Who Pays the Estate Tax? Lessons From Tom Clancy’s Estate
When novelist Tom Clancy died in 2013, he left an estate valued at approximately $86 million. While he had significant wealth at the time of his death, like many other people, Clancy also left behind a “blended” family. Clancy had four children (hereafter the “older children”) with his first wife, Wanda, and was survived by his second wife, Alexandra, and their young daughter, Alexis.
Clancy’s will left a portion of his estate to separate trusts for each of his older children, with another portion being left to two trusts for Alexandra, a “marital trust” and a “family trust”. Given the size of his estate, it was inevitable that a substantial estate tax would be owed on account of Clancy’s assets. A significant estate planning issue was who would be responsible for the estate tax liability, and when would it be payable?
Had Clancy wished to defer as much of the estate tax as possible, he would have left his older children a total amount up to the federal estate tax exemption at the time of his death – which in 2013 would have been equal to over $5.2 million – with the balance being left to Alexandra. Under federal estate tax law, assets in any amount left to a surviving spouse – either outright or in what is known as a Qualified Terminable Interest Property (QTIP) trust – will pass to or for the benefit of the surviving spouse free of estate tax under a concept known as the “marital deduction”. The catch is that upon the surviving spouse’s death, all the assets inherited by the spouse, including any future growth on those assets, will be added to the spouse’s own assets for calculating the estate tax due.
In Clancy’s case, however, his original will specified that his older children were to receive one third of his total estate in trusts, with the other two thirds divided between the marital trust and the family trust for Alexandra. Under that scenario, the value of the older children’s trusts and the family trust would have been combined to determine the total estate tax liability, which would have resulted in an estimated total estate tax of $15.7 million.
Shortly before Clancy’s death, however, he executed a “codicil” (i.e., an amendment) to his will, in which he modified the family trust so that it would qualify for the unlimited marital deduction. The benefit of doing so was that, as reported in the Wall Street Journal, the total estate tax bill was reduced from the estimated $15.7 million noted above to $11.8 million. So, what could be bad about that? Well, from the older children’s perspective, the codicil effectively shifted the entire $11.8 million estate tax burden to their share of the inheritance. Had the original will not been amended, the resulting $15.7 million estate tax obligation would have been divided evenly between the older children’s share and the family trust for Alexandra, effectively saving the older children approximately $4 million in estate tax liability.
Ultimately, the Maryland Court of Appeals sided with Alexandra, and ruled that her husband’s clear intent was to maximize the amount left to her, thereby saddling the older children with the entire estate tax obligation.
The Clancy case points out the challenge in allocating both assets and the tax burden between different “factions” of a blended family. Further, this episode demonstrates how essential it is to provide clear and direct instructions as to what party (or parties) is to be burdened with the obligation to pay taxes from their inheritance. Lastly, this case shows the potential folly in relying upon codicils to wills when making changes to an estate plan. Such modifications often leave a trail of ambiguous and conflicting provisions between the original will and any subsequent codicils. A far better practice is for the attorney to simply prepare an entirely new will (or restate an existing trust, if that vehicle is used), so that all modifications are contained within a single instrument.