Second Thoughts on Adult Adoptions

A parent, who is still living, created an irrevocable trust before 1985 for his lineal descendants. The trust creation date was before the effective date of the current generation-skipping transfer tax, and so the trust is protected from that tax by the “grandfather” rule for pre-existing trusts.

The trust will divide into three portions upon the parent’s death, one for each of three children. When the trusts terminate, the remainder will pass to the issue of the children, if any.

Child 1 has three children, and child 3 has none. Child 2 has a child and grandchild, both of whom were adopted as adults.

Evidently, the parent does not approve of child 2’s actions or lifestyle. The parent petitioned in state court to have the phrase “lineal descendant” interpreted, so as to exclude adoptees. At the time the trust was created, the state law presumption was that adoptees were not lineal descendants, a presumption that since has been reversed. The parent argued that, when the trust was created, he understood lineal descendant to be limited to blood relations.

The state court granted the petition. The tax question is: Does this new interpretation have any effect on the status of the trust for generation-skipping tax purposes?

The answer is: It does not, according to what the IRS holds in private advice (Private Letter Ruling 201814002). The interpretation of the ambiguous term in a manner consistent with what the state’s highest court would rule does not change the trust, so as to cost it the “grandfather” protection under the generation-skipping transfer tax. What is more, although the hopes of child 2’s adoptees for trust beneficiary status have been terminated, the interpretation of the trust clause does not trigger a taxable termination, distribution, or gift to any other person.