Can my client claim frozen embryos as dependents?

The Supreme Court of Alabama's February decision, which ruled that embryos stored in a medical facility for fertilization purposes had the same rights as "born" individuals, will have far-ranging consequences for prospective parents, medical providers, law enforcement — and for financial advisors and their clients. 

I won't seek to answer all the questions the ruling raises, but as an estate planning attorney and an academic with a concentration in estate planning and taxation law, I will call attention to myriad complex issues state legislators will need to consider if such rulings become more widespread across the nation and how they may affect individuals' financial and estate planning decisions.

While laws differ among the states, there is a common foundation in estate laws, family laws and tax laws that minor children hold certain rights and taxpayers with children are entitled to certain tax advantages compared to individuals without children. Because both the gestation period of an in utero embryo and the lifespan of a child can be roughly predicted, either medically or actuarially, the period of time over which their rights can be exercised can also be reasonably predicted. On the other hand, if an embryo is indefinitely frozen, uncertainty arises as to when and how the embryo's rights begin and terminate, adding major complications for financial planning purposes.

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When it comes to estate planning matters, it is common for testators or grantors to leave their assets to their "issue." This includes not only lineal descendants such as children, grandchildren and great-grandchildren, etc. born at the time of the decedent's death, but also descendants who may be born after the decedent's death — which means that all the possible beneficiaries will be identifiable within about nine months after the decedent's death.

However, if frozen embryos are found to have rights as the issue of a grantor or decedent, it may be impossible to identify all the possible beneficiaries of a decedent that will be born, raising questions as to how assets can be held or distributed for them. If the embryos are never born, for example will the assets be held in perpetuity?

If frozen embryos gain the same legal status as children, an individual representing frozen embryos — a custodian or guardian — could theoretically challenge a decedent's estate by claiming the embryos were inadvertently omitted from the testator's will or trust. 

The implications for estate planning are profound. Do individuals, including sperm donors, now need to plan for possible children, grandchildren and even great-grandchildren who could be born at some indefinite point in the future? Will a decedent's estate be exposed to generation-skipping transfer tax even if they don't have any children or grandchildren at the time of their death? 

Similar concerns arise over beneficiary designations. Does an embryo have the right to claim death benefits on a life insurance contract if other children or grandchildren in the family were named?

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Extending that line of reasoning, if frozen embryos are held to have the same legal status as born individuals, an embryo could potentially qualify as a dependent under income tax law. 

In Georgia this is no longer a hypothetical — it is already established law that taxpayers can claim an in utero fetus as a dependent on their state income tax returns starting at six weeks of gestation. 

This means that, theoretically, a perpetually frozen embryo could qualify as a dependent in perpetuity, qualifying the taxpayer to claim additional deductions and family tax credits — even for head of household filing status — even if no children are actually born. Could people actually be incentivized to create embryos just for the purpose of claiming tax credits and advantageous filing status?

Legislators will need to consider how to set boundaries around the rights of frozen embryos. Key questions include: do they have the same rights as others in a class of beneficiaries, how trust and estate assets can be allocated for them, how the assets will be managed, and how long the embryos' rights under estate laws can extend if they are never born.

From a family planning perspective, the perpetual nature of the frozen embryo's rights can also cause uncertainty. For example, parents are legally obligated to provide financial support for their children. 

Does this mean that a couple will be obligated to pay storage costs for the embryos forever? How will these storage costs be handled if the couple gets divorced or dies? If the couple decides not to pursue further fertility treatments, could the embryos be placed for adoption? If a couple moves from an "embryo rights" state to a state that does not recognize such rights, do the rights effectively disappear?

With more than 1.5 million frozen embryos existing in the U.S. today, according to Johns Hopkins Bloomberg School of Public Health, these and many more unanswered questions will create uncertainty for tax and estate planners in Alabama and throughout the country for some time to come as legislators work through these thorny issues.