A Baltimore judge recently ruled that Tom Clancy’s widow is not responsible for a multi-million dollar tax bill on the best-selling author’s $83 million estate. The case’s estate tax allocation litigation also highlights the critical importance of will drafting and not leaving room for more than one “plausible” interpretation; the Court’s decision hinged on the wording of an otherwise boilerplate provision in Mr. Clancy’s Second Codicil.
The Baltimore City Orphans’ Court ruled in favor of Alexandra Clancy, determining that no estate taxes should be due on the two-thirds share that she inherited of her late husband Tom Clancy’s Estate. For now, Tom’s four adult children from a previous marriage must pay an estimated $11.8 million in federal estate tax as the beneficiaries of a Family Trust funded with $28.5 million. Alexandra has won the first battle in what promises to be a protracted legal war over who must bear the burden of paying taxes on the novelist’s $83 million estate.
Tom Clancy was an American novelist best known for his complex, adrenaline-fueled espionage and military science storylines set during and after the Cold War. He was one of the world’s best-known authors - seventeen of his novels were bestsellers, and more than 100 million copies of his books are in print.
Mr. Clancy’s literary career began in 1982 when, as a thirty-five year old Maryland insurance agent, he started writing “The Hunt for Red October” on weeknights and weekends. In 1984 he sold his draft of “The Hunt for Red October” to the Naval Institute Press for $5,000. Mr. Clancy, who had wanted to sell 5,000 copies, wound up selling over 45,000 within the first six months of publication. And he was not finished: the book received praise from President Ronald Reagan, who called it “the best yarn,” and sales boosted to 300,000 hardcover and two million paperback, making it Mr. Clancy’s first of seventeen national bestsellers. “The Hunt for Red October” along with “Patriot Games” (1987), “Clear and Present Danger “(1989) and “The Sum of All Fears” (1991) were adapted by Hollywood and became commercially successful films starring Harrison Ford, Alec Baldwin and Ben Affleck as Mr. Clancy’s hero protagonist, Jack Ryan.
Mr. Clancy married Wanda Thomas King, a nursing student who became an eye surgeon, in 1969. They had four children together before separating and finalizing a divorce after 30 years of marriage in January 1999. On June 26, 1999, Mr. Clancy married freelance journalist Alexandra Marie Llewellyn. Mr. Clancy and Alexandra had a daughter, Alexis, and remained married until his death from heart disease in Baltimore on Oct. 2, 2013. He was 66 years old.
Mr. Clancy departed with a surviving spouse, four surviving children from a previous marriage, a surviving child from his current marriage, and an enormous Estate full of diverse assets. His Estate included a 535-acre farm on the Chesapeake Bay complete with a 24-room stone mansion, several other real estate holdings, a 12 percent ownership stake in the Baltimore Orioles and a rare WWII-era Sherman Tank, according to Maryland probate court filings. A partial estate inventory filed in January 2014 and a supplemental inventory filed in September 2014 estimated his Estate to be worth $83 million.
His Will and two Codicils were filed for probate in Baltimore, Maryland, on Oct. 10, 2013. Several of Mr. Clancy’s real estate holdings, along with other jointly held investments, were not part of his probate Estate and passed to his wife, Alexandra, through joint ownership with rights of survivorship. Mr. Clancy’s Will and Codicils directed that the remainder of his property be divided among three distinct trust “buckets”: (i) one-third in a marital trust (“Marital Trust”) for the benefit of his wife, (ii) one-third in a family trust (“Family Trust”) for the benefit of his wife and all of his five children, and (iii) the remaining balance in trusts (“Children’s Trusts”) for the benefit of his four adult children from his first marriage as well as his grandchildren. The contents of his second Codicil, signed three months before his death in 2013, would be crucial to later proceedings.
This plan might seem reasonable for a blended family, but it failed to clearly settle one critical issue: who will pay the substantial estate taxes due? When Mr. Clancy died in 2013, the federal estate tax exemption was $5.25 million and the Maryland estate tax exemption was a meager $1 million. With Mr. Clancy’s estimated $83 million Estate, the estate tax due on the assets that were allocated to the Family Trust and the Children’s Trusts totaled roughly $15.7 million.
The Personal Representative of the Estate (“Personal Representative”), an attorney, took the position that the Family Trust should pay $5.7 million of the tax due, and the Children’s Trusts should split the remaining $10 million of the tax due. The Personal Representative concluded that the Marital Trust should not pay any estate tax, since it was fully deductible for estate tax purposes, and thus did not generate any of the tax due.
This approach, however, was not palatable to Alexandra. Alexandra retained her own counsel and filed a Petition for Declaratory Judgment, Construction of Will, and Removal of Personal Representative in September of 2014. She alleged that the intent of the Second Codicil, executed in 2013, was to confirm that the Family Trust qualifies for the estate tax marital deduction, the same as the Marital Trust does, and should not pay any estate tax. The Children’s Trusts – the trusts for the lifetime benefit of Mr. Clancy’s four children from his first marriage – should be left to pay the entire $11.8 million estate tax due from the roughly $28.5 million that was allocated to the Children’s Trusts. Alexandra’s claim is made more interesting by the fact that the Personal Representative drafted all of Mr. Clancy’s estate planning documents, and he interpreted his own work differently than Alexandra and her attorneys have.
Naturally, Mr. Clancy’s four children from his first marriage disagreed with Alexandra. With the Personal Representative’s support, the children responded to Alexandra’s Petition with a Motion to Dismiss based on the argument that the $15.7 million tax due between the assets allocated to the Family Trust and Children’s Trusts should be split evenly between the Family Trust and the Children’s Trusts. Interestingly, the older children’s argument would have actually raised the total amount of estate tax due by roughly $4 million (from $11.8 million to $15.7 million) so that the children could avoid paying $4 million more themselves from their proposed split payment of $7.8 million.
It was never an issue that the Marital Trust qualified for the marital deduction and should be spared of all tax. Alexandra’s Petition argued that the Family Trust also qualified for the marital deduction and likewise should not pay any tax due. Alexandra maintained that the language in the Second Codicil is clear and unambiguous in its assertion that the Family Trust qualifies for the marital deduction.
The dispute regarding the estate tax liability of the Family Trust arises from the changes made by the Second Codicil in 2013 and its relationship with the tax clause found in Item Third (A) and Sixth of Mr. Clancy’s original Will, executed in 2007 (“Tax Clause”). Alexandra and the children disagreed whether the amendment to Item Twelfth (D) of the Second Codicil (“Savings Clause”) exempts the Family Trust from estate tax liability; this clause reads, in part, as follows:
D. No asset or proceeds of any asset shall be included in the Marital Share or the Non-Exempt Family Residuary Trust as to which a marital deduction would not be allowed if included.”
Both parties agree that under the Will executed in 2007, the Family Trust did not qualify for the marital deduction and that it was also liable for estate tax. Both parties also agree that the Second Codicil made the necessary changes to qualify the Family Trust for the marital deduction as Qualified Terminable Interest Property (QTIP), by satisfying the requirements under Section 2056(b)(7) of the Internal Revenue Code of 1986, as amended. The Personal Representative also confirmed that he had made the necessary QTIP election to qualify the Family Trust for the marital deduction on the estate tax return.
After eliminating the deficiencies that prevented the Family Trust from qualifying for the QTIP marital deduction, the Second Codicil incorporates the Savings Clause into the Family Trust – the effect of which was in dispute. Alexandra argued that the Savings Clause restricted the Personal Representative from requiring the Family Trust to contribute to the payment of estate taxes, and that qualifying for the marital deduction necessarily restricts the payment of estate taxes, since the payment of estate taxes would cause the Family Trust to lose a portion of the marital deduction.
In opposition, the Personal Representative and the children asserted that the Savings Clause only reflected an intent for the Family Trust to qualify for the marital deduction, but had no effect on eliminating the Family Trust’s liability for the payment of part of the estate taxes. The Personal Representative argued that the Tax Clause in the Will was controlling, and that the Savings Clause was only effective after the payment of estate taxes.
The Orphans Court of Baltimore City, Maryland, was left with the task of deciphering the plain meaning and intent of the Savings Clause, and its effect, if any, on the Tax Clause. In a 47-page Memorandum and Order, the Court held for Alexandra on the grounds that the language of the Savings Clause in the Second Codicil was effective in overcoming the direction of the Tax Clause in the original Will.
The Court reasoned that although the Tax Clause and division of trusts in the Will provided some evidence that Mr. Clancy intended the Family Trust to share in the estate tax liability with the Children’s Trusts, the express language of the Savings Clause in the Second Codicil was the clearest and most predominant evidence of Mr. Clancy’s intent that the Family Trust fully qualify for the marital deduction and be free from estate tax liability. The Court also found that the plain language of the Savings Clause, which prevents the Personal Representative from taking any action that would prevent the Family Trust from receiving the benefit of the marital deduction, necessarily includes restricting the payment of estate taxes. The Court concluded that the “overwhelming purpose” of the Second Codicil of 2013 is to qualify the Family Trust for the marital deduction and reduce the overall estate tax liability. Lastly, the Court found no cause for the removal of the Personal Representative, the drafting attorney.
The administration of Mr. Clancy’s Estate is far from over. The Personal Representative and the older children have already filed their timely appeals, and the battle over the allocation of the tax bill will continue. The Personal Representative will continue directing the Estate’s mired administration.
This case presents a compelling example of how quickly an estate plan can go awry when dealing with a blended family once the single link between otherwise disparate elements is removed – the late Mr. Clancy. It is hard to tell right from wrong when all parties are acting in self-interest. Attorneys and clients should retain the essential drafting lessons from this case that the testator’s intent must be expressed as clearly as possible; vague or arguably conflicting provisions can cause a clear and present danger to the estate! Also, the language of a provision as seemingly banal as a savings clause can have a profound impact. Choose your words wisely.