Milt Toby is an author and attorney who has been writing about horses and legal issues affecting the equine industry for more than 40 years. Former Chair of the Kentucky Bar Association's Equine Law Section, Milt has written eight nonfiction books, including national award winners Dancer’s Image and Noor. He teaches Equine Commercial Law in the University of Louisville's Equine Industry Program.

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