Tom Clancy at Burns Library, Boston College. Taken by Gary Wayne Gilbert.
Originally published on Forbes.com.
Before his death in 2013, Tom Clancy wrote some of the most exciting novels I have ever read. My personal favorite is Red Storm Rising. Alas, being a tax blogger and all, I only get to write about the litigation around his estate. There was a decision this week in the case of Michelle Bandy et al v Alexandra Clancy. It concerns, don’t get too excited, the estate tax marital deduction and, stay calm, iterative computations. Or you can look at it as a fight between a widow and the children from the first marriage which probably makes it sound more interesting.
The Iterative Computation
I often remark that you learn all the math you need for tax work by the fourth grade. The math issue in this case is one of the rare exceptions. If a share of an estate is exempt from estate taxes because it is going to benefit a surviving spouse, as in this case, or a charity and you use some of that share to pay the estate taxes, then that much does not qualify for the exemption.
So now you have a higher estate tax and if you pay some of that additional tax from the exempt share, you have an even higher tax and so on. A real accounting Einstein could solve the problem with algebra , but you can also grind it out by doing the computation over and over till it does not change. Thanks to Goal Seek in Excel, it is really not that hard, but still, I would want at least an eighth-grader handling it.
The Dispute
Tom Clancy’s will left real and personal property to Mrs. Clancy (That may mean that she got the honest to goodness tank that he owned) with the residue divided into trusts. One third went to a marital trust and the remainder after that was split between a family trust benefiting Mrs. Clancy and her child and Older Children’s Trusts to benefit Clancy’s four children from his first marriage.
Somebody had a brainstorm and drafted a codicil to the will to tweak the first family trust for Mrs. Clancy and the minor child so it would also qualify for the marital deduction (Basically the income has to go to Mrs. Clancy for her life and the trustee has to be able to invade principal if the marital trust is blown through). There are no numbers in the appellate decision issued this week. According to Scott Calvert’s Wall Street Journal story on the original decision last year, the older children’s trusts gross $28.5 million will be hit with $11.8 million in tax. The alternative would be to divide a higher tax of $15.7 million (remember the iterative computation) between the family trust and the older children’s trusts.
Given that the estate is in the highest bracket, it seems likely that if the family trust did not qualify for the marital deduction, it would also have been hit with about $11.8 million and there would have not been anything to fight about. Although maybe they would have thought of something else.
QTIP Is Not Free
On top of everything else in the will, there is a “Savings Clause” that is meant to protect the marital deduction:
ITEM TWELVETH
D. Anything in this Will to the contrary notwithstanding, and whether or not any reference is made in any other provision of this Will to the limitations imposed by this Paragraph D, neither my personal representative nor my trustee shall have or exercise any authority, power, or discretion over the Marital Share, or the income thereof, or the property constituting the Marital Share, nor shall any payment or distribution by my personal representative or my trustee be limited or restricted by any provision of this Will that would in any way prevent my estate from receiving the benefit of the marital deduction as hereinbefore set forth
So what was more important to Tom Clancy? Equality between the family trust and the older children’s trusts or minimizing immediate estate taxes. It is worth remembering that qualifying the family trust for the marital deduction is not a free lunch. When Alexanadra Clancy dies, the value in that trust will be included in her estate. Of course, her being twenty-one years younger than Tom Clancy mitigates that concern somewhat.
The Decision
Like the lower court, the majority of the appellate court focused on the primacy of the “Savings Clause”:
The Second Codicil did not, however, specifically address, in any way, the Will provision that instructed that taxes were to be paid out of the residuary estate of which the Family Trust was a part.
To resolve the ambiguity and apparent conflict, we rely on the interpretive aide of the Savings Clause to elucidate Mr. Clancy’s intent. In so doing, we determine, as did the Orphans’ Court, that the Savings Clause contained in the Second Codicil which prevented the personal representative from exercising any “authority, power, or discretion” to disqualify any portion of the Family Trust from the marital deduction, such as the payment of federal estate taxes, “trumps” ITEM THIRD of the Will relating to payment of taxes from the residuary estate. We reach this conclusion for a number of reasons, the first of which is because of the decisions in similar circumstances by other courts, as well as the Internal Revenue Service’s decision in Revenue Ruling 75-440.
The majority noted that the non-free lunch aspect of qualifying the family trust for the marital deduction.
Moreover, were the Family Trust to bear the burden of federal estate taxes, at the time of Mr. Clancy’s death, the corpus of that trust would be subject to imposition of federal estate taxes twice, at the time of Mr. Clancy’s death as well as when Mrs. Clancy died. The establishment of the QTIP Trust in Mr. Clancy’s Will insures that the Younger Child will have to pay estate taxes when Mrs. Clancy dies. 26 U.S.C. § 2044. Certainly, as each party agrees, Mr. Clancy intended to minimize the impact of federal estate taxes in the entirety of his Will, an intent that would be eviscerated by double taxation.
Finally, the Older Children question having the burden of federal estate taxation being placed on them, to the benefit of Mrs. Clancy. Mr. Clancy, however, clearly intended, by the establishment of the QTIP Trust, to benefit Mrs. Clancy to the detriment of the Younger Child, whose remainder could be diminished by Mrs. Clancy’s invasion of corpus for need. As a result, all of Mr. Clancy’s children are burdened for the benefit of Mrs. Clancy and to avoid federal estate tax.
An exercise that in my mind would have been useful would have been to compute the estate tax hit that would have fallen on the older children’s trusts without the codicil to qualify the family trust. I think it is likely that it would have been what they are ending up getting hit with.
Dissent
Three of the judges did not agree with the majority opinion. I have to give them credit for the most clever part of the overall document.
The Majority opinion appears to be based on the premise that the preeminent value for any testator is the avoidance of taxes. Perhaps there are people like that. If so, one would expect them to have bought a Yu go years ago and scrupulously maintained it to minimize and thereafter avoid the automobile excise tax.
The Lesson
It seems like ]this issue should have been noticed when the codicil was bolted onto the original will. Another sentence or two would have given direction on how the estate tax savings should be allocated and avoided some costly litigation. Commenting on an earlier stage of the struggle, Mark Harbin of Greenbaum Doll wrote:
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.
Tom Clancy’s Real Legacy
Of course, Tom Clancy left something not just to his family, but to all of us in his body of work. To get a more real assessment of that I reached out to one of my high school classmates. S.W. O’Connell writes spy novels about the American Revolution, but in real life he had a career in the United States Army first in tanks in Germany ready to play a role in stopping the Red Storm that thankfully never rose and then in counter-intelligence. Scott indicates that Clancy despite having no active military service really got it:
Red October was excellent and really established its own genre of reality and emerging technology suspense stories. Cardinal of the Kremlin was also very good and in my “wheel house” as they say being an espionage and counterespionage thriller. He demonstrated very authentic trade craft and touched on the nexus between intelligence/counterintelligence and policy issues set around the controversial SDI. At the time was deep into that world myself running counter spy operations in Europe. I had also been the Army Europe officer in charge of CI support to our “special weapons” in Europe and traveled through Germany and the Benelux, Italy, Greece and Turkey in furtherance of that mission. Clancy really hit on something when he made his central character an analyst – as the the knee jerk and understandable go to hero is the “operator.” Ultimately, intelligence and counterintelligence are about good analysis driving things.