CSP Legal & Regulatory Compliance 3 — Questions and Answers
Question 1: Which provision of the Tax Cuts and Jobs Act of 2017 most directly expanded the lifetime federal estate and gift tax exemption, affecting long-term succession planning calculations?
- Section 199A pass-through deduction
- Doubled the basic exclusion amount to approximately $11 million per person (Correct answer)
- Elimination of the generation-skipping transfer tax
- Repeal of the alternative minimum tax for individuals
Correct answer: Doubled the basic exclusion amount to approximately $11 million per person
The TCJA temporarily doubled the basic exclusion amount through 2025, significantly raising the threshold before federal estate and gift taxes apply.
Question 2: A corporation seeking to redeem shares from a retiring owner must consider IRC Section 302 to determine whether the redemption is taxed as a dividend or capital gain. Which test allows capital gain treatment when the redemption is 'not essentially equivalent to a dividend'?
- Complete termination test
- Substantially disproportionate test
- Not essentially equivalent test
- Both A and B are safe harbors; C is a facts-and-circumstances test (Correct answer)
Correct answer: Both A and B are safe harbors; C is a facts-and-circumstances test
Section 302 provides two bright-line safe harbors (complete termination and substantially disproportionate) and a facts-and-circumstances test for redemptions not essentially equivalent to a dividend.
Question 3: When a closely held business owner signs a shareholders' agreement that restricts the transferability of shares, which estate tax valuation rule under IRC Section 2703 may cause the IRS to disregard the restriction for estate tax purposes?
- The restriction was not a bona fide business arrangement
- The restriction was not comparable to similar arrangements in arm's length transactions
- The agreement was primarily used to transfer property to members of the decedent's family for less than full value
- All three conditions, if present together, allow the IRS to disregard the restriction (Correct answer)
Correct answer: All three conditions, if present together, allow the IRS to disregard the restriction
Under IRC Section 2703(b), a restriction is respected for estate tax purposes only if it satisfies all three requirements: bona fide business arrangement, comparable to arm's length terms, and not primarily a tax-motivated transfer to family.
Question 4: Which legal structure allows a business owner to transfer an interest to heirs while retaining management control, commonly used in succession plans to reduce estate taxes through valuation discounts?
- Irrevocable life insurance trust (ILIT)
- Family limited partnership (FLP) or family limited liability company (FLLC) (Correct answer)
- Charitable remainder trust (CRT)
- Qualified personal residence trust (QPRT)
Correct answer: Family limited partnership (FLP) or family limited liability company (FLLC)
FLPs and FLLCs allow owners to retain general partner or managing member control while gifting limited interests at discounted values for lack of control and marketability.
Question 5: Under the Americans with Disabilities Act (ADA), which obligation does a business owner have when identifying a successor who may have a disability?
- The ADA does not apply to business ownership succession
- The owner must provide reasonable accommodations if the successor is an employee being promoted (Correct answer)
- The owner must select a non-disabled successor to avoid accommodation costs
- The successor must disclose their disability before being considered for promotion
Correct answer: The owner must provide reasonable accommodations if the successor is an employee being promoted
When a succession plan involves promoting an employee, the ADA requires reasonable accommodations for qualified individuals with disabilities in the promotion process.
Question 6: A decedent's estate includes a 45% interest in a closely held manufacturing company. Which IRC Section allows the executor to pay the estate tax attributable to that business interest in installments over up to 14 years?
- IRC Section 6161
- IRC Section 6166 (Correct answer)
- IRC Section 2032A
- IRC Section 6324
Correct answer: IRC Section 6166
IRC Section 6166 permits installment payment of estate taxes attributable to closely held business interests when that interest exceeds 35% of the adjusted gross estate.
Question 7: Which type of trust is specifically designed to hold life insurance outside an owner's taxable estate while providing liquidity to the estate through loan or purchase of assets?
- Grantor retained annuity trust (GRAT)
- Irrevocable life insurance trust (ILIT) (Correct answer)
- Charitable lead annuity trust (CLAT)
- Qualified terminable interest property trust (QTIP)
Correct answer: Irrevocable life insurance trust (ILIT)
An ILIT removes life insurance proceeds from the insured's taxable estate and can provide estate liquidity by lending proceeds or purchasing estate assets.
CSP Legal & Regulatory Compliance 3
Which provision of the Tax Cuts and Jobs Act of 2017 most directly expanded the lifetime federal estate and gift tax exemption, affecting long-term succession planning calculations?