Financial Advisor Business Owner Financial Planning

Question 1

A properly structured and funded buy-sell agreement accomplishes which primary outcome upon the death of a business partner?

Accepted Answer

The deceased partner's estate receives fair value for the business interest while surviving partners retain full control

Answer

A buy-sell agreement funded by life insurance ensures business continuity: the surviving owners (or the entity) purchase the deceased owner's interest at a predetermined or formula price, providing liquidity to the estate and preventing unwanted co-ownership with heirs. Without a funded buy-sell, heirs may be forced into an unwanted partnership or accept a distressed sale price.

Question 2

In a cross-purchase buy-sell agreement among four business partners, how many life insurance policies are required?

Accepted Answer

12 policies — each partner insures each of the other three

Answer

In a cross-purchase arrangement, each partner personally buys a policy on each other partner's life. With four partners: 4 × 3 = 12 policies. The formula is n × (n−1). This administrative complexity for larger groups is why entity-purchase (stock redemption) buy-sells are preferred when there are many owners.

Question 3

Which retirement plan structure allows a self-employed individual with no employees to make both an employee elective deferral AND an employer profit-sharing contribution in the same year, maximizing total contributions?

Accepted Answer

Solo 401(k) / Individual 401(k)

Answer

A Solo 401(k) allows the self-employed owner to contribute as both employee (up to the elective deferral limit, $23,000 in 2024 plus catch-up if 50+) and as employer (up to 25% of compensation). This dual contribution structure allows higher totals at lower income levels than a SEP-IRA, which only allows the employer contribution (25% of net self-employment income).

Question 4

When gifting a minority interest in a family business for estate planning purposes, which valuation discount reflects the fact that the recipient cannot unilaterally direct business decisions?

Accepted Answer

Minority interest discount (discount for lack of control)

Answer

A minority interest discount (or discount for lack of control) reduces the value of a business interest that does not carry voting control. A buyer would pay less for a non-controlling stake because they cannot compel dividends, force a sale, or set business strategy. This discount is commonly stacked with a discount for lack of marketability (DLOM) to further reduce the transfer value.

Question 5

A business purchases a life insurance policy on its top sales executive, naming itself as beneficiary. The primary purpose of this arrangement is to:

Accepted Answer

Protect the company financially against the economic loss caused by the executive's death

Answer

Key person life insurance protects the business — not the employee's family — from the financial impact of losing a critical contributor: lost revenue, recruiting and training costs, loan covenant concerns, and investor confidence. The business owns the policy, pays the premiums, and receives the death benefit. Premiums are generally not deductible; proceeds are generally income-tax-free.

Financial Advisor Practice Test

Financial Advisor Practice Test

Financial Advisor Business Owner Financial Planning