Business Succession Planning Flashcards
7 cards from real CEA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Business Succession Planning flashcards as text
Which valuation discount is most commonly applied when transferring a minority interest in a closely held business?
Answer: Minority interest discount
A minority interest discount reflects the lack of control a minority owner has over business decisions, reducing the value of the transferred interest.
Under a cross-purchase buy-sell agreement with four partners, how many life insurance policies are typically required?
Answer: 12 policies
In a cross-purchase arrangement with n partners, each partner must insure every other partner, requiring n × (n-1) policies — with 4 partners that equals 12.
A grantor retained annuity trust (GRAT) is most effective in business succession when the business is expected to do what?
Answer: Appreciate significantly above the IRS Section 7520 rate
A GRAT transfers appreciation above the 7520 rate to heirs gift-tax free, making it most powerful when the business is expected to grow rapidly.
Which entity structure provides a step-up in basis for all assets at the death of a partner who held more than a 50% interest?
Answer: General partnership with a Section 754 election
A Section 754 election allows a partnership to adjust the basis of its assets when a partner's interest is transferred, including at death.
An installment sale of a business to a key employee is LEAST likely to be structured using which of the following?
Answer: A charitable remainder trust (CRT)
A CRT benefits charity and provides income to the grantor but is not a mechanism for transferring business ownership to a specific employee.
What is the primary advantage of using an Employee Stock Ownership Plan (ESOP) in business succession?
Answer: The selling owner may defer capital gains by reinvesting in qualified replacement property under IRC Section 1042
Under IRC Section 1042, a business owner selling to an ESOP can defer capital gains tax by reinvesting proceeds in qualified replacement property (QRP).
A 'wait-and-see' buy-sell agreement is best described as one that:
Answer: Gives the business and remaining owners the option to purchase before a third-party buyer can
A wait-and-see agreement gives the entity the first option to purchase, then surviving owners, and finally allows an outside sale if neither exercises the option.