Anyone who knows who CIA analyst Jack Ryan is likely appreciates the work of late author Tom Clancy. Called the "father of the techno-thriller," Clancy's career took off with his first novel, "The Hunt for Red October." His career -- spawning movies such as "Patriot Games" and "Clear and Present Danger" -- led to more than 100 million copies of his novels in print, with 17 books hitting the top spot on the New York Times best-seller list.
Tom Clancy passed away on October 1, 2013 from heart failure, at age 66. He was survived by his widow, Alexandra Clancy, and their young daughter, as well as four adult children from his first marriage. The Tom Clancy estate has been valued, based on probate court filings, at $82 million. It includes a $65 million ownership stake in the Baltimore Orioles, a rare, working World War II tank, a $7 million mansion overlooking the Chesapeake Bay, and more than $10 million in business interests based on his works.
Mr. Clancy left his mansion and another property to Alexandra Clancy, along with a Ritz-Carlton condo owned jointly by the married couple -- plus any other joint bank or investment accounts (which do not pass through probate and would not be public record).
The famed author wanted the rest of his estate divided between a series of trusts he created. His will specifies that one-third go to a trust for his wife, another one-third to a family trust (benefiting his wife and all of his children), and a final set of trusts for the four adult children from his first marriage, as well as grandchildren.
He also left a portion of the residue of his estate (it's unclear how much) to the Hopkins's Wilmer Eye Institute, which was founded based on a $2 million donation Mr. Clancy made in 2005, and where Clancy was treated for an eye disease.
Seems like he had his estate well planned, right? Unfortunately, his estate planning was not as thorough or well-thought-out as his meticulously detailed novels.
Recently, Alexandra filed a petition in probate court asking for the lawyer serving as executor (or technically, personal representative as it is called in Maryland and some other states) to be removed. This attorney was the same one who drafted an amendment to Mr. Clancy's will in 2013.
This amendment reportedly set forth Tom Clancy's wishes that no assets should be included in Alexandra Clancy's trusts that would require her to pay estate taxes. Assets that transfer between spouses are estate tax free. However, when the second spouse dies, those assets are subject to an estate tax based on the value of the assets in excess of the current exemption level ($5.25 million for Clancy) plus whatever the exemption level happens to be when Mr. Clancy's widow passes.
SO WHERE'S THE PROBLEM?
The lawyer serving as executor has taken the position that the estate taxes should be paid from the marital trust and the children's trusts, equally. Ms. Clancy's legal team says this will subject her to paying an $8 million tax bill (the total bill is around $16 million) that Clancy did not intend her to have to pay, based on the amendment. Because the lawyer who drafted that amendment is not following Mr. Clancy's intention, Ms. Clancy is asking for him to be replaced.
The rest of the family has not yet filed a response to the petition in court, but it is likely they will (based on statements their attorney made to the media). They will want the executor to remain in place and for the estate taxes to be shared -- otherwise the children's trusts will have to pay the entire $16 million tax bill.
Is that what Tom Clancy would have wanted? Or would he have wanted to spread the tax burden around, considering his wife already inherits a one-third interest, free of estate taxes, plus substantial real estate?
The family trust, if it is a typical one, would require interest to be paid to the wife (with principal as needed for maintenance and sometimes with yearly withdrawal rights capped at a set percentage or amount), with the principal of the assets remaining for the children. That means if that trust pays part of the estate taxes, Alexandra herself would not have to pay them, but it would reduce the trust assets available to generate income or as-needed principal to her each year.
So the big question will be whether the 2013 amendment was intended for the children's trusts to carry all of the tax burden or not. With better estate planning, this $8 million question of intent would not need to be litigated.
SETTLE THE QUESTIONS BEFOREHAND
Because Mr. Clancy's various trusts were not funded during his life, it is up to his estate executors to decide how to fund the trusts, which affects how the trusts will be taxed. If he had funded them himself, then he could have decided how the trusts would have carried the taxes. Instead, he used a codicil to his will which was ambiguous, because it led to his executor (the lawyer who drafted it) reading it one way and his widow and her lawyers reading it another way
It is much better practice for anyone with a trust -- especially someone with assets even a fraction of the value of Tom Clancy's -- to fund the trusts during lifetime. Trusts do not work until assets are transferred into them (called funding). This can -- and usually should -- be done during lifetime, so that the entire probate process can be avoided. When done correctly, it leads to less in legal fees, administrative expense, delays and aggravation that go hand-in-hand with probate court after someone dies.
And properly funding trusts during lifetime also helps minimize family fights like this one. If Mr. Clancy had funded his trusts, then the 2013 amendment to the will would not have been necessary, and the trust language and/or estate tax law would determine how the taxes were paid (i.e., by someone other than the spouse). The confusion here centers around how to fund the trusts in a way to minimize estate taxes to the spouse, but still follow Mr. Clancy's intent.
Why leave it up to probate court to sort out, and for lawyers to argue over his true intent? If Mr. Clancy had completed the estate planning by properly funding his trusts, and planning out how the estate taxes would be paid, this fight and confusion would not be necessary at all. Plus, this would have kept Mr. Clancy's affairs and assets private. Probate records are open for the public to see, but trusts (when used properly) are not.
This is a basic but important rule for everyone with a trust to follow. Just having a trust (or multiple trusts) is not enough! Trusts should be properly funded during lifetime, with the help of an experienced estate planning attorney or financial planner.
If Tom Clancy had the same type of expert advice that CIA analyst Jack Ryan provides in Mr. Clancy's various novels and movies, then Clancy's entire family would have been better protected.
Danielle and Andy Mayoras are co-authors of "Trial & Heirs: Famous Fortune Fights!" and attorneys with "Barron Rosenberg Mayoras & Mayoras, PC". You can reach them at [email protected].