Estate Planning for Pet Owners

Many pet owners consider their pet a beloved part of the family…and yet when they update their estate plan, they often forget to make provisions for these furry family members.  The following is a brief summary of some helpful tools that may ensure your pets receive appropriate care in the event you are unable to provide it yourself:

1. Power of Attorney:

Powers of attorney are documents that appoint an agent to make financial or medical decisions on your behalf if you are unable to do so.  You may want to include a provision in your power of attorney specifically authorizing your agent to care for and make decisions regarding the needs of your pet.

What if your entrusted agent is allergic to cats or nervous around large dogs?  One option is to execute a limited power of attorney, which can be limited in scope to simply grant a pet-savvy agent decision-making authority over your pet (not you).

You should also consider what would happen if a sudden emergency arose:  Would your agent have access to your house key to feed your pets?  Do they live close enough to do so on short notice?  Speak to your agent or a trusted neighbor to arrange an emergency plan.

1. Will:

A will provides for the distribution of property at your death.   You may include a provision that names an individual who shall receive your pets upon your passing, or you may grant the executor the ability to select an individual of his choosing.  Although you may not leave a sum of money directly to your pets, you may leave the individual in charge of your pets a sum of money, with the request that she use it to care for your pets.  Note that such a will provision would not be legally enforceable.

In some situations, this may be sufficient.  In other situations, you may prefer to have the money set aside with a more secure guarantee that the funds be used for the benefit of your pet.  In that case, you may prefer to execute a “pet trust” as described below.

1. Trust:

In 2005, the Illinois Trust and Trustees Act was amended to authorize the creation of pet trusts.  A pet trust allows you to set aside money for the care and maintenance of your pet.  You may leave the money to a trustee to dole out to the individual charged with caring for your pet.  This can in turn create a system of checks and balances to provide greater assurance that the funds are applied appropriately without being depleted too soon.

A trust provides an added benefit of taking effect quickly in the event of the owner’s death, whereas probating a will can be a process that can drag on for months or years in probate court.  Note that a judge does have the authority to reduce the amount of property transferred to the pet trust if the amount is deemed excessive.

1. Letter of Instruction:

Regardless of whether you choose any of the aforementioned estate planning documents to ensure the care of your pets after your passing, we strongly recommend leaving a letter of instruction.  This informal document provides care instructions so an agent can appropriately and confidently provide care for your pet if you are unable to do so.  This document should include instructions regarding your pets’ food, water, shelter, veterinary care, medical conditions, daily schedule, and general preferences so your agent can begin caring appropriately for your pet as soon as it becomes necessary.

2014 Tax Update

The American Taxpayer Relief Act, which was signed by President Obama on January 2, 2013, implemented those federal estate and gift tax laws that shall control during 2014.  Under this law, the federal estate and gift tax exemption was indexed for inflation, and therefore increased from $5.25 million per person in 2013 to $5.34 million per person in 2014.  In other words, each individual can transfer up to $5.34 million tax free, during life or at death, but transfers over this amount will be taxed (the maximum tax rate is 40%).  Likewise, the generation-skipping transfer (GST) tax exemption was reunified with the federal estate tax exemption, meaning it will continue to match the federal estate tax exemption, subject to the same annual inflation index.

There is still an unlimited marital deduction from the federal estate and gift tax that operates to defer estate tax on assets inherited from a spouse until the second spouse dies.  This marital deduction only applies if the inheriting spouse is a U.S. citizen.

The Act had also made permanent the concept of “portability,” which is a tax break offered to married couples.  A surviving spouse can add a recently deceased spouse’s unused exemption to their own unused exemption.  This enables a surviving spouse to transfer up to $10,680,000 federal estate tax free for 2014.  While the unused exemption might be portable, the amount sheltered does not adjust for inflation.

Keep in mind that portability is not automatic.  The fiduciary of the estate of the spouse who died must transfer the unused exemption to the surviving spouse by timely filing a federal estate tax return.  Furthermore, portability may not be an attractive option to some couples since there is no portability for unused Illinois exemption.

On a state level, the Illinois estate tax exemption is fixed and consequently not indexed for inflation.  As such, it will continue to be $4 million for 2014, with a maximum tax rate of 16%.  Portability is not available for the Illinois estate tax exemption.

There continues to be a disconnect between the federal and Illinois estate tax exemptions.  Some estate plans call for a division of assets between a credit shelter trust (sometimes called the “Family Trust”) and a marital trust according to a formula that allocates the maximum amount that can be sheltered from the federal estate tax to the credit shelter trust.  Of course, with the substantially increased federal exemption, a greater portion (or perhaps all) will be allocated to the credit shelter trust.

With the Illinois estate tax exemption set at $4 million, an Illinois decedent with a $5.34 million estate that is administered under a typical formula clause (allocating the $5.34 million to the credit shelter trust) would expose that trust to Illinois estate tax.  The Illinois legislature created a “patch” – the so-called “Illinois QTIP election” to defer the Illinois tax until the death of the surviving spouse, but the trust must be drafted to qualify for that election.  If you have not reviewed your current estate plan, we recommend that you consider doing so to make sure your plan document is eligible for the Illinois QTIP election.

One simple way you can reduce estate taxes and, in limited circumstances, shelter assets to achieve Medicaid eligibility, is to give some or all of your estate to your children (or anyone else) during their lives in the form of gifts.  Certain rules apply, however.  There is no actual limit on how much money you can give during your lifetime, but if you give any individual more than $14,000 in 2014, you must file a gift tax return reporting the gift to the IRS and use your available exemption to offset the gift tax due.

The $14,000 figure is an annual exclusion from the gift tax reporting requirement.  You may give $14,000 to each of your children, their spouses, and your grandchildren (or to anyone else choose) each year without triggering any IRS reporting requirements.  In addition, if you’re married, your spouse can duplicate these gifts.  For example, a married couple with four children could gift up to $112,000 in 2014 to their children with no gift tax implications.  In addition, the gifts would not count as taxable income to their children (although any earnings on the gifts would be taxed.)

Keep in mind that payments directly to an institution for tuition or to a provider for medical expenses on someone else’s behalf are not treated as taxable gifts and do not count against the $14,000 annual exclusion.

There is still no news on whether Congress will extend the tax break on IRA rollovers to charities.  Until February 1, 2014, there is a $100,000 “charitable rollover” of IRA distributions for anyone older than 70 ½.  Consequently, a taxpayer can direct up to $100,000 from an IRA to a charity and not have the amount included in his gross income.  These rollovers, known as qualified charitable distributions, were in effect for 2013 with special rules being applied:

1. An individual who received an IRA distribution during the month of December 2013 may transfer a portion not exceeding $100,000 in cash to a qualified charity before February 1, 2014, and the distribution will be excluded from 2013 income.
2. Alternatively, during January 2014, an individual may request that up to $100,000 be transferred directly from his or her IRA to a qualified charity before February 1, 2014, and have that amount included from 2014 income.