Pennsylvania Trusts and Estates Blog

It is not flesh and blood but the heart which makes us fathers and sons.
-Schiller

When a person dies intestate, that is, without a will; the law determines who are that person's heirs. The general rule for an adopted child is that the adoption severs the parent-child relationship between the adopted child and his or her natural parents including severance of all inheritance rights.

Thus, under Pennsylvania law, for purposes of inheritance by, from and through an adopted person, the adopted person is considered as a natural child of his or her adopting parents; and an adopted child is not considered to be a child of his or her natural parents. Pennsylvania provides a limited exception to this rule. A child who has been adopted may inherit from his or hernatural kin (but not natural parents) when the natural kin has maintained a family relationship with the adopted person. The comment to the statute when it was enacted says that "[t]he exception recognizes that family relationships frequently continue for grandparents and others where an adoption may have occurred after the death or divorce of a parent."

Here is an example: John and Katie are married and have a son, Buddy. John dies. Katie remarries. Her new husband, George, adopts Buddy. John's parents, Buddy's natural grandparents, are very much involved in his life, are frequent visitors and maintain a family relationship with Buddy. Under the Pennsylvania Statute, if John's parents die intestate, Buddy, even though adopted, would inherit from them.

What about step children? If they are not adopted, they do not inherit from their parent's spouse. This can create some unfortunate results. Let's say Amy has a child, Josh. Amy marries David who is not Amy's natural father. They live together as a family for years, but David never adopts Josh. That means that Josh is not Dave's heir. If David dies without a will, Josh has no rights to Dave's estate as an heir.

In these days of blended families, where the children can be yours, mine, and ours, it is extremely important that parents make wills that spell out the rights of their children. It can completely destroy a family if only some of the children in a household inherit and others are cut out because of these rules of inheritance.

What if a will or trust directs distribution to a person's children. Does that include adopted children? In construing a will making a devise or bequest to a person described by relationship and not by name (e.g. "my children" or "John's issue"), any adopted person shall be considered the child of his adopting parent or parents. In construing the will of a testator who is not the adopting parent, an adopted person shall be considered the child of his adopting parent or parents only if the adoption occurred during the adopted person's minority or if an earlier parent-child relationship existed during the child's minority.

Why the age limit? You can adopt and be adopted at any age. Mrs. Dowager left a will providing for distribution to her children and grandchildren. Mrs. Dowager's 65 year old son, Libertine, is unmarried and has no children. However, he has a lady friend, Floozy age 45. Libertine adopts Floozy. If Libertine dies, Floozy is Mrs. Dowager's grandchild by adoption. However, since the statutory rule of interpretation provides that in interpreting Mrs. Dowager's will, an adoption has to occur during a person's minority (under age 18) to be given effect, Floozy would not inherit any part of Mrs. Dowagers' estate. (And that's probably the way Mrs. Dowager would have wanted it.)

It is likely that taxes at all levels will increase to pay for the massive spending that has taken place. Taxing governments should be wary of raising taxes too far, too fast. According to 2007 IRS statistics the top 1% of U.S. Taxpayers paid 40.4% of federal individual income taxes. At some point, further increases of tax burden on the same individuals will affect behavior. As taxpayers react to tax increases, they may leave a state or even a country for more tax friendly environments.

The Wall Street Journal ran an editorial in May 2009 describing the situation in Maryland. In 2008 Maryland enacted a "millionaire's tax." The legislature increased the marginal income tax rate to 6.25% on incomes of more than $1 million. Since cities like Baltimore and Bethesda also impose income taxes, the state and local combined rates could be as high as 9.45%. The millionaire's tax was estimated to bring in an additional $328 million in revenue over three years to the state coffers. In 2008 roughly 3,000 income tax returns with a million or more dollars of reported income were filed by Maryland residents. In 2009, there were only 2,000. The revenue from this groups of taxpayers was down $100 million (not up as predicted). The net result is that state of Maryland actually collected less tax from the millionaires by raising the tax rate, instead of the increase they projected. The WSJ surmises that Maryland's millionaire population fell by a third. They changed which state they claim as their legal residence. That's why the legislation is referred to as the "Get Out of Maryland Tax Act."

Rochester New York billionaire Tom Golisano made a highly publicized move to Naples, Florida because of high taxes in New York State. Golisano said the new New York State budget would result in his paying $5 million in income tax to New York State. In Florida he will pay zero income tax. Read his piece on "Why I'm Leaving New York."

Toronto attorneys Lesperance & Associates, who advise wealthy U.S. citizens on the "how to" of expatriation, have created a video called "Flight of the Golden Geese." It is about Goldie, a goose who lays golden eggs. (You can see it here.) In the video, Goldie alone was covering over 40% of the cost of the farm. The farmer said he needed more eggs. Goldie responded that the other animals should contribute, as well. The other animals called Goldie names - greedy, disloyal, selfish and disloyal to the farm. The Farmer said "Let's vote on it. Everybody in favor of Goldie giving more eggs raise your hoof, paw, or wing." What happened to the goose who laid the golden eggs? She left the farm, flying to another country where she didn't have to give up so many of her golden eggs to the farmer. As did Goldie, some individuals will choose to move to lower-tax countries.

Concerned about crushing estate, capital gains, and income taxes as well as personal security risks and the threat of litigation in the U.S.; wealthy U.S. citizens are looking at other countries. Other U.S. citizens who we would not classify as "wealthy" are looking to move to lower-tax jurisdictions as well. It is happening at such a rate that Congress enacted the Heroes Earnings Assistance and Relief Tax Act of 2008 (the "HEART Act") which contains provisions to deter high net worth U.S. citizens or long term residents from avoiding payment of U.S. taxes by imposing an immediate exit tax on both the U.S. and foreign assets of individuals who relinquish their citizenship or who give up their green cards. How wealthy? The exit tax applies if you meet on of these three criteria: (1) for the period of five taxable years ending before the year of expatriation the individual has an average annual income tax liability of at least $145,000, (2) a net worth at the date of expatriation of at least $2 million, or (3) the individual would have failed to satisfy all applicable U.S. tax obligations for the five tax years before the year of expatriation.

Before you decide to take flight, there are things to consider. What about your health insurance? Medicare only pays in the U.S. - will your supplemental coverage cover you in the country where you are relocating? Will you be able to get the immigration status you need in the new country Will your retirement income support the lifestyle you want in the new country? What are the estate tax considerations?

Likewise, taxing authorities should consider the ability of geese who lay golden eggs to assume ever-increasing tax burdens.