CEA Business Succession Planning 5 — Questions and Answers
Question 1: A business owner wants to transfer controlling interest but retain decision-making power during a transition period. Which structure BEST accomplishes this?
- Outright gift of all voting stock
- Transfer of non-voting stock while retaining voting stock (Correct answer)
- Assignment of all partnership interests to children
- Charitable remainder trust holding all business shares
Correct answer: Transfer of non-voting stock while retaining voting stock
By transferring non-voting shares while retaining voting shares, the owner passes economic value and future appreciation to heirs while maintaining operational control.
Question 2: Which of the following triggering events is LEAST commonly included in a standard buy-sell agreement?
- Death of an owner
- Permanent disability of an owner
- Voluntary sale to a third party
- Temporary illness of an owner lasting fewer than 30 days (Correct answer)
Correct answer: Temporary illness of an owner lasting fewer than 30 days
Buy-sell agreements are triggered by permanent or long-term events like death, disability, retirement, or voluntary sale — not brief, temporary illnesses.
Question 3: When calculating the gift tax value of a transferred LLC interest, which two discounts are MOST frequently combined to reduce the reported value?
- Blockage discount and swing-vote premium
- Minority interest discount and lack-of-marketability discount (Correct answer)
- Control premium and key-person discount
- Built-in gains discount and absorption discount
Correct answer: Minority interest discount and lack-of-marketability discount
A minority interest discount (lack of control) combined with a lack-of-marketability discount (difficulty selling) are the two most commonly stacked discounts in closely held entity transfers.
Question 4: A Certified Estate Advisor assisting with business succession should advise that a buy-sell agreement funded with life insurance be reviewed at minimum:
- Every 10 years or upon any major life or business event
- Only when a new owner joins the business
- Every 2-3 years and upon significant changes in business value or ownership (Correct answer)
- At the time of the owner's death
Correct answer: Every 2-3 years and upon significant changes in business value or ownership
Regular reviews every 2-3 years and after any material change ensure the agreement price and insurance coverage remain aligned with the current business value.
Question 5: In a family business succession plan, the 'equal vs. equitable' challenge refers to:
- Dividing the business assets equally among all heirs regardless of involvement
- Balancing the desire to treat all children fairly while ensuring business-active children receive operational control (Correct answer)
- Splitting estate tax liability equally among beneficiaries
- Applying the same gift tax annual exclusion to each heir
Correct answer: Balancing the desire to treat all children fairly while ensuring business-active children receive operational control
Equal treatment divides everything identically, while equitable treatment considers each child's role, contribution, and need — often requiring life insurance or other assets to compensate non-active heirs.
Question 6: Which professional is BEST qualified to provide a formal, defensible business valuation for estate and gift tax reporting purposes?
- A Certified Public Accountant (CPA) without valuation credentials
- A Certified Business Appraiser (CBA) or Accredited in Business Valuation (ABV) designee (Correct answer)
- The business owner's personal attorney
- A commercial banker familiar with the industry
Correct answer: A Certified Business Appraiser (CBA) or Accredited in Business Valuation (ABV) designee
A credentialed business appraiser such as a CBA or ABV designee provides valuations that meet IRS standards and can withstand audit scrutiny for gift and estate tax purposes.
Question 7: Which of the following best describes the purpose of a 'succession readiness assessment' in business succession planning?
- Determining the exact estate tax liability of the business owner
- Evaluating whether the business, leadership pipeline, and legal documents are prepared for an ownership transition (Correct answer)
- Calculating the present value of a private annuity obligation
- Establishing the correct number of life insurance policies needed under a cross-purchase agreement
Correct answer: Evaluating whether the business, leadership pipeline, and legal documents are prepared for an ownership transition
A succession readiness assessment identifies gaps in management depth, legal agreements, financial liquidity, and owner readiness needed for a smooth transition.
CEA Business Succession Planning 5
A business owner wants to transfer controlling interest but retain decision-making power during a transition period.
Which structure BEST accomplishes this?