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Karameikan Succession Lawby Giampaolo Agosta
It is quite clear IMO that adoption is a valid way to setup inheritance outside the blood relations. Kaerin Penhaligon (adopted son of Kavorquian Penhaligon) is an example -- although he is not titled, Desmond Kelvin would hardly let him woo his sister Alerena if he wasn't a convenient political ally (Arteris Penhaligon is not married and unlikely to have children, Kaerin as her first cousin is the first in line of inheritance).
There is also a Dungeon magazine adventure, Ransom, featuring a noble family north of Threshold with an interesting story: Sir Reynald is the Lord (actually a Landed Knight, given his title), but he got there by marrying Lady Belesa, the wife of the former lord. Their first son, Baldwin, was born exactly nine months after the death of the previous lord, and the marriage took place only days after the event. Reynald has some doubts about Baldwin's paternity, and plans to make one of his younger sons his heir.
Thus, back to your question, IMO:
1) Blood ties are not needed, but legal ties are. You can basically make anyone your heir by adopting him/her.
2) Dominion rulers are co-rulers as equals. This is quite specific in the Gazetteer, and it is stated multiple times.
3) The heir becomes the new ruler only when both parents die or step down. The key point is "or step down". While theoretically the two rulers are equal, it is clear that practice is quite different: not surprisingly, Lady Belesa was basically forced to marry Sir Reynald after the death of her first husband. A baroness or landed lady widow who is not also a high level character would have a hard time holding to a fief in the borderlands, and would likely step down in favor of a suitable heir (if old) or remarry with some combat-proven but landless knight (like Sir Reynald). The same would happen to Olivia -- while she is theoretically equal in power to the Duke, when he dies she would be in a difficult position, since most nobles expect her to step down to allow a younger and more capable heir to take the power.
4) As far as I know, Magda has nominated no heir. She has no surviving relatives from the Marilenev family, but she might have some from her own family , which is not detailed in canon (this is somewhat unlikely, had she had some close relatives, they would be present to some extent, if not for anything else at least to attempt to become heirs!). If this is not the case, then the nearest known relative is indeed Alexander Torenescu, whose grandfather George was the paternal uncle of Magda's mother-in-law... as you can see, that's quite a flimsy relation: Alexander is second cousin-in-law of Magda. That makes him a 6th degree relative-in-law. In RW, Roman law (and some descendant law systems, f.i. Italian law) make 6th degree the maximum allowed for inheritance. Assuming Karameikos uses the same definition (it is never specified in canon AFAIK, but it seems reasonable since Thyatis is modeled on Byzantium), then Alexander Torenescu would be a viable heir (or Boris, if he manages to kill Alexander and get away with it).
BTW, if we consider known successions, we have the following:
- Sir Reynald, mentioned above
- Desmond Kelvin II: IIRC, Desmond Kelvin I was killed in a duel by the former ambassador of Ylaruam, Mustapha ibn Ibrahim (perhaps not surprisingly, since Mustapha is 15th level Fighter), who was then expelled or recalled, and later posted to Kirkuk. This event is mentioned in Gaz 2, although Desmond's name is not mentioned, he's the only Baron to have been replaced to date, so it's obvious Desmond's mother survived him and likely had to step down for her affair with the Alasiyan ambassador.
- Arteris Penhaligon: she succeeded her father; IIRC, her mother had died earlier on. I'm not terribly sure, though. Maybe the Penhaligon trilogy has more information.
- Baron Vorloi is likely to skip his son, Grigori (he's an idiot) in favor of his daughter.
- Baron von Hendricks has no named heir. His nearest relative should be Donna von Hendricks (sister), assuming she's alive, otherwise her daughter Anna von Hendricks. However, she's a cleric of the Heldannic Order, which is not an accepted religion in Karameikos. This might lead her to be skipped in favor of the next in line, that is Lord Korrigan. Indeed, after the Black Eagle is removed, Milo Korrigan is named castellan of Fort Doom -- which might at some point turn him into the fief's baron.
- Baron Sherlane Halaran has no direct descendants, but Aleena is his nephew, so she's the obvious heir.
- The Dukes: when Stefan dies (as a King, at that point), Olivia may step down, although she could in theory retain her power as the Queen, and rules until a later time. She's more likely to step down, though, to continue managing things from behind the scenes. It is well known that there was a power struggle between the two on the decision on the heir -- Adriana is announced as heir in 1008, when she has already a son, so the struggle, which was already going on in 1000 AC, went on for 8 years.