Unintended Consequences – Part 2

In my post last week, I started to tell you about an interesting estate administration case involving an heir who had legally adopted the decedent a number of years before the decedent died.  This was an adult adoption in which the adopted parent was only 10 years older than the adopted child.  As I stated last week,the primary motivation was to permit the parent to leave his estate to the adopted child and avoid inheritance tax because a child as a Class A beneficiary is exempt from inheritance tax.

Except that the child died first.  While he chose to leave a portion of his estate to the parent by adoption, he left the rest to his child and his sibling.  The adoption had an affect not only on the parent’s heirs but it also affected the adopted child’s heirs.

Just as a child is a Class A beneficiary, exempt from inheritance tax, so is a parent.  No problem there, however, the adult adoption also changed some of the decedent’s other relationships. 

The New Jersey statute concerning adult adoption states that the effect of the adult adoption is that the rights, privileges and obligations due from the adopted child to the natural parents and all relations existing between them are terminated, including the right of the natural parents and their kindred (descendants) to inherit intestate property from and through each other.

This means that if the decedent had no will his sibling would not be entitled to anything under the intestacy laws because the sibling’s relationship to the decedent is established through the natural parents.  It does not, however, affect the decedent’s child’s right to decedent’s estate because the child’s relation to the decedent is direct. It is not derived from the decedent’s natural parent. 

Because the sibling’s familial relationship to the decedent is in effect terminated, any share left to that sibling in decedent’s will would also put the sibling in a different class when calculating inheritance tax.  Siblings are Class C beneficiaries whereas non family members are Class D.  A higher tax rate is applied to Class D heirs than is applied to those in Class C, resulting in the unintended consequences.