CSP Financial & Risk Assessment in Succession 3 — Questions and Answers
Question 1: When using a self-canceling installment note (SCIN) in succession planning, what unique risk does the seller accept?
- Loss of stepped-up basis for heirs
- Death before receiving full payment cancels the remaining balance (Correct answer)
- Double taxation on interest income
- Mandatory IRS approval prior to execution
Correct 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.
Question 2: Which of the following best describes 'succession risk' in the context of enterprise risk management (ERM)?
- The risk that a business will be overvalued during a sale
- The risk that leadership gaps will disrupt operations and erode business value (Correct answer)
- The risk of regulatory penalties during ownership transfer
- The risk that insurance premiums will rise after a buyout
Correct 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.
Question 3: 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?
- $280,000 (Correct answer)
- $400,000
- $370,000
- $120,000
Correct 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.
Question 4: Which financial statement is MOST useful for assessing a company's liquidity position during succession due diligence?
- Income statement
- Statement of cash flows (Correct answer)
- Statement of retained earnings
- Notes to financial statements
Correct 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.
Question 5: A private company uses the excess earnings method for valuation. Which two components does this method combine?
- Liquidation value and goodwill value
- Asset value and capitalized excess earnings (goodwill) (Correct answer)
- Revenue multiple and EBITDA multiple
- Book value and market value of publicly traded comparables
Correct 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.
Question 6: A succession plan involves a charitable remainder trust (CRT) funded with appreciated business stock. What is the PRIMARY financial benefit to the owner?
- Complete avoidance of capital gains tax on sale
- Immediate charitable deduction plus deferred capital gains tax on the appreciated stock (Correct answer)
- Step-up in cost basis for the charitable remainder beneficiary
- Elimination of estate taxes on all trust assets
Correct 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.
Question 7: Which coverage gap most commonly exposes a business during an unplanned ownership transition triggered by disability?
- Errors and omissions insurance
- Disability buyout (DBO) insurance (Correct answer)
- Business interruption insurance
- Directors and officers (D&O) liability insurance
Correct 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.
CSP Financial & Risk Assessment in Succession 3
When using a self-canceling installment note (SCIN) in succession planning, what unique risk does the seller accept?