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
Under IRC Section 6166, an estate may elect to pay estate taxes attributable to a closely held business in installments over how many years?
Answer: 14 years
IRC §6166 allows qualifying estates to defer estate tax attributable to a closely held business interest and pay it in up to 10 annual installments after a 5-year deferral period, totaling up to 14 years.
A succession planner identifies that a company's EBITDA margin has declined from 22% to 14% over three years while revenue grew. What risk does this signal for a prospective buyer?
Answer: Operating leverage deterioration and potential cash flow risk
A declining EBITDA margin despite revenue growth suggests costs are rising faster than revenues, signaling operational efficiency problems that threaten future debt service capacity.
Which strategy allows a business owner to transfer future appreciation of a business out of the taxable estate while retaining an income stream?
Answer: Grantor retained annuity trust (GRAT)
A GRAT transfers future appreciation above the IRS Section 7520 hurdle rate to beneficiaries gift-tax-free while the grantor retains fixed annuity payments for the trust term.
In assessing key person risk, which metric best quantifies the financial exposure if the key person were lost?
Answer: The reduction in business value attributable to the departure of that individual
Key person risk exposure is best measured as the expected decline in enterprise value if that individual departed, which informs both insurance coverage amounts and succession urgency.
A stock redemption buy-sell agreement triggers a buyout upon an owner's death. Which tax disadvantage may affect surviving shareholders?
Answer: Loss of stepped-up basis on their existing shares
In a stock redemption, the company—not individual shareholders—buys the deceased owner's shares, so survivors receive no cost basis increase on their existing shares, unlike in a cross-purchase.
A family limited partnership (FLP) used in succession planning must demonstrate 'legitimate business purpose' to withstand IRS scrutiny. Which of the following is the WEAKEST business purpose argument?
Answer: Estate freeze to remove assets from taxable estate
An estate freeze objective is a tax-motivated purpose that the IRS views skeptically; courts have disregarded FLPs formed solely to reduce estate taxes without genuine operational rationale.
Which approach to business risk assessment during succession specifically evaluates the probability and financial impact of losing major customer concentration?
Answer: Customer dependency risk scoring
Customer dependency risk scoring quantifies concentration risk by assessing what percentage of revenue could be lost if top customers defect post-transition and the financial impact of each scenario.