MARCH 19, 2001 VOLUME 8, NUMBER 38
Discussions about repeal of the federal estate tax often focus on the notion that farms and businesses are threatened by taxing assets at the death of the family patriarch or matriarch. Opponents of repeal, on the other hand, argue that it is family and business dynamics that usually causes sale of farms and businesses. Katherine Pillot Lee Barnhart’s estate lends support to both arguments.
When Ms. Barnhart died in 1975 her estate was worth $12 million. Almost all of that value was tied up in two family ranches and several pieces of undeveloped land in Houston.
Ms. Barnhart had named her son Ronald E. Lee as executor of her estate and as trustee of two trusts she established for the benefit of her children and grandchildren. Mr. Lee began to administer the estate and the trusts shortly after his mother’s death, although there were few assets to permit payment of estate debts.
The first debt facing Mr. Lee was the federal and state estate tax liability. The IRS wanted $2.8 million in taxes, plus another $475,000 in interest by the time the tax liability was finalized. The State of Texas wanted $800,000.
Unfortunately there was no cash available to pay the tax bill. When Mr. Lee received an unsolicited offer on a 61-acre parcel of land in Houston, he sold it for a total of $19.5 million. After paying the tax bill he made the first distribution to his sister. Five years after her mother’s death, Susan Lee received $15,784 from her mother’s $12 million estate.
In all it took 13 years and two separate demands before Susan Lee decided her brother was not going to provide an accounting for his administration of the estate. She sued to remove him as trustee in late 1988.
She learned that Mr. Lee had charged fees totaling $2,836,000 to manage the trust property. He had failed to list any of the real estate for sale, and had refused several unsolicited offers as inadequate. He had spent over $700,000 in a failed effort to develop one of the parcels. He had continued to operate the family ranches at a loss rather than arrange their sale.
A jury decided Mr. Lee should be removed as trustee and reimburse the trusts $2.2 million in excessive fees, plus another $2 million in attorney’s fees, interest and other costs for the decade-long legal fight. Despite the jury’s award the trial judge reduced the judgment to less than $700,000 after finding that most of the excessive fees permitted substantial estate tax deductions, so that the estate was actually injured by a much smaller amount.
The Court of Appeals reinstated the jury award. It also added $300,000 for Susan Lee’s appellate costs, and ordered that the $1.5 million she had received for attorneys’ fees at trial should come from Mr. Lee’s own pocket. Lee v. Lee, February 8, 2001.
Was the estate tax liability of $4 million responsible for the break-up of Ms. Barnhart’s $12 million estate, or was it family infighting, greed and manipulation? Critics of the taxation of estates can point to the likelihood that Ms. Barnhart's estate plan would likely have been more responsive to the family's needs if estate taxes had not been an issue. Opponents of repeal can point to the fact that Ms. Barnhart's estate was illiquid, and her chosen successor apparently unreliable, or at least unsuited to the task of managing the family's considerable wealth.