Unintended Consequences (Part 1)

In this week’s post I’ll tell you about an interesting issue that came to our office involving an estate administration matter.  The decedent left a portion of his estate to his friend.  What I also learned is that the friend who was 10 or so years older than the decedent, legally adopted the decedent.  While I do not know for certain, a reason for the adult adoption may have been avoidance of inheritance tax.

A parent is a Class A beneficiary and anything inherited is free of inheritance tax.  The same is the case for a child who also inherits free of the tax.  A non related heir, on the other hand, is a Class D beneficiary.  The tax paid by Class D heirs is 15% of the first $700,000 received and then 16% of anything received above that amount.  By going ahead with the adoption, which must be accomplished  by a court order, the inheritance tax can be avoided for both the parent and the child.  But, there are also unintended consequences.

For one thing, because the friend did not have any children and was older than the decedent, I expect that a primary motivation was probably to avoid inheritance tax when the friend died.  Because the friend was older than the decedent, they probably expected the likely scenario to be that the friend would pass away first.  I doubt much consideration was given to what would happen if the friend survived the decedent or to how the adoption also altered the relationships and rights of some of decedent’s blood relatives.

Next week I’ll get into all that in more detail.