Celebrity author Tom Clancy was widely known for his bestselling novels, which include popular titles such as "Patriot Games," "The Hunt for Red October," and "Clear and Present Danger." Unfortunately, his skills in crafting and meticulously planning espionage tales did not transfer over when it came to planning his Estate. When Clancy passed away in 2013, his estate was left in a bit of a mess. This "mess" led to a family fight which quickly crept its way in to the public eye.
So just exactly where did Tom Clancy go wrong? Well, let's start with a bit of background. At his death, Clancy was married to Alexandra Clancy, with whom he had one daughter, a minor. He had 4 children from a previous marriage, as well as several grandchildren. His widow, his four children, and his grandchildren, were all named as beneficiaries to his estate, which is valued at approximately $83 million dollars. This does not include other investments or funds shared with his wife Alexandra, which would pass immediately to her and not be available for the public to see (that means you and me). Alexandra was left 2/3 of his estate, and 1/3 was to be split among his four children and grandchildren. $65 million of this was his share of ownership in the Baltimore Orioles, while the rest consists of several properties (one a 17,000 square foot penthouse at the Ritz Carlton in Baltimore!), 26 guns and rifles, and a WWII tank, among other items of value.
According to WSJ's article on the Clancy estate, Clancy's will specified that the family members shares be split between a family trust, a marital trust, and the children's trust(s). Now, first things first. You and I should not be privy to Tom Clancy's personal financial details (but it is awfully fun). After all, would you want the Wall Street Journal to publish articles that aired your family's dirty laundry? Well, the truth of the matter is that Mr. Clancy, with the help of a good estate planning lawyer, could have avoided this media fair. He only needed to fund the trusts he created for his family. What does it mean to fund a trust, you might ask. Well, any good estate plan will contain at least one trust. The trust is a legal entity which is created to hold assets, and sometimes shelter them from taxes. Tom did an excellent job of creating his trusts, but he (or his lawyer) failed to actually put $83 million is assets into these trusts. Instead, his will specified that his assets be split among the trusts. This means that the assets have to go through probate, which in turn means the documents become available to the public. And while no one may hunt down your court documents to be published in a newspaper, a trust done correctly leads to less administrative costs, legal fees, annoyance, and delay after someone dies. Setting his family up for a legal headache visible to the public was mistake number 1.
Mistake number 2 relates to ambiguity in the will over who will pay the estate taxes - his widow or his four children. Let us say for the record that this a problem of only the very wealthy. Estate taxes only apply to individuals who have over $5.34 million dollars at their death. This means a couple can jointly hold close to $11 million dollars and still be exempt from estate taxes. Clancy's $65 million dollar share in the Baltimore Orioles alone puts him well above the exemption limit. So, now to the mistake. Shortly before he died, Clancy made an amendment to his will, with his lawyer and executor of his Estate. Wealth Management Magazine reported last year that when Alexandra's tax bill came due, she claimed that this amendment clearly stated that she would not be responsible for any of the tax burden, and it should all be paid by the children. This would save her from owing about $7.5 million dollars. The very lawyer and estate executor who had amended Clancy's will stated that Alexandra was incorrect and this was not Mr. Clancy's intention. So, Alexandra quickly petitioned to have him removed as executor.
So the big question became whether or not 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, as a well drafted will or trust would clearly make these distinction. However, despite arguments from the very lawyer who drafted the amendment to Clancy's will, a Baltimore judge ruled yesterday that "the clearest and the predominant evidence" of Clancy's intent did not wish for Alexandra's family trust to shoulder the tax burden. Those familiar with the case believe an appeal by the children is imminent.
It also appears Tom made a third mistake in not taking full advantage of what I call specialty trusts. When there is significant money at stake, estate planning gets very creative to avoid taxes. QTIP trusts, generation skipping trusts, and GRATs are just three examples of such specialty trusts. A GRAT (grantor retained annuity trust) is one of the most interesting. Essentially, the GRAT allows money to be invested with any gains to go to heirs tax free. While a bit more complicated than that, the Center on Public Policy estimates that this specialty trust has allowed estates to avoid nearly $100 billion in taxes since 2000. The Center on Public Policy also states that while the estate tax rate is between 35-40%, the average effective rate in 2013 was just 16.6%. No doubt this was in large part due to creative estate planning that Mr. Clancy could have taken advantage of with the right lawyer.
While Tom Clancy's estate planning errors may be on a much larger scale that most, his story is not unusual. Improper estate planning is extremely common and can lead to serious rifts between families. If you have questions about your estate plan, or need help with a Trust Administration or Probate, feel free to call our Law office in downtown Walnut Creek at 925-322-1763. I offer free consultation and will be happy to speak with you.