Appellate courts address estate tax, trust division regarding adoptions

As adoptions have become more common and more accepted for expanding the family tree, courts have had to address some legal matters clarifying those familial ties.

Two opinions in recent months regarding inheritances for grandchildren – those adopted into the family and those adopted by another family – have shed some light on how the courts consider adoptions when it comes to trusts and inheritance tax.

While this is something that typically would fall under the umbrella of estate law, family law attorneys should also pay attention to these cases, said Indianapolis attorney Andrew Soshnick, chairman of Baker & Daniels’ family law group.

The cases are In Re The estate of Forrest W. Quackenbush, deceased, et al. v. Indiana Department of Revenue, Inheritance Tax Division, No. 49T10-0810-TA-61, which was decided by the Indiana Tax Court April 22; and Bonnie E. Taggart Paloutzian and Linda M. Taggart v. Gregory A. Taggart and Belle Delint-Eaglesfield, No. 49A02-0908-CV-812, decided by the Court of Appeals Aug. 13.

Forrest Quackenbush included his granddaughter Pamela Stewart Martin and her two children in his will. The estate treated them as Class A transferees and the Tippecanoe Circuit Court accepted the estate’s filing in February 2008.

However, because Quackenbush’s granddaughter had been adopted by another family, the inheritance tax division filed a petition for rehearing June 23, 2008, asking that Martin and her daughters be considered Class C transferees instead of Class A transferees.

On July 29, 2008, the probate court agreed with the inheritance tax division. On Aug. 28, 2008, the estate appealed to the Indiana Tax Court, which affirmed the probate court in April this year.

The difference between the two classes is a $100,000 exemption for inheritance tax purposes for Class A transferees, or $100 for Class C transferees.

In this case, as Class A transferees Martin and her children were found to owe $32,885.52 in estate taxes. But when they were considered to be Class C transferees, they were required to pay an additional $29,699.14.

“… The General Assembly has unambiguously determined that, for purposes of inheritance, a child adopted pre-emancipation by unrelated individuals should be placed in a family status equal to that of a natural child of those adoptive parents only. Thus, the child’s biological ties to her natural parents are legally severed,” Judge Thomas G. Fisher wrote for the opinion.

He went on to write that while Quackenbush still considered Martin his granddaughter regardless of the adoption, “The Court … cannot legitimize that familial relationship for inheritance tax purposes, as doing so would be the equivalent of restoring that which the law has already severed.”

In Taggart, the issue for review was whether Alex Taggart’s grandchildren who his son Henry G. Taggart had adopted were included in his trust, written in 1953, before his son married, adopted, or had children of his own.
 

The trust stated, “In the event the said Henry G. Taggart shall leave a widow surviving him and any children surviving, one-third (1/3) thereof shall be distributed to said widow and the remainder of the Trust Estate shall be divided equally among the surviving children of the said Henry G. Taggart.”

Henry married his first wife after the trust was written. He adopted Gregory A. Taggart and Maria Taggart, his first wife’s children, when they were minors. He later divorced his first wife, remarried, and had three natural children prior to Alex’s death in 1972.

Henry died in 2008. He was survived by his wife, his two adopted children, and his three natural children.

In December 2008, the trustee, JPMorgan Chase Bank, filed a petition in Marion Superior Court, Probate Division. The trustee cited the stranger to the adoption rule, “when one makes provision in his will for a child or children of some person other than himself, he will be presumed not to have included an adopted child or children of such other person, unless there is something in the will or in the extraneous circumstances to rebut that presumption.”

While this rule existed in 1953, the Trust Code was amended 50 years later for adopted children to be considered equal to natural children when writing a trust, as long as they were adopted before the age of 21 and before the settlor’s death. The 2003 amendment included a retroactivity provision that this would apply to trusts executed before Sept. 2, 1971.

Following a hearing, the Marion Superior Court ruled the adopted children should be included as “surviving children of … Henry G. Taggart.” The majority of the Court of Appeals panel that heard this case of first impression affirmed the probate court.

However, in his dissent, Judge Terry A. Crone wrote, “When Taggart executed his irrevocable inter vivos Trust in November 1953, the stranger to the adoption rule was in effect, and we must presume that he was familiar with that rule. … Here, nothing rebuts the presumption that when Taggart provided for the distribution of the Trust corpus to Henry’s surviving children upon Henry’s death, he intended for the corpus to be distributed only to Henry’s surviving natural children.”
 

Geyer

“Are these opinions inconsistent? In some ways they are,” Soshnick said, regarding how they treat people who have been adopted.

He said he understood why the Tax Court ruled the way it did in the Quackenbush case because it was a matter of interpreting the statutes for inheritance tax. Those statutes state once someone is adopted by another family, they become part of the adopting family and their rights are taken away in terms of their connections to the biological family.

He also said it was easy to understand why there was a split in the Taggart case.

“The big issue is the dissent focuses on the cardinal element of trust law: to try to derive the intent of the settlor,” he said.

He added in this case, even with the retroactivity of the 2003 amendment, it was not clear cut as to whether Alex Taggart meant to include his adopted grandchildren.

Rebecca Geyer, chair of the estate planning/elder law team of Hollingsworth & Zivitz in Carmel, said she thought the Tax Court decision was one that would be more likely to come up again. She said the Taggart case seems like it would be less common because she isn’t aware of many trusts that were created so long ago that don’t address if the adopted children should or shouldn’t be included in a trust.

She added other circumstances should be considered in estate planning when it comes to families with adopted children.

Soshnick agreed and said it was common for someone to adopt his or her stepchildren while married to the natural parent of those children. But if the couple later divorced, the relationship with the adopted stepchildren may not be as strong later in life. This could greatly affect how the parent views the children in terms of estate planning.

“I think it’s a reminder to everyone that you need to keep an eye on and update your estate plan regularly,” he said.

He added lawyers needed to keep up with the laws and remind their clients that some laws could have changed since they last updated their estate plans, including if they have adopted children or plan to.•