Business Succession Planning Flashcards

Which IRS revenue ruling established the framework for valuing minority interests in closely held businesses for gift and estate tax purposes?

Answer: Rev. Rul. 93-12

Rev. Rul. 93-12 established that minority discounts apply even when a family collectively controls a business, rejecting family attribution for valuation purposes.

A business owner age 72 wishes to pass the business to her children with minimal estate tax. Which strategy is generally LEAST suitable given her age?

Answer: GRAT with a 10-year term

A GRAT fails if the grantor dies during the term; at age 72 a long-term GRAT carries significant mortality risk, reducing its effectiveness.

When a buy-sell agreement sets the price using a fixed value that has not been updated for several years, what is the GREATEST risk?

Answer: The fixed price may no longer reflect fair market value, leading to a loss for one party

A stale fixed price can dramatically undervalue or overvalue the business, creating an economic windfall or loss for the buyer or seller at the triggering event.

Which of the following is a key advantage of a stock redemption (entity purchase) buy-sell agreement compared to a cross-purchase agreement for a corporation with many shareholders?

Answer: Administrative simplicity because the entity — not each individual — holds the insurance policies

In an entity purchase plan, the business owns one policy per owner, avoiding the n×(n-1) policy proliferation required in a cross-purchase arrangement.

A private annuity used in business succession requires that payments to the seller:

Answer: Cease at the seller's death, with no remaining obligation to the estate

A private annuity is an unsecured promise to pay for the seller's lifetime; payments stop at death, and nothing passes to the seller's estate from the annuity obligation.

Under the IRC Section 303 redemption, the proceeds received by the estate to pay estate taxes and funeral/administration expenses are treated as:

Answer: A tax-free return of basis up to the amount of estate taxes and qualifying expenses

Section 303 allows a corporation to redeem stock from an estate in an amount limited to estate taxes and deductible administration expenses, taxed as a sale rather than a dividend.

Which type of business entity can NOT use an S corporation election to pass through income and losses to owners, making it generally less flexible for multi-generational succession planning involving trusts?

Answer: A C corporation seeking pass-through treatment

Only certain IRS-qualifying entities can elect S corporation status; a C corporation can elect S status, but S corporations face restrictions on the types of trusts that can be shareholders, limiting trust-based succession.