CEA Business Succession Planning 2

Question 1

Which valuation discount is most commonly applied when transferring a minority interest in a closely held business?

Accepted Answer

Minority interest discount

Answer

A minority interest discount reflects the lack of control a minority owner has over business decisions, reducing the value of the transferred interest.

Question 2

Under a cross-purchase buy-sell agreement with four partners, how many life insurance policies are typically required?

Accepted Answer

12 policies

Answer

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.

Question 3

A grantor retained annuity trust (GRAT) is most effective in business succession when the business is expected to do what?

Accepted Answer

Appreciate significantly above the IRS Section 7520 rate

Answer

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.

Question 4

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?

Accepted Answer

General partnership with a Section 754 election

Answer

A Section 754 election allows a partnership to adjust the basis of its assets when a partner's interest is transferred, including at death.

Question 5

An installment sale of a business to a key employee is LEAST likely to be structured using which of the following?

Accepted Answer

A charitable remainder trust (CRT)

Answer

A CRT benefits charity and provides income to the grantor but is not a mechanism for transferring business ownership to a specific employee.

(CEA) Certified Estate Advisor Practice Test

(CEA) Certified Estate Advisor Practice Test

CEA Business Succession Planning 2