July 13, 2008 to July 15, 2008
Cats and Dogs, and "Sensible" Bequests
Cats and Dogs, and "Sensible" Bequests-Becker
Leona Helmsley's bequests of $12 million to her dog, and several billion dollars to the welfare of dogs in general, are highly unusual, eccentric, and strange. Should these and similar bequests be allowed? No doubt $12 million is far more than can be spent on a single dog in any reasonable way, but is that the right criterion to use?
An analogy with huge bequests to individuals is appropriate. The number of billionaires in the world has been growing rapidly rapidly, and a large fraction of these are in the United States. Most of them will leave hundreds of millions, and even billions, of dollars to their spouses, children, and grandchildren. Some of these recipients may recklessly go through these huge bequests in a short time, but is there any sensible way heirs can spend billions, or even hundreds of million, of dollars in their lifetimes? It is difficult for the rest of us to imagine how to spend that much, even with purchases of private planes, several expensive homes, and other luxuries. Spend these sums they may, but not in ways that would generally be considered useful or sensible. Similarly, I have no doubt that it is possible to spend $12 million on Helmsley's dog, but that would involve expenditures that most would consider at least as foolish and wasteful as the way some very wealthy heirs spend their much larger inheritances. This type of reasoning would explain why the Uniform Trust Act authorizes judges to reduce bequests to pets to a so-called maximum comfort level.
Yet, with a couple of exceptions, I do not believe that trustees or anyone else should have the power to decide whether the nature and amounts of bequests for particular purposes are excessive and inappropriate. Respecting individual preferences, no matter how idiosyncratic, is one important measure of a free society, even when those tastes relate to bequests and inheritances. As Posner said, peoples' tastes take many forms, and it is not possible to prove objectively that some preferences, such as the huge bequest to Helmsley's dog, are much worse than even larger bequests to worthless children?
One traditional exception to the principle of accepting bequests relates to those bequests made by persons judged to be incompetent, either because of demonstrated senility or mental illness. Such an exception, when used sparingly to avoid abuses, can be useful since bequests made by mentally incompetent individuals may well have no rational basis, not even eccentric ones. Another exception to the rule of allowing bequests, no matter how strange or eccentric, would concern bequests that violate laws. For example, a bequest to give guns to individuals would be disallowed if there were stringent gun ownership laws. Similarly, a bequest to promote white supremacy, or the employment only of males, would be judged to violate anti-discrimination laws.
Respect for individual preferences does allow bequests to be taxed. To reduce the importance of bequests that make little sense, Posner proposes to tax large bequests given to charitable organizations. Yet it is not bequests that raise questions about appropriateness, but inheritances. A large bequest divided among many recipients, including many individuals and charities, does not raise anywhere near the same ethical or other problems as the same large bequest given to a few children or charitable organizations. The United States' estate tax and that of many other countries is wrong-headed because they tax bequests rather than inheritances.
The case for making charitable organizations exempt from estate, inheritance, and other taxes that apply to individuals and for-profit businesses is that these charities decentralize giving to hospitals, universities, the poor, and for many other purposes that are not readily made self-financing. Absent private charities, the financial support of these purposes would be concentrated, that is monopolized, in the hands of governments, as it is in countries that do not exempt foundations and charities from estate and other taxes.
The major concern about private charities and foundations is not that they are too large, but that their leaders often perpetuate their organizations beyond any reasonable duration, partly by transforming their goals over time. I believe a case can be made for keeping the tax exemption in place, but changing present laws to require charities and foundations to have limited durations, perhaps 30 years. That is, to introduce a kind of sunset provision for private charities and foundations. If they stayed in business beyond that time period, they would then be subject to significant wealth and income taxes.
Should Dogs Get $8 Billion from the Helmsley Estate? Posner
Eyebrows were raised when Leona Helmsley left $12 million to her dog in her will, and they were raised even farther when it was learned recently that she had signed a "mission statement" indicating her wish that the charitable trust created by her will, which has an estimated $5 to $8 billion in net assets, be devoted to the welfare of dogs. The judge supervising the implementation of her will cut the bequest to her dog from $12 to $2 million, and it is uncertain how much of the charitable trust will actually be devoted to dogs rather than to other objects of charity, since the mission statement is (according to news reports) not binding on the trustees who will be administering the trust.
Section 408 of the Uniform Trust Act makes trusts for pets enforceable (historically they were not--such trusts were called "honorary trusts" and it was up to the trustee to decide whether to enforce the trust even if commanded to do so by the document creating it, as was not the case with the Helmsley charitable trust), but only up to the amount actually required to maintain the pet in comfortable circumstances. This would not necessarily limit the amount left to dogs as a class; there are so many dogs that even $8 billion could be spent on them without any individual dog receiving more than necessary for its maintenance in comfortable circumstances.
The possibility that dogs will receive billions of dollars from a bequest presents three interesting questions: why would a person leave so much money to dogs; should such bequests be permitted by law; and should charitable bequests be subject to estate tax, rather than, as they are now, exempt from it?
Some pets are kept for essentially practical purposes, such as mousing in the case of cats and home protection in the case of dogs. But increasingly pets are child substitutes or personal companions and, as such, love objects, and hence natural objects of bequests, particularly for childless or wealthy people. And it is natural to extend one's affection to the entire species, just as, if you love any persons, even if just members of your family, it is natural to have at least an attenuated regard for the welfare of other people, even for the human species as a whole; and so with dogs and cats if you have a pet of one of those species. Therefore, odd as it may seem, Mrs. Helmsley's desire to spend billions of dollars on dogs is more easily understood than her desire to give her dog $12 million, since above a far lower amount (probably far below the $2 million allowed by the probate judge) it is inconceivable that the money could increase the dog's welfare; hence the size of the gift makes no sense as an altruistic measure. This may explain why the Uniform Trust Act authorizes the judge to cut down the amount of the bequest to a pet to the pet's maximum comfort level.
What makes a trust of $5 billion to $8 billion for dogs seem eccentric is that so much is spent on them already. A bequest of that amount for endangered animal species or other animal-protective purposes would be easy to understand as an environmental measure, but not a bequest for dogs or cats. However, a fundamental premise of normative economics is the subjectivity of values: value is determined by personal preference, and the preferences of adults who are compos mentis and back their preferences with money are not to be questioned by others unless the expression of those preferences would cause uncompensated harms to unconsenting third parties. Moreover, bequests will decline if judges pick and choose which to enforce; and to the extent that bequest motives are a significant force in motivating people to earn money, people may not work as hard to accumulate an estate if judges will not honor their bequests, or, even if they do work as hard, they may save less because consumption becomes more attractive relative to saving when the objects for which people save are not fully chosen by them.
As I said, a bequest for a specified animal that greatly exceeds any conceivable estimate of what the animal needs to be as happy as it can be cannot be rationally altruistic, so perhaps the authority that the Uniform Trust Act confers on trustees to cut back such bequests to reasonable limits is justifiable--and for the additional reason that excessive wealth actually endangers an animal, since once it dies the money will go to residuary legatees; and killing an animal is not considered murder (though it can be a lesser crime) and is easier to arrange and conceal than killing a human being. Expensive security precautions have in fact been taken for the protection of Mrs. Helmsley's dog. These concerns do not attend a bequest for a large class of animals.
The size of the Helmsley trust does suggest that it might be sensible to impose a ceiling on the charitable exemption from estate tax. For example, the law might exempt the first $1 billion of a person's charitable gifts (whether made during his or her lifetime or at death), but above that level such gifts would be taxed at the ordinary gift and estate tax rates. It is hard to believe that such a change in law would significantly affect work incentives, and it would therefore be an efficient tax. If it did not reduce people's effort level, it would not reduce aggregate personal income, but (because it would reduce the size of bequests and other charitable gifts), it would merely spread it about somewhat differently. Given that much charitable spending is wasteful because of the weak incentives for efficiency of the staffs of charitable enterprises, economic efficiency might be increased if there were fewer and smaller charitable trusts.
Trusts for Pets--Supplemental Comment--Posner
Professor Robert Sitkoff of Harvard Law School, an expert on trusts and estates, points out two errors in my post and also suggests a further point about trust governance. He writes that the uniform act is styled the "Uniform Trust Code," not "Act," and that section 408(c) authorizes the court--not the trustee, as stated in the second to last paragraph of the post--to reduce a bequest for the care of an animal. Limiting the power to reduce the gift to the court is critical especially when the trustee is the remainder beneficiary, as it is easier to reallocate a bequest to oneself than to undertake the distasteful act of killing the animal.
But notice the governance problem posed by a trust for a pet animal. Normally a trust must be for the benefit of an ascertainable beneficiary. This rule, which the English call the "beneficiary principle," ensures that there is someone with an economic incentive to police the trustee's conduct. Contrast the world of charitable trusts, where the absence of such a person leaves supervision (such as it is) in the hands of the distracted (at best) state attorneys general. For a pet trust, the UTC addresses the enforcement problem by authorizing the donor or the court to name an enforcer. In functional terms, therefore, the Code treats dogs and other pet animals as if they were children. Both children and pets are permissible beneficiaries, but both require an alternate enforcement mechanism (albeit one that creates another agency relationship) because neither can bring suit themselves.