Death, Taxes, and 9/11

I have been a co-trustee of some trusts that were created by two very successful real estate businessmen.  They were both attorneys, admitted to the New York State bar before I was born.  They made their fortunes as partners in real estate, originally buying slum properties in Troy, New York, but later, years before I became their general counsel, they shed that part of their business and invested in multifamily apartment projects, originally in the capital district of New York, but eventually acquiring properties in several states.  When they started their business, there were certain tax and liability advantages to put the title to the properties in small “C” corporations, which eventually numbered more than fifty.  As a result of tax law changes, and because it became difficult to manage the number of corporations, I consolidated the corporations into two holding companies.

As property values increased, the partners were able to refinance the properties multiple times.  Each time they refinanced, they were able to pay off the existing mortgages and retain very substantial funds.  Refinance proceeds are not taxable, so these corporations grew in value as the refinance proceeds enabled them to expand their holdings, and continually increase the value of the holding companies.  But there was a downside to the plan:  Upon the death of the partners, there were no family members who could continue the operations of the holding companies, which were owned by the partners’ trusts.  Selling the properties, either individually or in bulk created a huge financial problem.  The proceeds of such a sale would first be used to pay off existing mortgages, but there was a huge capital gains tax bill that would come into effect when the properties were sold, since the refinance proceeds that were retained at the time of refinancing tax-free lowered the “cost basis” of the properties, and the gain, and thus the tax, was more than could be realized by the sale. 

Fortunately, our New York City counsel came up with a solution.  They knew of a wealthy businessman, a CPA, who had figured out a method of avoiding the capital gains tax on a sale and purchased the holding companies from the trusts for a sum which netted the trusts' cash in the mid-eight-figures.  Suddenly, the trusts were flush with cash to invest for the benefit of the partners’ families, the ultimate beneficiaries. 

Trustees must be prudent in making the investment of trust funds.  This normally involves dividing funds between fixed-income investments (bonds or bond funds) and equities (stocks or managed stock funds).  It is also prudent to spread the investments among various brokers to get the benefit of a variety of investment options and advisory opinions.

One of the brokers with whom the partners and the trusts had previously used in Albany suggested that we go to the New York City office to speak with the company’s team of investment specialists.  That office was located in the World Trade Center.  We arranged for a morning meeting on September 11, 2001, a date that the man who had purchased the holding companies was going to host a celebratory dinner for us. 

September 11 was a Tuesday.  My original plan was to take the 7:00 a.m. Amtrak from Rensselaer to Manhattan, meet up with the other trustees and the broker’s Albany representative and go together to the Trade Center for the mid-morning meeting.  However, after the arrangements had been made, I remembered that September 11 was Primary Day in New York State, and I wanted to vote in the primary election because of its potential effect on the forthcoming local election.  According, I contacted the other parties and pushed the meeting back to early afternoon so that I could take a later train to New York City.

After returning from voting in the primary election, I returned home to gather my materials for the meeting.  As I was preparing to leave our home, my wife called me to look at the television, which was reporting the first airplane that hit the north tower of the World Trade Center.  At that time, it was thought to have been an accident that would have an effect on a few floors of one of the tower buildings.  I did not immediately believe that it would necessarily cause my meeting, in Building 7 of the World Trade Center, to be affected, and I still planned to go to New York City, if only for the planned dinner party. 

Then the second airplane hit the south tower, and I realized that the meeting or the dinner would never be held, and like millions of others around the world, I spent the next hours and days watching the horrible destruction the terrorists had brought as they struck the Pentagon in Washington, and the airplane brought down by passengers in Pennsylvania to prevent it's hitting an intended target in Washington, D.C.