CEA Business Succession Planning 3

Question 1

Which of the following trust structures allows a business owner to freeze the value of an interest while transferring future appreciation to heirs at little or no gift tax?

Accepted Answer

Intentionally defective grantor trust (IDGT)

Answer

An IDGT is treated as owned by the grantor for income tax purposes but not for estate tax, allowing installment sales to the trust to shift future appreciation gift-tax free.

Question 2

When a family limited partnership (FLP) is used in succession planning, which IRS challenge is MOST commonly raised?

Accepted Answer

Inclusion of FLP assets in the gross estate under IRC Section 2036

Answer

The IRS frequently argues that FLP assets should be pulled back into the gross estate under Section 2036 when the transferor retained control or economic benefit.

Question 3

Which term describes the agreed-upon formula or method written into a buy-sell agreement that determines the purchase price when a triggering event occurs?

Accepted Answer

Valuation method

Answer

The valuation method — whether fixed price, formula, or appraisal — determines how the business interest will be priced at the time of a triggering event.

Question 4

A self-canceling installment note (SCIN) differs from a standard installment note primarily because:

Accepted Answer

The remaining balance is canceled at the seller's death with no estate tax inclusion

Answer

A SCIN automatically cancels upon the seller's death, removing the remaining balance from the gross estate — in exchange for a risk premium added to the price or rate.

Question 5

In the context of business succession, 'key-person insurance' is primarily used to:

Accepted Answer

Indemnify the business for lost revenue and transition costs if a critical employee dies or becomes disabled

Answer

Key-person insurance protects the business entity itself from financial losses caused by the death or disability of a vital contributor whose skills drive revenue.

(CEA) Certified Estate Advisor Practice Test

(CEA) Certified Estate Advisor Practice Test

CEA Business Succession Planning 3