ARE PET TRUSTS SUBJECT TO PENNSYLVANIA’S 15% INHERITANCE TAX
I. A History of Pet Trusts in the new Context of Pennsylvania’s inheritance tax.
Initially, US courts did not treat pet trusts favorably, holding that a gift to a pet trust failed because the trust violated the rule against perpetuities by having the pet – a non-human – as a measuring life. Slowly but surely, however, pet owners’ dogged determination swayed public opinion about the positive effects of pet trusts, and today all fifty states statutorily authorize them. Perhaps to avoid being perceived as petulant, Pennsylvania explicitly authorized bet trusts back in 2006, so long as the trust only lasts as long as the pet’s life (or pets’ lives)
While Pennsylvania’s authorization of pet trusts is clear, what is less clear is how a pet trust is taxed for Pennsylvania inheritance tax purposes, or, more specifically, whether pet trusts are subject to the inheritance tax at all. As a general matter, Pennsylvania uses a four tiered inheritance tax structure where the rate of the tax depends on the relationship of the beneficiary to the decedent. Transfers to spouses and (human) children under the age of 21 are taxed at 0% transfers to direct descendants and lineal heirs are taxed at 4.5%, transfers to siblings are taxed at 12%, and transfers to all “all other persons” are taxed at 15%.
Section 9111 of Pennsylvania’s Inheritance tax statute states that an inheritance tax of 15% will be imposed on the transfer of property “to or for the use of all persons” other than specific beneficiaries that are exempt from the inheritance tax, including government entities and most non-profit organizations that exist for religious, charitable, scientific, literary or educational purposes. Notably, neither animals nor pet trusts are included in Section 9111’s list of exempt beneficiaries.
The first case to address whether pet trusts are subject to Pennsylvania inheritance tax was Schrock Estate, out of the Orphans’ Court of Westmoreland County in August 2015. In that case, a pet trust was established for the decedent’s horses. The Pennsylvania Department of Revenue argued that the money put in the pet trust was subject to the 15% inheritance tax because (1) the trust was a “person” for the purposes of the inheritance tax statute, and (2) the trust did not fail into any of the statute’s lower-tiered rates. Because the inheritance tax statute does not define “person,” the Department of Revenue relied on Pennsylvania’s Statutory Construction Act, which defines “person,” among other labels, as “business trust…estate,[or] trust[.]”
The decedent’s estate countered, arguing that the trust was not subject to the inheritance tax because an animal is not a “person” and therefore was no “transfer” occurred as is required by the inheritance tax statute. In coming to this conclusion, the estate relied on Section 2102 of the statute, which does not include animals as a potential “transferee.” Because a complete transfer requires both a transfer and a transferee, and animals are not transferees under the statute, the estate argued that the statute did not apply and therefore no inheritance tax was owed.
The Department of Revenue attempted to reinforce its argument by noting that the trust was the transferee, not the horses, but the Orphans’ Court agreed with the estate that the trust was “merely an instrument or conduit for the passage of the assets[.]” The Court also noted that the scheme of the inheritance tax statute (that is, determining what rate of tax is owed) depends on the identity of the recipient. In the case of trusts, the statute requires examining who the trust beneficiary is in order to determine the applicable tax rate. The court stated that if it accepted the Department of Revenue’s argument that the trust was a “person” within the meaning of the statute, that interpretation would be “contrary to the language of the statute[.]”
II. Chester County Orphans’ Court Rules that Pet Trusts are Subject Pennsylvania’s 15% Inheritance Tax
Not content to just parrot the decisions of the Westmoreland County Orphans’ Court, the Chester County Orphans’ Court decided in May 2015 in King Estate that pet trusts are subject to Pennsylvania’s 15% inheritance tax. In King Estate, a decedent died and left a pet trust for her horses, dogs, cats, and chickens in the amount of $409,288.86. In a similar series of events as in Schrock Estate, the Pennsylvania Department of Revenue assessed an inheritance tax of 15% on the money placed in trust, which came out to $61,393.33 owed in taxes. Objecting to the 15% assessment, the decedent’s estate cited Schrock Estate and argued that the pet trust could not be taxed because the trust’s beneficiaries were not human. The Department of Revenue argued (just like it did in Schrock Estate) that every transfer from a decent is subject to the inheritance tax unless the transfer is “specifically excepted” in Section 9111 (like transfers to government entities or non-profits). In a very brief analysis, the Chester County Orphans’ Court agreed with the Department of Revenue and found that because pet trusts were not specifically listed as exempt transferees in the inheritance tax statute, the inheritance tax applied. In coming to its conclusion, the court noted that while the Westmoreland County Orphans’ Court came to an entirely different conclusion, the Westmoreland County Orphans’ Court still engaged in a “thoughtful analysis.”
III. The Uncertainty of the Orphans’ Courts’ Decisions
What may seem surprising considering Pennsylvania has a population of almost 13 million people and formally legalized pet trusts over a decade ago, whether or not pet trusts are subject to the state’s inheritance tax is still uncertain. As of today, there are two court cases that address the matter. Unfortunately, these two court cases came from two non-appellate level courts, engage in little in-depth analysis, and arrive at completely different conclusions.
While residents in Westmoreland and Chester Counties may have a better idea of how Orphans’ Court would rule if they challenged an inheritance tax assessment on a pet trust, those in Pennsylvania’s sixty-five other counties are left largely in the dark.
Reference: Ryan J. Ahrens, Probate and Trust Law Section Newsletter, October 2018, No. 148. Probate and Trust Law Section of the Philadelphia Bar Association
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