Financial & Risk Assessment in Succession Flashcards
7 cards from real CSP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial & Risk Assessment in Succession flashcards as text
When using a self-canceling installment note (SCIN) in succession planning, what unique risk does the seller accept?
Answer: Death before receiving full payment cancels the remaining balance
A SCIN cancels automatically at the seller's death, meaning if the seller dies early, unpaid principal disappears from the estate—but the seller risks dying before receiving full payment.
Which of the following best describes 'succession risk' in the context of enterprise risk management (ERM)?
Answer: The risk that leadership gaps will disrupt operations and erode business value
In ERM, succession risk refers to the potential for operational disruption and value destruction when key leadership positions are vacated without qualified replacements ready.
A business is valued at $4 million. The owner gifts a 10% minority interest to a child, applying a combined discount of 30%. What is the taxable gift value?
Answer: $280,000
10% of $4M = $400,000 pro-rata value; applying a 30% combined discount yields $400,000 × 0.70 = $280,000 taxable gift.
Which financial statement is MOST useful for assessing a company's liquidity position during succession due diligence?
Answer: Statement of cash flows
The statement of cash flows reveals actual cash generation and usage, providing direct insight into whether the business can meet near-term obligations during a succession transition.
A private company uses the excess earnings method for valuation. Which two components does this method combine?
Answer: Asset value and capitalized excess earnings (goodwill)
The excess earnings method adds the net asset (tangible) value to a capitalized stream of earnings above a normal return on assets, which represents intangible/goodwill value.
A succession plan involves a charitable remainder trust (CRT) funded with appreciated business stock. What is the PRIMARY financial benefit to the owner?
Answer: Immediate charitable deduction plus deferred capital gains tax on the appreciated stock
Funding a CRT with appreciated stock generates an immediate partial charitable deduction and defers—though does not eliminate—capital gains tax when the trust sells the stock.
Which coverage gap most commonly exposes a business during an unplanned ownership transition triggered by disability?
Answer: Disability buyout (DBO) insurance
Disability buyout insurance funds the purchase of a disabled owner's interest, preventing financial strain on remaining owners who might otherwise be unable to complete the buyout.