PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
CONFIDENTIAL TAX PLANNING MEMORANDUM
Proposed Sale of Hospitality Interests to Intentionally Defective Grantor Trust
September 25, 2025
FROM: Leonard Cross, Specialist Partner (Tax), Calderwood & Harkness LLP
TO: Salvatore A. Pellegrino Managing Member, Pellegrino Capital Group LLC 2400 Salzedo Street, Suite 1200 Coral Gables, FL 33134
CC: George Trujillo, Responsible Partner, Calderwood & Harkness LLP Rafael Dominguez, Lead Associate, Calderwood & Harkness LLP
Matter No.: 1027-00005
Billing Code: 78500.00014
RE: Proposed Intra-Family Wealth Transfer — Sale of Membership Interests in Meridian Shores Hospitality LLC, Costa Luma Resort Holdings LLC, and Azulia Beach Club LLC to The Salvatore A. Pellegrino 2025 Family Trust (Intentionally Defective Grantor Trust)
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I. Executive Summary
This memorandum analyzes the estate-planning, gift-tax, income-tax, and generation-skipping transfer ("GST") tax implications of the proposed sale of hospitality membership interests to a newly established intentionally defective grantor trust (an "IDGT"). The purpose of this memorandum is to provide Salvatore A. Pellegrino ("Salvatore" or the "Grantor") with a comprehensive overview of the transaction structure, the applicable federal transfer-tax and income-tax rules, the valuation framework, and the principal risk factors and mitigation strategies associated with the proposed transaction.
Overview of the Transaction. Salvatore A. Pellegrino, age 71, a United States citizen domiciled in Coral Gables, Florida, will establish an irrevocable trust — to be known as The Salvatore A. Pellegrino 2025 Family Trust (the "2025 IDGT" or the "Trust") — for the benefit of his three adult children, Marco A. Pellegrino, Lucia Pellegrino-Vasquez, and Dante R. Pellegrino, and their respective descendants. The Trust will be structured as an intentionally defective grantor trust for federal income-tax purposes under Sections 671 through 679 of the Internal Revenue Code of 1986, as amended (the "IRC" or the "Code"), while simultaneously being structured to ensure that the Trust assets are excluded from Salvatore's gross estate for federal estate-tax purposes.
Independent Trustee. Cornerstone Fiduciary Services, Inc. ("Cornerstone"), an independent, licensed Florida trust company (Florida Trust Company License No. FTC-2014-00287), will serve as independent trustee of the Trust. Helena R. Matsuda, Senior Trust Officer at Cornerstone's Jacksonville, Florida office, will be the primary point of contact and will be responsible for the day-to-day administration of the Trust. Cornerstone will be independently advised by Ridgeway & Callahan LLP (Patricia N. Callahan, Partner) in Jacksonville, Florida.
Seed Gift. Salvatore will seed the 2025 IDGT with an irrevocable cash gift of $2,000,000, representing approximately five percent (5%) of the aggregate purchase price of the membership interests to be acquired by the Trust. This seed gift will constitute a completed gift for federal gift-tax purposes and will consume $2,000,000 of Salvatore's remaining lifetime gift-tax exemption.
Installment Sale. Following the seed gift, the Trust — acting through Cornerstone as independent trustee — will purchase from Salvatore (acting through Pellegrino Capital Group LLC, as applicable) his membership interests in three Florida hospitality entities: Meridian Shores Hospitality LLC, Costa Luma Resort Holdings LLC, and Azulia Beach Club LLC. The aggregate purchase price for the membership interests, after application of a combined twenty percent (20%) discount for lack of marketability ("DLOM") and lack of control ("DLOC"), is $40,000,000. The purchase price will be paid entirely through a nine-year secured promissory note bearing interest at the September 2025 mid-term applicable federal rate ("AFR") of 4.40% per annum, compounded annually.
Estate-Planning Objective. The transaction is designed to transfer approximately $40,000,000 in current value — together with all future appreciation on the transferred hospitality interests — out of Salvatore's taxable estate, at a transfer-tax cost limited to the $2,000,000 seed gift (which is fully sheltered by Salvatore's remaining lifetime exemption). By freezing the value of the promissory note in Salvatore's estate at its face amount and allowing all growth in the underlying hospitality assets to accrue for the benefit of the Trust beneficiaries, the structure has the potential to remove tens of millions of dollars of additional value from the reach of the federal estate tax over the term of the note.
Target Closing. December 15, 2025.
Disclaimer. This memorandum constitutes legal advice protected by the attorney-client privilege and the work-product doctrine. It is prepared solely for the use of the named recipients and is not intended for distribution to any other person or entity without the prior written consent of Calderwood & Harkness LLP. This memorandum is a planning analysis and does not constitute a formal tax opinion. The analysis set forth herein is based upon the current provisions of the Internal Revenue Code, the Treasury Regulations promulgated thereunder, published rulings and procedures of the Internal Revenue Service, and relevant judicial authority, all as in effect on the date hereof, and all of which are subject to change, potentially with retroactive effect.
II. Background and Current Estate Profile
A. Salvatore A. Pellegrino — Personal and Financial Overview
Salvatore A. Pellegrino is seventy-one (71) years of age, a United States citizen, and is domiciled in Coral Gables, Miami-Dade County, Florida. Florida is a common-law property state; accordingly, community-property considerations do not apply to the transactions contemplated herein. Salvatore and his spouse, Adriana M. Pellegrino ("Adriana"), age sixty-eight (68), also a United States citizen, maintain their primary residence at 610 Casuarina Concourse, Coral Gables, Florida 33143.
Salvatore and Adriana have three adult children who will serve as the primary beneficiaries of the 2025 IDGT:
(i) Marco A. Pellegrino, age 44, residing in Naples, Florida, who currently serves as Chief Operating Officer of Meridian Shores Hospitality LLC;
(ii) Lucia Pellegrino-Vasquez, age 41, residing in Miami, Florida; and
(iii) Dante R. Pellegrino, age 37, residing in Tampa, Florida.
Salvatore's current estimated gross estate is approximately $285,000,000, inclusive of the hospitality interests that are the subject of this memorandum, commercial real estate holdings, liquid investment portfolios, retirement accounts, personal-use real property, and other miscellaneous assets.
Pellegrino Capital Group LLC ("PCG"), a Florida limited liability company organized in 2006, serves as the family office for the Pellegrino family. PCG manages approximately $215,000,000 in diversified assets across hospitality operations, commercial real estate, and alternative investments. Salvatore is the sole managing member of PCG. PCG's Employer Identification Number is 65-1238074. PCG may act as Salvatore's representative in certain aspects of the transaction, including the execution of the Membership Interest Purchase Agreement, as further discussed below.
B. Subject Assets — Hospitality Portfolio
The three hospitality entities whose membership interests are the subject of the proposed sale are summarized in the following table:
Each of the three entities is described briefly below.
Meridian Shores Hospitality LLC ("Meridian Shores") operates a 142-room boutique resort located at 4500 Gulf Shore Boulevard, Naples, Florida 34102. The property is situated on the Gulf of Mexico waterfront and generates revenue from room rentals, food and beverage operations, spa services, and event hosting. Marco A. Pellegrino currently serves as Chief Operating Officer. Salvatore holds a 92% Class A membership interest; the remaining 8% is held by minority investors who are not members of the Pellegrino family. The entity generated net operating income ("NOI") of $3,200,000 for the fiscal year ended December 31, 2024.
Costa Luma Resort Holdings LLC ("Costa Luma") owns and operates a 96-room oceanfront resort property located at 81700 Overseas Highway, Islamorada, Florida 33036, in the Florida Keys. The resort is a full-service property with dining facilities, marina access, and water-sport amenities. Salvatore holds a 100% membership interest in Costa Luma. The entity generated NOI of $2,640,000 for the fiscal year ended December 31, 2024.
Azulia Beach Club LLC ("Azulia") operates an upscale beachfront food and beverage and special-events venue located at 22 Baymont Drive, Clearwater Beach, Florida 33767. The venue hosts private events, weddings, corporate functions, and offers daily dining service with panoramic Gulf views. Salvatore holds an 88% Class A membership interest; the remaining 12% is held by minority investors. The entity generated NOI of $1,300,000 for the fiscal year ended December 31, 2024.
The aggregate pre-discount fair market value ("FMV") of the three hospitality entities, computed using a 7.0× multiple of 2024 NOI (an approximate 14.3% capitalization rate), is $50,000,000 ($22,400,000 + $18,500,000 + $9,100,000). After application of a combined DLOM/DLOC discount of 20%, the aggregate discounted FMV is reduced by $10,000,000 to $40,000,000. This discounted FMV will serve as the sale price for the installment transaction. The valuation methodology and discount analysis are discussed in greater detail in Section VII of this memorandum.
C. Exemption and Prior Gift History
For the 2025 tax year, the federal applicable exclusion amount (the "lifetime exemption") for estate and gift tax purposes is $13,990,000 per individual, as announced by the Internal Revenue Service. This amount reflects the increased exemption under the Tax Cuts and Jobs Act of 2017 ("TCJA"), as adjusted for inflation.
Based on records maintained by Baxter Whitfield CPA Group, P.A. (Sandra T. Whitfield, CPA, Managing Partner; 150 Alhambra Circle, Suite 800, Coral Gables, Florida 33134), Salvatore has utilized $6,140,000 of his lifetime gift/estate-tax exemption through prior taxable gifts. These prior gifts include transfers to various family trusts and direct gifts made over the period from 2008 through 2022, as reflected on prior-year Forms 709 filed by Salvatore.
Accordingly, Salvatore's remaining lifetime exemption prior to the seed gift is calculated as follows:
2025 Applicable Exclusion Amount: $13,990,000 Less: Prior Lifetime Exemption Usage: ($6,140,000) Remaining Lifetime Exemption (Pre-Seed): $7,850,000
Following the $2,000,000 seed gift to the 2025 IDGT, Salvatore's remaining lifetime exemption will be:
Remaining Lifetime Exemption (Pre-Seed): $7,850,000 Less: Seed Gift to 2025 IDGT: ($2,000,000) Remaining Lifetime Exemption (Post-Seed): $5,850,000
The remaining $5,850,000 of lifetime exemption will be available to shelter future transfers, including any additional gifts Salvatore may wish to make before a potential reduction in the exemption amount (discussed in Section IX.D below).
D. Adriana M. Pellegrino — Spousal Limited Access Trust
Adriana M. Pellegrino does not hold any direct ownership interest in any of the three hospitality entities being transferred in the proposed transaction. Her assets are held separately and include a spousal limited access trust (a "SLAT") that was established in a prior planning engagement. The SLAT is not directly involved in the proposed IDGT structure; while early-stage planning considered whether the SLAT might serve as the initial funding vehicle for the seed contribution, the current plan calls for Salvatore to make the $2,000,000 seed gift directly from his own funds.
As noted above, Florida is a common-law property state. There are no community-property interests in the hospitality entities, and no spousal consent or joinder is required for the transfer of Salvatore's membership interests to the Trust, though Adriana's consent on the 2025 Form 709 may be relevant if gift-splitting is elected for other gifts made during 2025. We will coordinate with Baxter Whitfield on this point.
III. Transaction Structure
The proposed transaction consists of three principal steps, which are described in detail below. The steps must be executed in the order presented to ensure that the Trust has economic substance and independent equity prior to the installment sale.
A. Step 1 — Establishment of the 2025 IDGT
Salvatore will execute an irrevocable trust agreement establishing The Salvatore A. Pellegrino 2025 Family Trust under the laws of the State of Florida. The target execution date for the trust instrument is November 10, 2025. Calderwood & Harkness will prepare the trust instrument for Salvatore's review and will circulate a draft to Cornerstone Fiduciary Services, Inc. and its counsel, Ridgeway & Callahan LLP, for comment no later than October 20, 2025.
Trustee. The trust instrument will name Cornerstone Fiduciary Services, Inc. as independent trustee. Cornerstone is a professional fiduciary institution with no familial, employment, or economic relationship to the Pellegrino family. The selection of an independent, institutional trustee is a critical structural safeguard, as discussed further in Section VIII.A of this memorandum.
Beneficiaries. The beneficiaries of the Trust will be:
(i) Marco A. Pellegrino (age 44, Naples, Florida);
(ii) Lucia Pellegrino-Vasquez (age 41, Miami, Florida);
(iii) Dante R. Pellegrino (age 37, Tampa, Florida); and
(iv) The respective descendants of each of the foregoing, per stirpes.
The Trust will contain standard provisions authorizing the Trustee to make discretionary distributions of income and principal to or for the benefit of the beneficiaries, subject to an ascertainable standard (health, education, maintenance, and support), together with broader distribution powers exercisable at the Trustee's sole discretion. The trust instrument will also contain provisions for separate trust shares, generation-skipping trust protections, and spendthrift provisions in compliance with Florida law.
Grantor Trust "Defect." The critical feature of the Trust, from an income-tax perspective, is the incorporation of a grantor-trust "defect" under IRC § 675(4)(C). Specifically, the trust instrument will grant Salvatore the power, exercisable in a non-fiduciary capacity without the approval or consent of any person in a fiduciary capacity, to reacquire the trust corpus by substituting other property of an equivalent value.
This substitution power renders the Trust a "grantor trust" for federal income-tax purposes under IRC §§ 671–679. As a result, all items of income, gain, loss, deduction, and credit attributable to the Trust's assets will be reported on Salvatore's individual federal income-tax return (Form 1040) as though Salvatore personally owned those assets. The Trust will not be a separate taxpayer for federal income-tax purposes so long as the grantor-trust defect remains in effect.
Estate-Tax Treatment. Critically, the substitution power under § 675(4)(C) — if properly structured — does not cause the Trust's assets to be included in Salvatore's gross estate for federal estate-tax purposes under IRC §§ 2036 or 2038. This is the essential "defect" that gives the IDGT its name: the Trust is "intentionally defective" because it is treated as owned by the grantor for income-tax purposes, but is treated as a completed transfer outside the grantor's estate for estate-tax purposes.
The authority for this favorable treatment is found in Revenue Ruling 2008-22, 2008-1 C.B. 796, in which the Internal Revenue Service ruled that a grantor's retained power to substitute trust property with other property of equivalent value, exercisable in a non-fiduciary capacity, does not by itself cause estate-tax inclusion under § 2036 or § 2038, provided that the trustee has a fiduciary duty to ensure the substituted property is of equivalent value. The trust instrument will contain explicit provisions requiring the Trustee to verify the equivalency of any substituted property, thereby satisfying the requirements of Revenue Ruling 2008-22.
B. Step 2 — Seed Gift
On or about November 10, 2025 — the same date as the execution of the trust instrument — Salvatore will make an irrevocable gift of $2,000,000 in cash to the 2025 IDGT (the "Seed Gift"). The Seed Gift will be funded by wire transfer from Salvatore's personal account to the Trust's newly established account at Prescott National Bank, 401 East Las Olas Boulevard, Fort Lauderdale, Florida 33301 (Thomas J. Andersen, Senior Vice President, Private Banking). Coordination with Mr. Andersen will be required to ensure the Trust's bank account is established and operational prior to the funding date.
The Seed Gift represents five percent (5%) of the aggregate purchase price of the hospitality interests to be acquired by the Trust ($40,000,000 × 5% = $2,000,000). The purpose of the Seed Gift is to endow the Trust with independent economic substance and initial equity capital sufficient to support the installment purchase as a bona fide sale for full and adequate consideration, rather than as a disguised gift or a transfer with a retained interest. The Seed Gift provides the Trust with "skin in the game," establishing that the Trust bears genuine economic risk in the transaction — a factor that courts have consistently identified as important in determining whether an installment sale to a grantor trust will be respected as a bona fide sale. See Estate of Bongard v. Commissioner, T.C. Memo 2005-18; Estate of Karmazin v. Commissioner, T.C. Memo 2016-161.
The $2,000,000 Seed Gift is a completed gift for federal gift-tax purposes. The gift will consume $2,000,000 of Salvatore's remaining $7,850,000 lifetime exemption, reducing his remaining exemption to $5,850,000 as set forth in Section II.C above. No gift tax will be payable because the gift is fully sheltered by the available lifetime exemption. The Seed Gift must be reported on Salvatore's 2025 Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return), as discussed in Section X of this memorandum.
C. Step 3 — Installment Sale of Hospitality Interests
Following the execution of the trust instrument and the funding of the Seed Gift, the 2025 IDGT, acting through its independent trustee, Cornerstone Fiduciary Services, Inc., will purchase from Salvatore (acting through PCG, as applicable) the following membership interests:
(i) A ninety-two percent (92%) Class A membership interest in Meridian Shores Hospitality LLC;
(ii) A one hundred percent (100%) membership interest in Costa Luma Resort Holdings LLC; and
(iii) An eighty-eight percent (88%) Class A membership interest in Azulia Beach Club LLC.
The aggregate purchase price for the foregoing membership interests is $40,000,000, representing the discounted fair market value of the interests after application of a combined 20% DLOM/DLOC discount (as discussed in Section VII). The purchase price will be paid entirely through a secured promissory note (the "Note") issued by the Trust in favor of Salvatore. The terms of the Note are detailed in Section IV of this memorandum.
The sale will be documented through a Membership Interest Purchase Agreement (the "MIPA"), which will contain standard representations and warranties, covenants, closing conditions, and indemnification provisions customary for transactions of this nature. The MIPA will be executed by Salvatore (or PCG on his behalf, as seller) and by Cornerstone Fiduciary Services, Inc. (as trustee of the 2025 IDGT, as buyer). The target closing date for the sale is December 15, 2025.
The sale price is, and must be, supported by a qualified appraisal prepared by an independent, qualified appraiser. Calderwood & Harkness has engaged Hargrove & Lindquist LLP (Dennis W. Hargrove, ASA, CFA, Managing Director; 3344 Peachtree Road NE, Suite 900, Atlanta, Georgia 30326) to prepare the appraisal. The valuation engagement letter was signed on October 6, 2025, and the appraisal report is expected to be delivered on or before November 3, 2025. The appraisal is a critical component of the transaction, as it establishes the fair market value of the membership interests and substantiates the adequacy of the consideration paid by the Trust.
D. Note-to-Seed Ratio and Economic Substance
A key metric in evaluating the structural integrity of an installment sale to an IDGT is the ratio of the promissory note to the Trust's independent equity — commonly referred to as the "note-to-seed ratio" or "leverage ratio." In the proposed transaction, the relevant metrics are as follows:
• Note principal: $40,000,000
• Trust equity (Seed Gift): $2,000,000
• Projected Year-1 distributable cash flow from hospitality operations: approximately $2,000,000 (representing the Trust's share of distributions, net of debt service on the Note, available during the first year of operations)
• Total Trust equity (inclusive of projected cash flow): approximately $4,000,000
• Note-to-total-equity ratio: $40,000,000 / $4,000,000 = 10:1
A note-to-seed ratio of 10:1 or lower is generally within accepted planning parameters for IDGT installment sales and is supported by available case law and IRS guidance. While there is no bright-line statutory or regulatory threshold, practitioners and commentators have generally viewed ratios in the range of 9:1 to 10:1 as reasonable, provided the Trust has demonstrable economic substance and the ability to service the note from its own resources. At higher ratios, the risk of IRS recharacterization increases substantially.
The Seed Gift provides the Trust with genuine "downside" exposure — if the hospitality assets decline in value, the Trust's $2,000,000 equity cushion absorbs the initial loss before the note obligations are impaired. This economic exposure is an important factor in establishing that the transaction is a bona fide sale rather than a disguised gift. The projected cash flow from the hospitality entities further demonstrates the Trust's independent capacity to meet its obligations, reinforcing the arm's-length character of the sale.
IV. Promissory Note Terms
A. Principal Terms
The promissory note to be issued by the Trust in connection with the installment sale will contain the following principal terms:
• Principal Amount: $40,000,000.
• Interest Rate: 4.40% per annum, compounded annually, equal to the applicable September 2025 mid-term AFR as published by the Internal Revenue Service in Revenue Ruling 2025-18 (or the applicable revenue ruling for September 2025).
• Term: Nine (9) years, commencing on the closing date of December 15, 2025 and maturing on December 15, 2034.
• Payment Structure: Annual interest-only payments of $1,760,000 ($40,000,000 × 4.40%), payable on each anniversary of the closing date, with a balloon payment of the full principal amount of $40,000,000 due on the maturity date (December 15, 2034). No scheduled amortization of principal during the term.
• Maker: Cornerstone Fiduciary Services, Inc., as Trustee of The Salvatore A. Pellegrino 2025 Family Trust.
• Payee: Salvatore A. Pellegrino.
• Prepayment: The Trust shall have the right to prepay the Note, in whole or in part, at any time without premium or penalty.
• Default Provisions: Standard default provisions, including acceleration upon failure to make a scheduled payment within thirty (30) days of the due date, insolvency or bankruptcy of the Trust, and breach of material covenants in the Pledge and Security Agreement.
B. AFR Compliance
Section 7872 of the IRC provides that if a loan between related parties bears interest at a rate below the applicable federal rate, the loan is treated as a below-market loan, with imputed interest consequences. Additionally, IRC § 1274 provides original issue discount ("OID") rules for debt instruments issued for property, which require the stated interest rate to equal or exceed the applicable federal rate for the term of the note.
The mid-term AFR applies to debt instruments with a term exceeding three (3) years but not exceeding nine (9) years. Because the Note has a term of precisely nine years (December 15, 2025 through December 15, 2034), the mid-term AFR is the relevant benchmark. The September 2025 mid-term AFR for annual compounding is 4.40%, and the Note rate of 4.40% precisely satisfies the minimum rate requirement.
It is important to note that the AFR is locked in at the time the note is executed. If the closing occurs on December 15, 2025 as planned, the applicable AFR will technically be the rate in effect for December 2025. We strongly recommend confirming the December 2025 mid-term AFR when it is published (typically in mid-to-late November). If the December 2025 mid-term AFR exceeds 4.40%, the interest rate on the Note must be adjusted upward to at least the December 2025 rate. Alternatively, the Note could be executed prior to December 1, 2025 (while the November 2025 AFR is still applicable), with a separate closing of the MIPA and assignment documents occurring on December 15, 2025. We will evaluate the optimal timing as the transaction approaches closing.
C. Security / Collateral
The Note will be secured by a Pledge and Security Agreement (the "Pledge Agreement") pursuant to which the Trust will grant Salvatore a first-priority security interest in:
(i) All membership interests in Meridian Shores Hospitality LLC, Costa Luma Resort Holdings LLC, and Azulia Beach Club LLC acquired by the Trust in the transaction;
(ii) All distributions, proceeds, revenues, and cash flows attributable to or derived from such membership interests; and
(iii) All supporting obligations, instruments, and general intangibles related to the foregoing.
To perfect the security interest, UCC-1 financing statements will be filed with the Florida Secured Transaction Registry (Division of Corporations, Florida Department of State) following closing. The filing will identify the Trust as the debtor and Salvatore as the secured party, and will describe the collateral in accordance with Article 9 of the Florida Uniform Commercial Code.
The collateralization of the Note serves two important purposes. First, it is consistent with arm's-length commercial practice — a lender in a comparable third-party transaction would typically require security for a $40,000,000 loan. Second, the security interest provides additional evidentiary support for the position that the transaction is a bona fide sale for full and adequate consideration, rather than a disguised gift. The existence of a perfected security interest demonstrates that Salvatore retains meaningful creditor rights with respect to the Note and that the Trust bears genuine debtor obligations, hallmarks of a legitimate sales transaction.
D. Cash-Flow Coverage Analysis
The ability of the Trust to service its debt obligations under the Note from the cash flow generated by the acquired hospitality interests is a critical factor in establishing the bona fides of the sale. The relevant cash-flow analysis is as follows:
• Estimated Annual Distributable Cash Flow from Hospitality Entities: $4,800,000. This figure represents an approximate 12% cash-on-cash yield on the $40,000,000 purchase price and is derived from the combined NOI of the three entities ($7,140,000), adjusted for capital reserves, management fees, and other operating expenses not reflected in NOI.
• Annual Debt Service (Interest Only): $1,760,000 ($40,000,000 × 4.40%).
• Debt Service Coverage Ratio: $4,800,000 ÷ $1,760,000 = 2.73×.
A coverage ratio of 2.73× provides a substantial margin of safety for the Trust to meet its annual interest obligations. Conventional commercial lending standards typically require a minimum debt service coverage ratio ("DSCR") in the range of 1.20× to 1.50× for hospitality-sector loans; the Trust's projected 2.73× ratio significantly exceeds this threshold and provides robust evidence that the Trust has the independent capacity to perform its obligations under the Note as a going concern.
The combined entity NOI of $7,140,000 for 2024 ($3,200,000 for Meridian Shores + $2,640,000 for Costa Luma + $1,300,000 for Azulia) further supports the reasonableness of the cash-flow projections. Even in a downside scenario where distributable cash flow declines by thirty percent (30%) from projected levels, the adjusted cash flow of approximately $3,360,000 would still provide a 1.91× coverage ratio, comfortably exceeding the minimum threshold.
Excess Cash Flow. After payment of annual debt service of $1,760,000, the Trust is projected to retain excess cash flow of approximately $3,040,000 per year ($4,800,000 − $1,760,000). This excess cash flow will accumulate within the Trust for the benefit of the beneficiaries and represents the core estate-planning "Upside" of the IDGT structure — value that accrues entirely outside of Salvatore's taxable estate and passes to the next generation transfer-tax free. Over the nine-year term of the Note, aggregate excess cash flow (before reinvestment returns) could total approximately $27,360,000, further enhancing the estate-planning benefits of the transaction.
V. Grantor Trust Status — Income Tax Analysis
A. Grantor Trust Rules (IRC §§ 671–679)
The grantor trust rules, codified at IRC §§ 671 through 679, provide that where a grantor retains certain powers or interests in a trust, the grantor (rather than the trust) is treated as the owner of the trust's assets for federal income-tax purposes. The specific grantor trust powers enumerated in the Code include, among others: the power to revoke the trust (§ 676); the power to control beneficial enjoyment (§ 674); certain administrative powers (§ 675); and the retention of reversionary interests exceeding five percent (5%) of the trust corpus (§ 673).
The 2025 IDGT will be treated as a grantor trust by virtue of the power of substitution granted to Salvatore under IRC § 675(4)(C). Section 675(4)(C) provides that a trust is treated as a grantor trust if "a power of administration is exercisable in a nonfiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity," and the administrative powers enumerated in § 675(4) include "a power to reacquire the trust corpus by substituting other property of an equivalent value."
In the trust instrument, Salvatore will be granted the unrestricted power, exercisable in a non-fiduciary capacity and without the approval or consent of the Trustee or any other person in a fiduciary capacity, to reacquire any or all of the trust corpus by substituting other property of equivalent value. This power is the sole "defect" that causes the Trust to be treated as a grantor trust for income-tax purposes. As discussed in Section III.A above, this power does not cause estate-tax inclusion under IRC §§ 2036 or 2038, per Revenue Ruling 2008-22.
As a grantor trust, all items of income, gain, loss, deduction, and credit attributable to the Trust's assets — including rental income, operating income from the hospitality entities, capital gains, depreciation, and any other tax attributes — will be reported on Salvatore's personal Form 1040 for each year in which the grantor trust status is in effect. The Trust will not file a separate Form 1041 (U.S. Income Tax Return for Estates and Trusts) as a taxpaying entity, though it may be required to file an informational return (a "grantor trust return") as directed by the Treasury Regulations.
B. Income-Tax Neutrality of the Sale
The grantor trust status of the 2025 IDGT produces a profoundly favorable income-tax consequence with respect to the installment sale: the sale is a non-event for federal income-tax purposes.
Under Revenue Ruling 85-13, 1985-1 C.B. 184, the Internal Revenue Service ruled that a grantor who is the deemed owner of a trust under the grantor trust rules is treated, for income-tax purposes, as the owner of the trust's assets. Consequently, a transaction between the grantor and the trust — such as a sale of property — is treated as a transaction between the grantor and himself. No gain or loss is recognized on the sale, and the trust takes the grantor's carryover basis in the property received.
The practical implications for the proposed transaction are as follows:
(i) No Capital Gains Tax. The sale of the hospitality membership interests from Salvatore to the Trust will not trigger any capital gains tax, notwithstanding the fact that the interests may have significant embedded appreciation. If, for example, Salvatore's adjusted basis in the membership interests is $30,000,000 and the sale price is $40,000,000, the $10,000,000 of embedded appreciation will not be recognized as gain at the time of the sale. This represents a significant income-tax benefit that would not be available if the Trust were a separate taxpayer (i.e., a non-grantor trust) or if the interests were sold to an unrelated third party.
(ii) No Interest Income on Note Payments. Because the Trust is treated as owned by Salvatore for income-tax purposes, the annual interest payments of $1,760,000 made by the Trust to Salvatore on the Note are treated as payments from Salvatore to himself. Salvatore will not recognize interest income on the Note payments, and the Trust will not claim an interest deduction. This is a critical benefit: the Note payments are "invisible" for income-tax purposes, reducing the effective cost of the transaction.
(iii) Grantor's Payment of Trust Income Taxes (the "Burn" Benefit). Because all trust income is reported on Salvatore's personal return, Salvatore is responsible for paying income taxes on the Trust's income. This has the effect of an additional tax-free transfer from Salvatore to the Trust beneficiaries — Salvatore's payment of taxes attributable to trust income depletes his taxable estate without constituting a taxable gift. The IRS has confirmed this treatment in Revenue Ruling 2004-64, 2004-2 C.B. 7, holding that the grantor's payment of the income tax attributable to the inclusion of the trust's income in the grantor's taxable income is not an additional gift to the trust. This "burn" benefit can be substantial: if the Trust's taxable income is $4,800,000 annually and Salvatore's marginal federal income-tax rate is 37%, the annual income-tax burden attributable to trust income is approximately $1,776,000, representing a further tax-free transfer of wealth from Salvatore to the Trust beneficiaries.
C. Toggling Off Grantor Trust Status
The trust instrument will be designed to allow for the possibility of "toggling off" the grantor trust status at a future date, should circumstances warrant. This can be accomplished by Salvatore's voluntary release of the substitution power under § 675(4)(C), or by a trust protector's exercise of a power to eliminate the grantor trust defect.
If the grantor trust status is toggled off, the Trust ceases to be a grantor trust and becomes a separate taxpayer for federal income-tax purposes. From that point forward:
(i) All trust income is reported on the Trust's own Form 1041 and taxed at the compressed trust income-tax rates (which reach the maximum 37% bracket at taxable income of approximately $15,200 for 2025);
(ii) The annual interest payments on the Note ($1,760,000) become taxable interest income to Salvatore (reportable on his Form 1040);
(iii) The Trust may or may not be entitled to an interest deduction for the Note payments, depending on whether the interest is allocable to investment income or business income and on the applicable limitations under §§ 163 and 265; and
(iv) The "burn" benefit ceases — the Trust, rather than Salvatore, bears its own income-tax liability.
Potential Gain Recognition on Toggle. There is an important and unresolved question in the tax law regarding whether the release of the grantor trust power — and the resulting shift from grantor trust to non-grantor trust status — triggers recognition of gain on the difference between the outstanding principal balance of the Note and the Trust's carryover basis in the transferred assets. Under the reasoning of Revenue Ruling 85-13 (treating the grantor and the trust as the same taxpayer during grantor trust status), the Note effectively does not exist for income-tax purposes while the Trust is a grantor trust. When the Trust becomes a separate taxpayer, the Note springs into existence as a bona fide debt obligation, and the Trust may be treated as having "acquired" its assets for the Note's face value — potentially triggering gain if the face value exceeds the Trust's basis.
This issue was addressed obliquely in Madorin v. Commissioner, 84 T.C. 667 (1985), and has been the subject of extensive scholarly commentary without definitive resolution. The Service has not issued formal guidance on point. We strongly recommend that any decision to toggle off the grantor trust status be preceded by a thorough analysis of the potential gain-recognition consequences and that Salvatore consult with Calderwood & Harkness before taking any action to release or modify the substitution power.
The most likely scenario in which toggling off might be considered is if the income-tax burden on trust income becomes onerous to Salvatore — for example, if his overall income-tax rate increases significantly, if the trust income grows substantially, or if Salvatore's liquidity position changes such that paying taxes on trust income becomes impractical. Under current planning assumptions, however, we anticipate that the grantor trust status will be maintained for the duration of the Note term (through December 15, 2034).
VI. Estate and Gift Tax Analysis
A. Gift Tax — Seed Gift
The $2,000,000 Seed Gift to the 2025 IDGT is a completed, taxable gift for federal gift-tax purposes. A gift is "complete" when the donor has so parted with dominion and control as to leave in him no power to change its disposition. Treasury Regulation § 25.2511-2(b). Because the 2025 IDGT is an irrevocable trust and Salvatore retains no power to revoke the trust or redirect the disposition of the Seed Gift among the beneficiaries, the gift is complete upon funding.
The $2,000,000 gift will be applied against Salvatore's remaining $7,850,000 unified credit (lifetime gift/estate-tax exemption), reducing the available exemption to $5,850,000. Because the gift is fully sheltered by the available exemption, no gift tax will be payable on the Seed Gift.
The Seed Gift must be reported on Salvatore's 2025 Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return), which is due April 15, 2026 (or October 15, 2026, if Salvatore files for an extension of his individual income-tax return, which automatically extends the Form 709 filing deadline). The preparation and filing of the Form 709 will be coordinated with Baxter Whitfield CPA Group, P.A. (Sandra T. Whitfield, CPA), as discussed in Section X below.
B. The Sale — Not a Gift
The sale of the hospitality membership interests to the 2025 IDGT at the discounted fair market value of $40,000,000 is not a gift. It is an arm's-length sale for full and adequate consideration. The sale price is supported by a qualified appraisal from Hargrove & Lindquist LLP, an independent valuation firm with no economic interest in the outcome of the transaction. The Trust will pay consideration equal to the appraised fair market value of the interests in the form of a secured promissory note bearing interest at the applicable federal rate.
Because the Trust pays full and adequate consideration for the membership interests, no additional gift-tax exemption is consumed by the sale itself. The sale is not reportable as a gift on Form 709. However, as discussed in Section X, we recommend that the sale be adequately disclosed on the 2025 Form 709 (or in an attachment thereto) to commence the running of the statute of limitations under IRC § 6501(c)(9).
It bears emphasis that the adequacy of the consideration is determined by reference to the fair market value of the interests at the time of the sale — not by reference to any future appreciation that may accrue. The fact that the hospitality interests may appreciate significantly in value after the sale does not retroactively convert the sale into a part-gift/part-sale transaction. The consideration paid (the $40,000,000 Note) is measured against the value of the interests at the time of the transfer, and if the Note equals or exceeds that value, the transfer-tax analysis is straightforward: the sale is for full value and no gift has occurred.
C. Estate Tax — Exclusion from Gross Estate
The membership interests transferred to the 2025 IDGT will be excluded from Salvatore's gross estate for federal estate-tax purposes, provided the transaction is respected as a bona fide sale for full and adequate consideration. Because Salvatore will no longer own the membership interests after the sale, they will not be includible in his gross estate under IRC § 2033 (which includes in the gross estate the value of all property to the extent of the decedent's interest therein at the time of death).
Substitution Power — No Estate Inclusion. As discussed above, the substitution power under § 675(4)(C) should not trigger estate inclusion under § 2036 (retained life estate or right to income) or § 2038 (revocable transfers), provided the power is properly limited to the substitution of assets of equivalent value and is exercisable in a non-fiduciary capacity. In Revenue Ruling 2008-22, the IRS specifically ruled that:
"[A] grantor's retained power, exercisable in a nonfiduciary capacity, to acquire property held in trust by substituting property of equivalent value will not, by itself, cause the value of the trust corpus to be includible in the grantor's gross estate under § 2036 or § 2038, provided the trustee has a fiduciary obligation (under local law or the trust instrument) to ensure the grantor's compliance with the terms of this power by satisfying itself that the properties acquired and substituted by the grantor are in fact of equivalent value."
The trust instrument will include express provisions requiring the Trustee to verify the equivalency of any substituted property, thereby satisfying the condition articulated in Revenue Ruling 2008-22.
Promissory Note Inclusion. The promissory note ($40,000,000 face value) will remain an asset in Salvatore's gross estate. As principal payments are made on the Note, the estate-includible value of the Note decreases dollar-for-dollar. Because the Note is structured as an interest-only obligation with a balloon payment at maturity, the full $40,000,000 principal balance will remain in Salvatore's estate throughout the nine-year term (unless voluntary prepayments are made or the Note is otherwise satisfied prior to maturity). Upon receipt of the balloon payment at maturity, the $40,000,000 in cash replaces the Note in Salvatore's estate — the net estate value is unchanged with respect to the consideration received.
The Estate-Planning "Spread." The estate-planning benefit of the IDGT structure lies in the difference between the value of the transferred interests (which grow outside the estate) and the value of the Note (which is fixed in the estate). If the hospitality interests appreciate in value — and particularly if they appreciate at a rate exceeding the Note interest rate of 4.40% — the incremental appreciation passes to the Trust beneficiaries entirely free of estate tax. This is the core economic rationale for the transaction.
Illustrative Estate-Tax Savings. The following illustration demonstrates the potential estate-tax savings:
• At the current federal estate-tax rate of 40%, removing $40,000,000 from Salvatore's gross estate (assuming the full amount would otherwise be subject to estate tax after application of the available exemption) would save approximately $16,000,000 in estate taxes.
• If the hospitality portfolio appreciates at an assumed rate of 5% per annum over the 9-year Note term, the transferred interests could be worth approximately $62,053,000 at the time of the Note's maturity in December 2034. The incremental appreciation of approximately $22,053,000 above the $40,000,000 purchase price would pass entirely to the Trust beneficiaries free of estate tax, representing an additional estate-tax savings of approximately $8,821,000 (at a 40% rate).
• Combined potential estate-tax savings: $16,000,000 + $8,821,000 = approximately $24,821,000, all at a transfer-tax cost of the $2,000,000 Seed Gift (which itself is sheltered by the lifetime exemption and generates no out-of-pocket tax liability).
These figures are illustrative only and are based on simplifying assumptions. Actual results will depend on the performance of the hospitality portfolio, changes in tax law, and the ultimate composition and value of Salvatore's estate at death. Nevertheless, the magnitude of the potential savings underscores the compelling estate-planning rationale for the proposed transaction.
D. Generation-Skipping Transfer (GST) Tax
The 2025 IDGT will benefit not only Salvatore's three children but also their respective descendants (i.e., Salvatore's grandchildren and more remote descendants). Because these descendants are "skip persons" for GST-tax purposes (being two or more generations below the transferor), distributions to or trust terminations in favor of such descendants could be subject to the federal GST tax at a flat rate equal to the maximum estate-tax rate (currently 40%).
To ensure that the 2025 IDGT is exempt from GST tax, Salvatore should allocate a portion of his GST exemption to the $2,000,000 Seed Gift. The GST exemption for 2025 is $13,990,000 — the same amount as the estate/gift-tax exemption. The allocation of $2,000,000 of GST exemption to the Seed Gift will produce an inclusion ratio of zero for the Trust, rendering the Trust fully GST-exempt from inception. All subsequent appreciation in the Trust's assets, and all future distributions from the Trust to skip persons, will be free of GST tax.
We will confirm with Baxter Whitfield CPA Group the amount of Salvatore's GST exemption that has been allocated to prior transfers. The GST exemption allocation will be made on the 2025 Form 709 and should be affirmatively elected on Schedule D of that return.
Importantly, because the sale of hospitality interests is for full and adequate consideration, no additional GST exemption is consumed by the sale itself. The GST-exempt status of the Trust is established by the allocation of exemption to the Seed Gift alone.
VII. Valuation and discount Analysis
A. Valuation Methodology
The fair market value of the hospitality membership interests will be determined by a qualified appraisal prepared by Hargrove & Lindquist LLP (Dennis W. Hargrove, ASA, CFA, Managing Director), a nationally recognized independent valuation firm. The appraisal will satisfy the requirements of a "qualified appraisal" under Treasury Regulation § 1.170A-13(c) and will be prepared by a "qualified appraiser" within the meaning of that regulation.
The primary valuation approach employed by Hargrove & Lindquist is the income capitalization method (also referred to as the "direct capitalization method"), under which the value of each entity is derived by capitalizing its stabilized net operating income at an appropriate capitalization rate (or, equivalently, by applying an appropriate multiple to NOI). The income approach is the most appropriate methodology for operating hospitality assets, as the value of such assets is primarily driven by their ability to generate cash flow.
The capitalization rate used in the preliminary valuation analysis is approximately 14.3%, which corresponds to a 7.0× NOI multiple. This multiple is consistent with market data for comparable hospitality transactions in the Florida Gulf Coast and Keys markets and reflects the subject properties' location quality, condition, occupancy levels, revenue per available room (RevPAR), and management stability.
Applying the 7.0× multiple to each entity's 2024 NOI produces the following pre-discount fair market values:
• Meridian Shores Hospitality LLC: $3,200,000 × 7.0 = $22,400,000
• Costa Luma Resort Holdings LLC: $2,640,000 × 7.0 ≈ $18,500,000 (rounded)
• Azulia Beach Club LLC: $1,300,000 × 7.0 = $9,100,000
• Aggregate Pre-discount FMV: $50,000,000
B. Discount for Lack of Marketability (DLOM) and discount for Lack of Control (DLOC)
A combined DLOM/DLOC discount of 20% is applied uniformly across all three entities for purposes of this planning memorandum. This combined discount reduces the aggregate FMV from $50,000,000 to $40,000,000, representing a total discount of $10,000,000.
discount for Lack of Marketability (DLOM). The membership interests in Meridian Shores, Costa Luma, and Azulia are privately held and are not freely tradeable on any public exchange or established secondary market. The operating agreements of each entity contain transfer restrictions that limit the ability of a holder to transfer its membership interest without the consent of the other members (or, in the case of Costa Luma, without compliance with notice and right-of-first-refusal provisions). The absence of a liquid market for these interests, together with the contractual transfer restrictions, supports the application of a meaningful DLOM.
Standard empirical studies used to quantify DLOM include restricted stock studies (which measure the discount at which restricted shares of publicly traded companies are sold in private placements) and pre-IPO studies (which compare the price of shares sold in private transactions prior to an initial public offering with the subsequent IPO price). These studies generally support DLOM in the range of 15% to 35% for closely held interests of the type at issue here, depending on the specific characteristics of the interest, the entity, and the market.
discount for Lack of Control (DLOC). A DLOC reflects the reduction in value attributable to a holder's inability to unilaterally control the management, operations, distribution policy, or liquidation of the entity. While Salvatore holds majority or controlling interests in each of the three entities (92% in Meridian Shores, 100% in Costa Luma, and 88% in Azulia), the interests being transferred to the IDGT are evaluated from the perspective of the transferee — i.e., the Trust. Following the transfer, the Trust will hold the same percentage interests as Salvatore currently holds, but the Trust's interests are held by an independent trustee who must act in a fiduciary capacity and whose authority is governed by the trust instrument and applicable law rather than by entrepreneurial discretion.
The DLOC argument is strongest with respect to the interests in Meridian Shores (92%) and Azulia (88%), where minority interests held by non-family members limit the Trust's control rights. The DLOC argument is somewhat weaker with respect to Costa Luma, where Salvatore (and therefore the Trust) holds a 100% interest and there are no minority members whose interests constrain control. Nevertheless, a modest DLOC is supportable for Costa Luma based on the transferee's limited practical ability — as an irrevocable trust administered by an institutional trustee — to force a liquidation, compel distributions, or engage in operational decision-making with the same freedom as a sole proprietor.
Combined 20% discount. The uniform 20% combined discount applied across all three entities is conservative relative to the range of empirical data and is intended to be defensible in the event of IRS examination. The aggregate discount amount is $10,000,000 ($50,000,000 × 20%), resulting in a discount-adjusted sale price of $40,000,000.
We note that the uniform 20% discount used in this memorandum is a planning estimate for purposes of structuring the transaction. Hargrove & Lindquist will prepare entity-specific discount analyses for each of the three hospitality entities, and the final appraisal may apply different discount levels to each entity based on the specific characteristics of the interest, the operating agreement provisions, the size of the minority interests, and other relevant factors. The aggregate discount may be higher or lower than the 20% estimate used herein, which would correspondingly adjust the sale price and the terms of the Note.
C. Timing of Appraisal
The valuation engagement letter with Hargrove & Lindquist was signed on October 6, 2025. The appraisal report is expected to be delivered on or before November 3, 2025.
To withstand IRS scrutiny, the appraisal should be as of a date proximate to the closing date (December 15, 2025). A stale appraisal — one prepared as of a date significantly prior to the transfer — is more vulnerable to challenge on the grounds that market conditions or the entity's financial performance may have changed between the appraisal date and the transfer date. We recommend an appraisal date of November 1, 2025 or December 1, 2025, with an update letter from Hargrove & Lindquist at closing (December 15, 2025) confirming that no material changes in value have occurred between the appraisal date and the closing date.
If material changes in the hospitality market, the entities' financial performance, or other relevant factors occur between the appraisal date and the closing date, a supplemental appraisal or a revised report may be necessary. We will monitor market conditions and coordinate with Hargrove & Lindquist as the closing date approaches.
VIII. Structural Safeguards and Best Practices
The success of the proposed IDGT structure depends not only on the correctness of the legal analysis but also on the meticulous implementation of structural safeguards and best practices. The following measures are designed to maximize the likelihood that the transaction will be respected by the IRS as a bona fide sale for full and adequate consideration, and that the transferred interests will be excluded from Salvatore's gross estate.
A. Independent Trustee
Cornerstone Fiduciary Services, Inc. is a licensed Florida trust company (Florida Trust Company License No. FTC-2014-00287) with institutional-grade fiduciary capabilities and no familial, employment, or economic relationship to the Pellegrino family. The selection of an independent, institutional trustee — rather than a family member or a related party — is one of the most important structural safeguards in an IDGT transaction.
Helena R. Matsuda, Senior Trust Officer at Cornerstone, will be responsible for administering the Trust, including negotiating and executing the MIPA and Note on behalf of the Trust, monitoring the Trust's financial performance and debt-service obligations, maintaining trust records, and making discretionary distributions to beneficiaries in accordance with the terms of the trust instrument.
Cornerstone will be independently advised by Ridgeway & Callahan LLP (Patricia N. Callahan, Partner; 50 North Laura Street, Suite 2200, Jacksonville, Florida 32202). Ridgeway & Callahan will review the transaction documents from the Trustee's fiduciary perspective and will provide independent legal advice to Cornerstone on the terms of the sale, the adequacy of the consideration, and the Trustee's duties and obligations under the trust instrument and Florida law.
The use of an independent trustee, independently advised by its own counsel, significantly strengthens the argument that the Trust is a bona fide entity with independent decision-making authority and that the sale is an arm's-length transaction. Courts have consistently emphasized the importance of trustee independence in evaluating IDGT transactions. See, e.g., Estate of Bongard v. Commissioner, T.C. Memo 2005-18.
B. Adequate Consideration — Note Structure
The adequacy of the consideration paid by the Trust for the hospitality interests is established by the following features of the Note:
(i) The Note bears interest at the applicable federal rate (4.40%), satisfying the minimum rate requirement under IRC §§ 7872 and 1274;
(ii) The Note is secured by a first-priority pledge of the transferred membership interests and an assignment of all distributions and cash flows attributable to those interests, documented through a formal Pledge and Security Agreement with perfection through UCC-1 filings;
(iii) The Trust has a demonstrable ability to service the Note from the cash flow generated by the acquired hospitality interests, with a projected debt service coverage ratio of 2.73×; and
(iv) The Note contains standard commercial terms, including acceleration provisions, default remedies, and prepayment rights, consistent with arm's-length lending practices.
These features collectively establish that the Trust has paid full and adequate consideration for the membership interests and that the Note is a genuine debt obligation — not a disguised gift or a retained interest.
C. Respect for Entity Formalities
The transaction must be documented with the same level of formality and rigor that would be expected in a sale between unrelated parties. The following documentation and procedural requirements will be observed: