AEP AEP Business Succession Planning

Question 1

A buy-sell agreement funded with life insurance that is triggered upon a business owner's death ensures which primary outcome?

Accepted Answer

The surviving owners can purchase the deceased's interest at a predetermined price

Answer

A life insurance-funded buy-sell agreement provides the surviving owners with tax-free death benefit proceeds to purchase the deceased owner's interest at a pre-agreed valuation.

Question 2

In a cross-purchase buy-sell agreement among three business owners, how many life insurance policies are typically required?

Accepted Answer

6

Answer

In a cross-purchase agreement, each owner insures every other owner, so with three owners the formula is n(n-1) = 3×2 = 6 policies.

Question 3

Which business succession vehicle allows a parent to transfer a family business to children while retaining an income stream and minimizing gift tax?

Accepted Answer

Both A and B

Answer

Both an IDGT installment sale and a GRAT can shift business appreciation to the next generation while the grantor retains income, making them complementary succession tools.

Question 4

For federal estate tax purposes, a closely held business interest may be eligible for a valuation discount due to lack of marketability (DLOM) and lack of control (DLOC) primarily because:

Accepted Answer

A hypothetical buyer would pay less for an illiquid, non-controlling interest

Answer

Valuation discounts reflect economic reality: a hypothetical buyer would demand a lower price for an interest that cannot be easily sold and provides no ability to control business decisions.

Question 5

IRC §6166 provides estate tax relief specifically for estates with a significant closely held business interest by allowing:

Accepted Answer

Installment payments of estate tax attributable to the business over up to 14 years

Answer

IRC §6166 permits estates where the closely held business exceeds 35% of the adjusted gross estate to pay the business-related estate tax in installments over up to 14 years at favorable interest rates.

(AEP) Accredited Estate Planner Practice Test

(AEP) Accredited Estate Planner Practice Test

AEP AEP Business Succession Planning