Letter from... the US

Abigail Rayner reports on the dog left millons of dollars in a will. Whatever would the taxman say?

'We don't pay taxes. Only the little people pay taxes,' billionaire hotel magnate, Leona Helmsley, reputedly once said, but what about little dogs? Helmsley, who died last August, left US$12m in trust for her closest confidant - a white Maltese terrier named Trouble.

Respondents to blogs on the matter cried foul. 'Clone Trouble - avoid estate tax!' said one, because dogs, no matter how human their owners consider them to be, are treated as property by the law, and pay no more taxes than a lampshade or a china tea set. Nonetheless, the taxman has his ways.

Helmsley's estate, estimated to be worth more than US$4bn, must be assessed for estate tax before any distributions to beneficiaries are allowed. Helmsley, like anyone else posthumously transferring money, was granted a US$2m exemption, and not taxed on anything she gave away to charity. Everything else is considered her 'taxable gross estate', of which the Federal Government can claim 45%. The sum that remains can be doled out to heirs, and it is from this pot that Trouble received his US$12m.

The estate tax has been dubbed the 'death tax' by its opponents, and the controversial levy is already the subject of much debate as contenders line up to take a shot at the 2008 presidency. Rudy Giuliani, the former New York mayor running for the Republican nomination for President, recently pledged to do away with the estate tax for good, calling it an assault on the American dream. 'Only Washington could create a tax incentive for death,' he wrote in the New Hampshire Union Leader newspaper. Trouble would doubtless vote for him if he could.

In 2002 President Bush signed into law an act to repeal the estate tax, and the tax is gradually being phased out. Every year the Government provides a slightly larger exemption, and progressively lowers the tax rate until the tax is entirely eliminated in 2010. If Helmsley had held on until then she could have avoided the estate tax, but only for one year. Unless Congress acts to change things, the estate tax will return in 2011, the exemption will go back to 2001 levels of US$675,000, and the tax rate will return to 55%.

'If Congress doesn't do something about this there may be some suspicious deaths or some “accelerated” deaths,' said Professor William Moser, an expert on taxation at the University of Missouri's School of Accountancy. 'There's a lot of money on the line.'

The estate tax is not the only levy that Trouble has to worry about. Although as a dog Trouble is not taxable, the income on his trust is. On his US$12m trust, Trouble can expect to make about US$600,000 in income a year. Of this he will be required to pay 35%, or US$210,000 in taxes, which leaves US$390,000 for doggie essentials like food, veterinary care, walkers, hairdressers, manicurists and squeaky toys.

Traditionally, the beneficiaries of a trust had to be an individual or a legal entity, such as a corporation. In the past, courts frequently challenged pet trusts because they were deemed excessive, or because their duration was based on animal rather than human life expectancy - which is how trusts were traditionally measured. But in recent years many people, rich and not so rich (but mainly rich), started to make provisions for pets. Among them was Doris Duke, the only child of tobacco tycoon James Buchanan Duke. Upon her death in 1993, Duke left a US$100,000 trust to a Shar-Pei named Rodeo. It is not just crazy rich Americans either: in 1991, Carlotta Liebenstein, a German countess, left her US$80m estate to her dog, Gunther.

In 1993 there was a change in the US Uniform Probate Code, a model adopted by many states governing the distribution of intestate property, which allowed for pet trusts to continue over the life of the animal. In response, 38 US states and the District of Columbia have enacted laws that allow statutory pet trusts.

It is responsible to set aside adequate funds and instructions for the posthumous care of a pet, but Trouble's trust is grossly excessive. In the coming electoral race, supporters of higher taxes might well use him as their poster-child. The pampered pooch is among the 2% of those rich enough to be affected by the estate tax and, without it, he could have made off with even more.

Abigail Rayner is a freelance writer based in New Jersey.