Stopping the Biological (Tax) Clock: ART & Generational Tax Assignments

Medical innovation in Assisted Reproductive Technology (ART) has rapidly outpaced the statutory Estate and Tax guidance that governs the inheritance rights of children conceived by such technology. The use of cryopreserved reproductive material and embryos poses a significant challenge for estate planning: how must we draft and administer multi-generational trusts to protect the wealth of families created by such technology?

            According to the 1992 Fertility Clinic Success Rate and Certification Act, ART is defined as fertility treatments in which both eggs and embryos are handled, specifically, medical procedures that surgically remove eggs from a woman’s ovaries, combine them with sperm, and return them to a woman’s uterus. The most common types of ART include in vitro fertilization-embryo transfer (IVF-ET), gamete intrafallopian transfer (GIFT), zygote intrafallopian transfer (ZIFT), and frozen embryo transfer (FET).

            The advancement of reproductive technology has enabled reproductive material to remain viable decades later. In fact, embryos can be preserved and used to conceive a child years after both of the genetic parents are deceased. While this may seem like an exceedingly rare circumstance, as of 2011, “the Social Security Administration reported receiving more than 100 applications for Social Security survivor benefits on behalf of posthumously conceived children.” It is unsurprising that this type of medical innovation has prompted innumerable estate planning questions to which applicable statutory guidance is yet to exist. Thus, courts are tasked with interpreting the wills and trusts of decedents who would have likely considered ART to be the subject of science fiction at the time of executing their wills or trusts.

            A core task of estate planning is to create documents that secure the future transfers of a family’s wealth, while protecting the inheritance from unfriendly or uncertain tax environments. An estate planning tool that seeks to accomplish such a task is called a multi-generational trust, which allows a grandparent to transfer money or property to his or her grandchild without transferring it to the grandchild’s parent first, thus skipping a generation of estate tax liability. However, such transfers will incur an astronomical generation-skipping tax (GST) rate of 40% on the value of the transferred money or property that exceeds the $11.8 million exemption, per the Tax Cuts and Jobs Act (TCJA) of 2018. Put simply, an individual’s generational assignment has remarkable tax implications.

            The collision between traditional estate law notions and current tax code begets the question: what is the generational assignment for children born posthumously by ART? The Internal Revenue Code offers rudimentary guidance:

  • 26 U.S. Code § 2651(f)(2) provides that if an estate or trust has an interest in property, each individual having a beneficial interest in such entity shall be assigned to a generation.
  • § 2651(f)(1) provides that when an individual is assigned to more than one generation, he or she is assigned to the youngest such generation.
  • § 2651(d)(2) states that the GST applies to gifts or transfers made to individuals at least 37.5 years younger than the donor, meaning that the individual need not be a lineal descendant.
  • § 2651(e) creates an exception for persons with a deceased parent, stating that if an individual’s parent who is a lineal descendant of the donor is dead at the time of the transfer, such individual shall be treated as if she was a member of the generation which is 1 generation below the lower of the transferor’s generation (i.e., a grandchild).

            Consider a parent who seeks to use the cryopreserved eggs, sperm or embryos of a deceased child to give life to his or her own grandchildren. To what generation does that conceived child belong? Would the child be the child of the parent or would the child be the grandchild? Would the predeceased parent exception apply? Would § 2651(f)(1) treat such a child as a grandchild? If the reproductive material was preserved for enough time, perhaps the 37.5-year threshold would trigger a generational shift regardless.

             The staggering legal uncertainty surrounding ART signals courts and legislatures to adopt reliable methods of administering the inheritance rights of children conceived by evolving technology. Without sophisticated models, fiduciaries are left stretching age-old principles of estate law to fit the needs of unimaginable and ever-changing family structures.