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
A succession planner recommends an installment sale to an intentionally defective grantor trust (IDGT). What is the primary income tax advantage of this technique?
Answer: No capital gains tax is recognized on the installment sale because the grantor and trust are the same taxpayer
Because the grantor is treated as the owner for income tax purposes, the installment sale to an IDGT is ignored for income tax—no capital gains are recognized on the sale.
When benchmarking a private company's valuation using the guideline public company method, which adjustment is typically ADDED to the comparable public company multiple?
Answer: Control premium for the private subject company
Public company multiples reflect minority, freely tradable interests; when valuing a controlling interest in a private company, a control premium is added before applying marketability discounts.
A business owner in the 37% federal income tax bracket sells business assets via an asset sale. Long-term capital gains on goodwill are taxed at what maximum federal rate?
Answer: 20%
Self-created goodwill is classified as a capital asset; long-term capital gains are taxed at a maximum federal rate of 20% (plus the 3.8% net investment income tax if applicable), well below ordinary income rates.
Which of the following scenarios would MOST likely trigger a valuation discount for lack of control (DLOC) in a succession transfer?
Answer: Gifting a 15% non-voting limited partnership interest
A 15% non-voting limited partnership interest lacks any ability to compel distributions, control management, or force liquidation, making it a classic minority interest subject to DLOC.
A 'funded' buy-sell agreement means the buyout obligation is backed by which financial instrument?
Answer: Life insurance, disability buyout insurance, or sinking fund assets set aside in advance
A funded buy-sell agreement pre-positions financial resources—typically insurance policies or dedicated investment accounts—so that cash is immediately available when a triggering event occurs.
A succession plan is stress-tested using scenario analysis. Which scenario would MOST severely test the plan's financial resilience?
Answer: Simultaneous death of two key owners during a recession with depressed business value
Simultaneous loss of two key owners during a recession creates compounded stress: dual funding demands, depressed asset values, reduced cash flow, and potential lender reassessment of acquisition debt.
For estate tax purposes, what is the valuation date for business interests when the executor makes an 'alternate valuation date' election under IRC Section 2032?
Answer: Six months after the date of death
IRC §2032 allows the executor to elect to value estate assets six months after the date of death, which can reduce estate taxes if asset values have declined during that period.