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Succession Planning:
How Real Estate Dynasties Pass the Torch
Anita Hamilton, CPA

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Anita Hamilton
CPA
Partner
HORNE LLP
26 Security Drive
Jackson, TN 38305
Main: 731.668.7070
Direct: 731.664.3706
anita.hamilton@horne-llp.com
Anita Hamilton, CPA
Anita is a tax partner in the Jackson, TN, office. She primarily provides services in federal and
state tax compliance for individuals, partnerships, corporations, estates and trusts, non-profit
entities and bankruptcy work. Anita works closely with clients who need multi-state taxation
assistance. She assists closely-held businesses and individuals with complex areas of tax law
including entity structuring and resolving difficult tax controversies with state and federal
agencies. Anita provides comprehensive tax and other personal financial consulting services to
high net worth individuals and family groups and also provides retirement planning consulting
services. She provides guidance in estate planning and has several years of experience with
inheritance tax returns.
Anita has more than 25 years of public accounting experience including real estate tax law, tax
ramifications and estate planning and guidance in compliance with government filings.
Anita earned a Bachelor of Business Administration from Union University.
Professional Affiliations
 American Institute of Certified Public Accountants, Real Estate Tax Conference
Committee
 Tennessee Society of Certified Public Accountants, Board Member
 Tennessee Society of Certified Public Accountants, State Taxation Committee
Community Involvement
 Union University, Board of Regents
 Exchange Club - Carl Perkins Center for Prevention of Child Abuse, Board Member
 Jackson Exchange Club, Exchangite of the Year
 University School of Jackson – Finance Committee and Past Chairman of the Board
 Jackson Symphony – Finance Chair and Board Member

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Outline
I. Transfer Wealth to the Next Generation
II. Change of Leadership
III. Planning Tips
• Intentionally Defective Grantor Trust
• Dynasty Trust
• Current Law

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Transfer Wealth to the
Next Generation

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Change of Leadership

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Planning Tips

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Intentionally
Defective Grantor Trust

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Intentionally Defective Grantor Trusts
• Grantor owner of trust for Federal Income tax purposes
• Complete gift to the child

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Intentionally Defective Trust
How Do They Work?
• The trust assets and the appreciation of the trust assets are
removed from grantor’s gross estate.
• Powers commonly used to create an Intentionally Defective
Grantor Trust.
- Reacquire trust property by substituting other property of
equivalent value (IRC Sec. 675((4)(c))). The most commonly
included power in a trust instrument to create an intentionally
defective grantor trust.
- Power to distribute income on principal among beneficiaries
- Power to add beneficiaries to trust
- Power to use trust income to pay life insurance premiums

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Example:
Intentionally Defective Grantor Trust
Assume the following facts:
John is the manager and owns 95 percent of the membership
interests of Real Estate Now, LLC, which owns several
properties as single-member LLCs. The other 5 percent of Real
Estate Now, LLC is owned by Sue, a key employee who was
provided her ownership interest several years ago. John would
like to transfer ownership of the business to his children, Jacob
and Katie, and to their descendants on a tax-advantageous
basis without paying any gift tax, but, at the same time, he
would like to retain control of the business. Assume the cash
flow and income have been relatively consistent over the past
several years, averaging approximately $450,000 per year. On
that basis, an appraiser has valued Real Estate Now, LLC at
$3,000,000; however, its value is $1,800,000 on a non-control
basis.

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One alternative for John is to create an IDGT to which he would “sell”
a 95 percent non-managing interest for its fair market value of
$1,710,000 (95 percent of the appraised value on a non-control
basis), while remaining the non-owner manager of the LLC. The
purchase price would be paid by delivery of the trust’s promissory
note for the purchase price, which would bear interest at the AFR.
The note would be secured by the transferred membership interest,
as well as by $171,000 of trust assets, which the trust would obtain
via a gift from John (using a portion of his applicable exclusion
amount). Note that it is common for the IDGT to be a generation-
skipping trust and for the grantor to utilize his generation-skipping tax
exclusion against the gift made to the IDGT.
Intentionally Defective Grantor Trust

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The trust would be an irrevocable trust and would be structured in a
manner such that the trust is effective for estate and gift tax
purposes (i.e., property transferred to it will not be included in
John’s estate). The gift of $171,000 to the trust is designed to
provide the trust with economic substance other than the LLC
interest that the IDGT will acquire.
Intentionally Defective Grantor Trust

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From an income tax standpoint, the trust is structured to be
“defective”, so that the grantor, i.e. John, is considered to be the
owner of the trust for income tax purposes. The sale of property
by a grantor to one’s grantor trust is considered a sale to one’s
self, so that the sale is not a taxable event.
Intentionally Defective Grantor Trust

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Let’s take a look at why IDGT planning has become a popular
succession planning tool. First, John has “sold” property with a
value of $2,850,000 (95 percent of $3,000,000) for $1,710,000.
Of course, because the sale is non-taxable there is no step-up in
the basis of the property, as there would be if John held the
transferred property at the time of his death. However, John has
secured a discount that might not otherwise be available, if he
held control of the LLC at the time of his death. Second, all the
growth with respect to the transferred assets has been removed
from John’s estate. Third, assuming the trust qualifies as a
grantor trust, John will be subject to tax on the income of the trust
used to amortize the promissory note.
Intentionally Defective Grantor Trust

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The IRS has finally put this issue to bed in Rev. Rul. 2004-64,
wherein the IRS publicly ruled that in the case of a grantor trust –
1) The payment of income tax by the grantor attributable to the inclusion
of the trust’s income in the grantor’s taxable income is not a gift. This
rule is finally an acknowledgement by the IRS that there cannot be a
gift when one is paying one’s own tax liability that is imposed by
statute (i.e., under the grantor trust rules of Code Secs. 671-679).
2) The right of the grantor to a mandatory tax distribution will cause
inclusion of the trust’s assets in the grantor’s estate pursuant to Code
Sec. 2036(a)(1), because the grantor has retained beneficial
enjoyment of income from trust property. According to the IRS, the
amount includible in the grantor’s estate is the “full value” of the trust’s
assets, not just the amount necessary to fund the tax distribution.
3) The right of the grantor to a discretionary tax distribution generally is
not an estate-includible right, such as in a situation where there is an
independent trustee who reviews the need of the grantor for a tax
distribution. However, the IRS cautioned that such non-includibility
was not a per se rule, and there could be estate tax includibility where
the grantor effectively controls whether or not she receives a tax
distribution.

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Dynasty Trust

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• A long-term trust created to benefit descendants of multiple
generations.
• Efficient and impactful when funded with highly appreciating
assets.
• GST Exemption and Tax
- Grantor allocates their generation skipping transfer tax exemption to
a trust with an unlimited duration.
- Trust assets are not subject to wealth transfer taxes.
- Irrevocable trust
- Domicile the trust in a state with preferable tax and asset protection
laws.
- Review any extended rule against perpetuities that may pierce
trust.
- Often structured as a grantor trust for income tax purposes.
Dynasty Trust

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Dynasty Trust
How does it work?
Let’s say “Tom” has expressed an interest in establishing a trust that
would let him benefit his family for multiple generations. With the
assistance of Tom’s estate planning attorney, a multigenerational
Dynasty Trust is created, and he gifts money each year to the trust in
the amount that would cover the life insurance that the trust intends to
purchase. The attorney instructs Tom regarding some of the technical
requirements in making the gift to ensure Tom leverages his GST
exemption.
The trustee of the Dynasty Trust purchases and owns the life insurance
on Tom’s life and makes the premium payments. Then, Tom, with the
help of his tax adviser, notifies the IRS that he’s used some of his GST
tax exemption to shield the Dynasty Trust from the GST tax.
Example:

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Upon Tom’s death, the insurance proceeds with be paid to the
Dynasty Trust. The trust assets can continue to be held in trust for
the benefit of multiple generations of Tom’s family. The assets
continue to grow but the trustee has the ability to make distributions
to family members as the trust’s beneficiaries. This can continue in
perpetuity.
In this example, the Dynasty Trust is created during Tom’s lifetime.
It‘s funded with cash to let the trust purchase life insurance on
Tom’s life. Tom’s wife could have joined him in his arrangement
and the trustee could have purchased survivorship life insurance on
their joint lives. Tom could also have gifted other assets, such as
securities, that he believes will continue to grow in value. In
addition, Tom could have opted to have this trust created at his
death, funded with assets held in his estate.
Dynasty Trust

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Dynasty Trust can benefit all sorts of families, not just the wealthy,
particularly if their goals include:
• A desire to provide for multiple generations of family
members;
• An interest in protecting accumulated assets from estate and
generation skipping transfer taxes;
• A concern about protecting accumulated wealth from creditors
and ex-spouses; and
• A desire to ensure the transfer of family values to successive
generations in the form of incentive provisions.
Dynasty Trust

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Current Law

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Current Law - 2014
Gift Estate GST
Annual Exclusion $14,000 N/A $14,000
Lifetime
Exemption
5.34 million 5.34 million 5.34 million
Tax Rate 40% 40% 40%
Basis Carryover DOD FMV N/A
Portability Yes Yes No

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What happens if you do
not plan for future
generations?