Family Business 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 Family Business Succession flashcards as text
Which document formally grants a family member authority to manage business operations in the event the owner becomes incapacitated?
Answer: Durable power of attorney
A durable power of attorney remains effective upon incapacity and grants a designated agent authority to manage business and financial matters.
In a family business context, what is the primary purpose of a 'family council'?
Answer: To provide a forum for family communication and governance decisions
A family council serves as a structured forum where family members discuss shared values, policies, and governance issues separate from business management.
When a founder transfers business interests to children at a discount using a Family Limited Partnership (FLP), which IRS concern is most commonly triggered?
Answer: Lack of economic substance or sham transaction
The IRS may challenge FLPs if they lack genuine business purpose and appear to exist solely for tax avoidance, citing lack of economic substance.
A sibling who works in the family business full-time is most likely to feel inequity when the succession plan treats all children:
Answer: Equally regardless of contribution
Equal inheritance regardless of contribution creates perceived inequity because active children often believe their sweat equity warrants greater compensation.
Which succession strategy is most appropriate when no family member is willing or capable of leading the business?
Answer: Sale to a strategic third-party buyer
When no qualified family successor exists, selling to a strategic buyer is often the best option to maximize value and ensure business continuity.
What is the main risk of relying solely on a life insurance policy to fund a cross-purchase buy-sell agreement among five co-owning siblings?
Answer: Each sibling must own policies on all others, creating an administrative burden
With five owners, each must own four policies, resulting in 20 separate policies total, which creates significant administrative complexity and cost.
Which valuation method is generally preferred for a closely held family business that generates stable, predictable cash flows?
Answer: Discounted cash flow (DCF) method
The discounted cash flow method is preferred for stable cash flow businesses because it captures the present value of expected future earnings.