AEP AEP Business Succession Planning 2 — Questions and Answers
Question 1: Which IRC section provides favorable installment sale treatment when a business owner sells to an ESOP, potentially allowing deferral of capital gains tax?
- IRC §1042 (Correct answer)
- IRC §1031
- IRC §1014
- IRC §2057
Correct answer: IRC §1042
IRC §1042 allows a C-corporation owner who sells qualifying stock to an ESOP to defer capital gains tax by reinvesting proceeds in qualified replacement property.
Question 2: When valuing a closely held business for estate or gift tax purposes, which three approaches are commonly used under IRS Revenue Ruling 59-60?
- Income, market, and asset (cost) approaches (Correct answer)
- Book value, replacement cost, and liquidation value
- DCF, EBITDA multiples, and tax basis
- Fair value, intrinsic value, and assessed value
Correct answer: Income, market, and asset (cost) approaches
Revenue Ruling 59-60 directs appraisers to consider the income approach (capitalized earnings), market approach (comparable transactions/multiples), and asset approach (net asset value) when valuing closely held stock.
Question 3: A deferred compensation plan funded by a business for a key owner-employee who has an estate planning concern should typically be structured as a:
- Qualified pension plan to maximize creditor protection
- Non-qualified deferred compensation plan to control timing of inclusion in the taxable estate (Correct answer)
- Roth IRA for tax-free growth
- SIMPLE IRA for ease of administration
Correct answer: Non-qualified deferred compensation plan to control timing of inclusion in the taxable estate
A non-qualified deferred compensation plan allows flexible structuring to defer income recognition and coordinate estate inclusion, though it remains subject to creditor claims as an unfunded obligation.
Question 4: In a redemption (entity-purchase) buy-sell agreement, which party owns the life insurance policies on the owners?
- Each owner individually on the other owners
- The business entity itself (Correct answer)
- A trustee named in the agreement
- The owners' spouses
Correct answer: The business entity itself
In a redemption agreement, the business entity owns and is the beneficiary of policies on each owner's life, using the death proceeds to redeem the deceased owner's interest.
Question 5: Which estate planning technique allows a parent to 'freeze' the value of a business interest in their estate while transferring future appreciation to the next generation income-tax free?
- Testamentary bypass trust
- Installment sale to an IDGT (Correct answer)
- Section 303 stock redemption
- Charitable remainder trust funded with business interests
Correct answer: Installment sale to an IDGT
An installment sale of business interest to an IDGT freezes the seller's estate at the note value while all future appreciation accrues income-tax free inside the grantor trust for the next generation.
Question 6: IRC §303 provides an important business succession benefit by allowing a partial stock redemption from a closely held corporation to be treated as:
- A tax-free reorganization
- A capital gain or loss rather than a dividend (Correct answer)
- Ordinary income taxed at full rates
- A charitable contribution deduction
Correct answer: A capital gain or loss rather than a dividend
IRC §303 allows a corporation to redeem stock from a deceased shareholder's estate to pay estate taxes and funeral/administration expenses with the redemption taxed as capital gain rather than a dividend.
AEP AEP Business Succession Planning 2
Which IRC section provides favorable installment sale treatment when a business owner sells to an ESOP, potentially allowing deferral of capital gains tax?