The Hunt for Tax Apportionment: Lessons from Tom Clancy’s Estate Litigation

Edwin Morrow 

The Hunt for Red October was Tom Clancy’s debut novel in 1984.  It was a fun, exciting novel written in the Reagan, pre-Glasnost era about a rogue Soviet (remember the Soviet Union?) submarine captain, later turned into a movie with Sean Connery in the lead role. It spawned a very successful career for Mr. Clancy, such that when he recently died in 2013, he was a wealthy man – even owning part of the Baltimore Orioles.  And where there is wealth transfer, there is often tax and litigation with millions of dollars at stake, which turns us to the case decided this week by Maryland’s highest court and the somewhat less riveting Hunt for Tax Apportionment, and important lessons on the intersection of state law of wills and its impact on the federal estate tax.

http://www.mdcourts.gov/opinions/coa/2016/93a15.pdf 

Like many today, Clancy had a blended family – four children from a first marriage, and a second wife and minor child of that marriage. His will left personal and real property to his wife and the remainder of his estate created three residuary trusts: a Marital Trust for the benefit of his wife representing one third of the residuary; a Family Trust for the benefit of his wife and their minor child called a “Non-Exempt Family Residuary Trust” equal to one half of the residue that remained after the creation of the Marital Trust; and the final half of the residue for two Older Children’s trusts.  No one contested the will itself or this division, the case concerned who paid the estate tax.  Notably, a codicil later amended the “Non-Exempt Family Residuary Trust” to be QTIPable as well – that is, all net income to be paid annually, with the power to make non-income producing property productive, and removing the power to distribute to their then minor child.

The Will had a seemingly clear tax apportionment clause: “All estate, inheritance, legacy, succession and transfer taxes . . . shall be paid by my Personal Representative out of my residuary estate, subject, however, to the provisions hereinafter contained in Item SIXTH hereof with respect to the Marital Share therein”.

So, it was clear that the Marital Share did not pay estate tax, but the central question was – what about the Family Share that was later made QTIPable similar to the Marital Share, and could a general savings clause instruction to maximize the marital deduction override or inform interpretation of the tax apportionment to the residuary that seemed to include the Family Share?

It was extremely sloppy drafting – and an excellent lesson in why attorneys should execute a new will or trust restatement in most cases rather than patch over complicated provisions with a codicil or amendment.  Ultimately, the court concluded, rightly in my opinion, that Mr. Clancy’s probable intent when clearly amending the Family trust and adding the savings clause that referenced the Family Trust was to qualify it for the maximum marital deduction, thus to have it treated similar to the Marital Trust for the tax provisions of the will, because otherwise the marital deduction would have been reduced in a circular calculation, causing additional estate tax. Strangely, there was no discussion or confirmation in the case that the executor actually DID make the QTIP election over both trusts.  Although the QTIP election was likely made in this case, one can imagine situations in which an executor, particularly a surviving spouse, may botch or miss the election, or even fail to make the QTIP election on purpose to saddle the rest of the family with more estate tax so that the surviving spouse’s “QTIPable” share can later pass tax-free.

However, this was no clear, slam dunk case at all.  There were three dissenting judges who also had excellent arguments and equal precedents to cite – minimizing taxes is not always, perhaps not usually, the primary goal of estate planning to the exclusion of being fair and equitable in blended a blended family. To use a general tax savings clause to override a clearer direction in the Will is troublesome.

Did any financial or estate planner ever explain to Mr. Clancy a simple estimate of where his net estate would go or who would pay the tax?  If so, there is nothing in the court record, but it’s incompetent not to have done so, especially after the major revisions were done in the codicil. The effect of the court’s decision is to effectively shift millions to the widow at the expense of the older children from the first marriage. Who knows what Mr. Clancy really wanted?

Ed Morrow