How Adoption Affects Inheritance

Dear Len & Rosie,

My recently deceased brother had a daughter thirty years ago. He and his wife divorced within her first year of her life. Apparently, my brother’s daughter was adopted by her mother’s second husband after she remarried.  Would this daughter be legally entitled to any part of my brother’s estate or his trust? My brother had a living trust and didn’t want to leave anything to her, but the trust didn’t specifically name her and exclude her from an inheritance. Instead, the trust says, “I have purposefully omitted any other relatives from any and all distributions.” Is this a problem?

Nancy

Dear Nancy,

When we meet an estate planning client, the first thing we do is to talk about the client’s family. How many children and grandchildren are there? Are there any deceased or disabled children? Are there children our client has adopted, or children who’ve been adopted away? It’s also a subtle way to quiz a client’s mental capacity. It’s a good sign when a client knows the names and ages of all seven of her grandchildren.

If our client wishes to disinherit a child, we like to include language such as “The settlor has intentionally and with full knowledge of the consequences made no provision for the settlor’s daughter, Nancy, or her issue.” (Issue is a legal term that means “descendents.”) From what you’re telling us, it looks like your brother’s attorney may not have been that thorough.

Fortunately, the law is somewhat forgiving. Your niece will always be the biological daughter of your brother, but if she was adopted by her step-father, she’s no longer legally related to you or your brother. She’s not entitled to notice of the existence of your brother’s trust, or notice of a probate. She also does not inherit anything from your brother’s trust or probate estate unless the trust or will names her as a beneficiary.

Unless you have proof of the adoption, the successor trustee of your brother’s trust should provide your niece (or ex-niece) notice of the existence of the trust under Probate Code section 16061.7. Play it safe.

If she was never adopted away from your brother, she’s still not entitled to inherit anything if your brother’s will and trust left everything to others. The only time a child is automatically cut into an estate plan is if the trust or will fails to dispose of everything, or if the child was born after the trust or will was created.

So why name children and specifically disinherit them when it strictly isn’t necessary? It makes the client’s intentions clear. It’s harder to prove a man didn’t know he was disinheriting a daughter when his initials are next to a paragraph saying so in clear unambiguous language.

Len & Rosie

Should you add your children’s names to the title of your homes?

Dear Len & Rosie,

My father died and left some cash and the house to my mother. She is 82 years old. She has put the house in my name as well as hers. Her doctor has informed her she needs a pacemaker, and now she wants to put the house solely in my name.

I have several concerns. The first is tax purposes for me. How will this affect me and my husband’s taxes for the next year? I also have other sisters and a brother who will eventually inherit part of the home. Mom’s lawyer says that she is safe with just my name on the deed, but I am not sure.

Linda

Dear Linda,

We normally do not recommend to my clients that they add their children’s names to the title of their homes. One reason why is that if you get sued if you declare bankruptcy, your mother could lose her home. Also, she would not be able to sell her home without your permission.

There will not be any particular tax consequences to you this year if your mother signs her home over to you. Gifts are not subject to income tax. Your mother will have to file a gift tax return with the IRS, but she won’t have to send a check to the IRS unless she has given away more than $5,430,000 of gifts in excess of the annual gift tax exclusion (currently $14,000). You should have those problems.

The property tax of the home will remain the same. Thanks to Propositions 13 and 58 there will be no reassessment. You will lose the $7,000 Homeowner’s property tax exclusion unless you live in the home, but that will increase the property tax by less than $100. It’s no big deal.

The big deal comes in when you sell the home after your mother’s death. If she gives you the home to you, it will not get a new cost basis when she dies. If you ever sell the home, you will have to pay capital gains tax on the increase in value since either your father’s death.

You will have tax problems even if you don’t sell the home. There is no property tax transfer exclusion for transfers among siblings. If you add your brother and sisters on title the way your mother wants you to, either before or after her death, the home will get reassessed and the property taxes will increase dramatically.

Your mother would be much better off if she keeps the entire home in her name, and creates a revocable trust to both avoid probate and take advantage of the basis adjustment that will happen upon her death. As an added benefit, if the children get their shares directly from their mother instead of from you, there will be no property tax reassessment.

Your mother should seriously consider a transfer of the home only if your she is in a nursing home or is likely to need nursing home care and Medi-Cal benefits during her lifetime. And in that event, it’s still not best to simply give her home to her children. An irrevocable trust designed to shelter her home from Medi-Cal estate recovery claims is a better bet.

Len & Rosie