AEP Business Succession Planning Flashcards
6 cards from real AEP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 AEP Business Succession Planning flashcards as text
A business owner who wants to transfer a farm or closely held business at a reduced estate tax value may qualify for which special valuation election under IRC §2032A?
Answer: Special use valuation
IRC §2032A special use valuation allows qualifying real property used in a farm or closely held business to be valued at its current use value rather than highest and best use, reducing estate taxes.
Which of the following is a key disadvantage of a cross-purchase buy-sell agreement compared to an entity-redemption agreement when there are many business owners?
Answer: The number of required policies grows exponentially as owners increase, creating administrative complexity
With many owners, a cross-purchase agreement requires each owner to hold policies on every other owner, creating an unwieldy number of policies (n×(n-1)), whereas a redemption agreement requires only n policies held by the entity.
A business succession plan should address which potential trigger event in addition to the owner's death?
Answer: Disability, divorce, bankruptcy, or voluntary departure of an owner
A comprehensive buy-sell agreement covers all 'D' events — death, disability, divorce, departure, and sometimes disagreement — that could force an ownership change.
When a family business is transferred to the next generation using a self-canceling installment note (SCIN), what unique feature distinguishes it from an ordinary installment note?
Answer: The remaining balance is automatically cancelled at the seller's death, removing it from the gross estate
A SCIN includes a cancellation-at-death provision so that if the seller dies before the note is paid off, the remaining balance disappears from the taxable estate without triggering income tax.
In which type of business entity is a step-up in income tax basis MOST easily achievable for all business assets upon the death of an owner?
Answer: Partnership or LLC taxed as a partnership
In a partnership or LLC taxed as a partnership, a §754 election allows the inside basis of partnership assets to be stepped up to match the outside basis received by the deceased partner's successor, optimizing income tax treatment.
A business owner concerned about estate liquidity should primarily ensure that the buy-sell agreement valuation method is:
Answer: Agreed upon in advance using a defined formula or regular appraisal, and kept current
The IRS will respect a buy-sell valuation for estate tax purposes only if it was set in an arm's-length transaction using a bona fide method kept current throughout the agreement's life.