AEP AEP Business Succession Planning 2

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?

Accepted Answer

IRC §1042

Answer

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?

Accepted Answer

Income, market, and asset (cost) approaches

Answer

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:

Accepted Answer

Non-qualified deferred compensation plan to control timing of inclusion in the taxable estate

Answer

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?

Accepted Answer

The business entity itself

Answer

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?

Accepted Answer

Installment sale to an IDGT

Answer

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.

(AEP) Accredited Estate Planner Practice Test

(AEP) Accredited Estate Planner Practice Test

AEP AEP Business Succession Planning 2