Tax Apportionment Controversies Continue to Fuel Litigation
by C. Jean Stewart
Last month Maryland’s highest appellate court released[1] a narrowly-divided (4-to-3) opinion in a tax apportionment case involving the estate of celebrity novelist Tom Clancy (The Hunt For Red October, Patriot Games, Clear and Present Danger, and other popular espionage novels), who died on October 1, 2013. This case once again confirms that (1) blended families, combined with (2) tax apportionment disputes and (3) ambiguity and inconsistency in estate planning documents, inevitably fuel expensive and protracted probate litigation.
In his will, Clancy gave his tangible personal property and two of his residences outright to his second wife, who survived him, and directed his Personal Representative to divide his residuary estate into three equal parts. One part, designated as the “Marital Share,” was to be (a) comprised entirely of assets qualifying for the federal estate tax marital deduction, (b) held solely for the benefit of his widow, and (c) exonerated from all tax liabilities to qualify entirely for the marital deduction.
The will, executed in 2007, provided that taxes were to be paid from the Residuary Estate. After paying the specific gifts to the spouse and funding the Marital Share, the residuary estate was allocated one-half to a Family Trust benefitting his surviving spouse and the minor child from that marriage and one-half to trusts for the benefit of the adult children from his prior marriage.
A Second Codicil, executed in 2013 shortly before Clancy’s death, included several provisions apparently intended to allow the Family Trust to qualify as a Qualified Terminable Interest Property (QTIP) Trust, along with an “interpretive aid savings clause” prohibiting his personal representative or trustee from exercising any authority, power or discretion in any way that would “prevent my estate from receiving the benefit of the marital deduction.”
The litigation centered on whether the substantial federal estate taxes on Clancy’s estate were to be paid from the Residuary Estate before the Family (QTIP) Trust and the adult children’s trusts were funded or paid entirely from the adult children’s trusts, thus exonerating the QTIP share from taxes. The Orphans’ Court and the Maryland Court of Appeals supported the latter interpretation. The resulting outcome produces a significant imbalance between the Family Trust share and the adult children’s trust share.
In spite of testimony from the estate’s appointed Personal Representative that Clancy intended the tax burden to be paid from the residuary estate before the division into the several trust shares, and in spite of a strongly reasoned dissent expressing the minority’s view that the will and codicil could be read harmoniously without creating an imbalance between the Family Trust and the adult children’s trusts, the Maryland Court of Appeals narrowly affirmed the Orphans’ Court’s decision, finding that decisions of other courts in similar circumstances and Rev. Rul. 75-440 resolved the ambiguity in favor of the interpretive aid savings clause and exonerated the QTIP Trust from any tax burden.
This case reminds us that sensitivity to tax apportionment language must be the highest priority in drafting estate planning documents, particularly where blended families present the real possibility of post-death litigation over perceived inequities. Courts can ultimately end these disputes by exhausting all judicial remedies but the scars of family discord likely remain.
[1] A preliminary version of the opinion appears at 2016 WL 4471323