The first round of the battle over author Tom Clancy’s estate has been won by his widow, Alexandra Clancy. The estate, worth $86 million, derives most of its value from a 12% stake in the Baltimore Orioles, and the first dispute has arisen over who should pay the tax. The tax bill in question isn’t small – almost $12 million.
When Tom died in 2013, he left his wife two-thirds of his assets and the remaining one-third he left to his children from a previous marriage in a family trust. Alexandra, who also has a minor daughter with Tom received $57.5 million, consisting of a separate family trust and a marital trust. When the tax bill first came due, Alexandra initiated a suit claiming that Tom modified his will just before his death to ensure that her inheritance fell completely under the marital deduction and, as such, completely escapes taxation.
The children disagreed and maintained that the tax bill should be split evenly between the two respective family trusts (that Alexandra’s marital trust passed tax free was never at issue). This arrangement would have actually raised the amount due to $15.7 million, but it would have resulted in a more equal distribution of the bill, with each side being on the hook for $7.85 million.
Baltimore Judge Lewyn Scott Garrett ruled in favor of Alexandra Clancy in deeming that no taxes should be due on the two-thirds share of Tom’s estate that she inherited. Instead, Tom’s four adult children from a previous marriage will be required to foot the estimated $11.8 million tax bill from the $28.5 million family trust they inherited from their father.
Disagreements about the will between children from a previous marriage and the current spouse of the deceased are extremely common. It becomes even more difficult when the deceased’s wishes are unclear or seem unfair.
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In Queensland, we don’t have to pay inheritance tax. But we do have to pay tax on any income generated by the assets we’ve inherited, and this is why obtaining specialist legal advice is so important. An estate can be set up in such a way that tax is minimised and there will be fewer disputes.
A Case Study in Reducing Tax
John and Judy establish a discretionary testamentary trust which comes into effect upon their deaths. They have a son, Peter, who will be the trustee of the trust. Beneficiaries of the trust include Peter, his wife Sarah, and their children, aged 5 and 8.
The assets in the trust total $1 million. When invested, they return a yearly income of 5%, or $50,000.
If the trust did not exist, and Peter inherited the assets at the same investment return, he would receive the income in his own name. Peter is in the top tax rate of 49% (including the Medicare levy) and would therefore be taxed $24,500.
Now consider what would happen if the $50,000 worth of income was generated through the testamentary discretionary trust. Peter would be able to distribute income to the beneficiaries – his wife and children. He could distribute the maximum tax-free threshold plus rebate to each of his children at about $21,000 each per year. The remainder of the investment income could be distributed to his wife, Sarah, who is in a lower tax bracket. She would pay 30% of $8,000. Her tax bill would be $2,400.