Business Succession Planning - Review Questions Flashcards
One of the advantages of key employee life insurance is that there is never an estate tax ramification due to the death benefit, whether payable to the corporation, a beneficiary of the key employee, or the estate of the employee.
Choose the best answer.
True
False
False
Corporate-owned key employee life insurance may have some effect on the federal estate tax payable by the deceased key employee’s estate. This can happen when the key employee is a shareholder. The key employee’s taxable estate may increase due to the death proceeds that can increase the value of the company’s stock. The value of corporate stock held by a decedent at death is included in the decedent’s gross estate for federal estate tax purposes.
In which type of partnership is each partner fully liable and involved in the management of the firm?
Choose the best answer.
General Partnership
Limited Partnership
General Partnership
In a general partnership each partner is actively involved in the management of the firm and is fully liable for partnership obligations.
Which of the following statements are true about insurance buy-and-sell agreements for sole proprietorship and/or a partnership? (Select all that are true.)
1) Premiums are deductible
2) Premiums are not deductible
3) Death proceeds are taxable
4) Death proceeds are income tax free
2) Premiums are not deductible
4) Death proceeds are income tax free
In an insurance buy-and-sell agreement, premiums are not deductible whether paid by the partnership or a partner. In addition, death proceeds are treated as under Internal Revenue Code (IRC) Section 101(a), which implies that such proceeds are normally income tax free.
Which of the following are alternatives a shareholder may face if there is a death or permanent disability of a majority shareholder? (Select all that are true.)
1) Accept an adult heir of the deceased into management of the firm
2) Pay the salary of the deceased or disabled shareholder to the heir or heirs
3) Admit into active management of the firm outside interests to whom the stock of the deceased may have
been sold
4) Purchase the stock from the disabled owner or from his or her estate
1) Accept an adult heir of the deceased into management of the firm
3) Admit into active management of the firm outside interests to whom the stock of the deceased may have
been sold
4) Purchase the stock from the disabled owner or from his or her estate
The alternatives they face are: to accept an adult heir of the deceased into management of the firm; to pay dividends that are approximately equivalent to the salary of the deceased or disabled shareholder to the heir or heirs; to admit into active management of the firm outside interests to whom the stock of the deceased may have been sold; or to purchase the stock from the disabled owner or from his or her estate
Shareholders’ interests in a buy and sell agreement are determined when a shareholder passes away.
Choose the best answer.
True
False
False
Each shareholder’s interest is valued at the time the agreement is drafted, and it should be revalued periodically and the agreement amended to incorporate the new values.
If the corporation is in a lower tax bracket than the shareholders, which type of plan would be preferred?
Choose the best answer.
Cross-purchase
Stock Redemption
Stock Redemption
If the corporation is in a lower tax bracket than the shareholders, a redemption plan may be preferred. This is because premium payments would take a smaller share of the corporation’s after-tax income than it would of the shareholder’s after-tax income.
What is the total number of policies needed for a cross-purchase arrangement if there are seven employees?
Choose the best answer.
1) 7
2) 14
3) 42
4) 49
3) 42
The formula is n(n-1). 7(7-1) =42
AAA corporation has a stock-redemption plan and is going to have to claim bankruptcy. Creditors can get access to the cash values in the stock-redemption plan.
Choose the best answer.
True
False
True
Any policy cash values and death proceeds are, therefore, subject to attachment by the creditors of the corporation because the policy values are general corporate assets.
Which of the following characterizes a highly compensated individual for the purposes of defining a parachute payment?
Choose the best answer.
1) Highest paid company employee
2) Highest paid 1% of company employees, up to 250
3) Highest paid 10% of company employees, up to 50
4) Highest paid 5% of company employees, up to 250
2) Highest paid 1% of company employees, up to 250
A highly compensated individual is defined as one of the highest paid 1% of company employees, up to 250 employees.
A business connection of yours, Jim, has passed away while leaving behind the successful home healthcare business he built over the last decade of his life. While you had discussed changing the organization of the business numerous times, it was still structured as a sole proprietorship at the time of Jim’s passing. What typically happens to the remaining business entity in this scenario assuming no formal succession agreement is in place?
Choose the best answer.
1) The business is liquidated by Jim’s heirs.
2) The business is liquidated by Jim’s personal representative
3) Jim’s heirs inherit the business and continue operations
4) Shares of the business pass to Jim’s heirs, who may decide to liquidate or retain their individual ownership
stakes.
2) The business is liquidated by Jim’s personal representative
Which of the following statements are correct concerning an entity buy-sell agreement?
I) The parties to the buy-sell are the business entity itself and its owners.
II) The shares of deceased owners are purchased by surviving shareholder-owners.
III) The parties to the buy-sell are the shareholders amongst themselves.
IV) The business is obligated to purchase the deceased shares as outlined in the agreement.
V) Shareholders are obligated to sell to the business in the event they pass away.
Choose the best answer.
1) I and II
2) I, IV, and V
3) II and III
4) I, III, and V
2) I, IV, and V
The Software Mill is considering a cross-purchase buy-sell agreement among its 5 partners. Assuming the plan will be funded with life insurance, how many policies would the partners be required to obtain in order to provide comprehensive coverage for the plan.
Choose the best answer.
1) 10
2) 5
3) 20
4) 25
3) 20
A business overhead policy provides a benefit to cover specific covered expenses in the event of disability of the owner. Of the following expenses which would NOT be covered under this type of plan?
I) Hospital costs for the owner while he or she is disabled
II) Lease payments for the company’s office space
III) Payments to a supplier related to the financing of inventory
IV) Business liability insurance premiums
Choose the best answer.
1) I only
2) II and IV
3) II, III, and IV
4) I and III
4) I and III
Of the following statements, which one is true regarding key employee life insurance?
Choose the best answer.
1) Death benefit proceeds over and above premiums paid will be taxable to the employer.
2) A surviving spouse of the key employee is typically named as the primary policy beneficiary.
3) The proceeds of a key employee life insurance policy do not constitute taxable income to key employee’s
estate but may be includable in the taxable estate value.
4) Death benefit proceeds will constitute taxable income to a C corporation for purposes of the AMT calculation
only.
4) Death benefit proceeds will constitute taxable income to a C corporation for purposes of the AMT calculation
only.
William Katz, a c-level executive, was recently let go from his position at Make-U-More, Inc. following the company’s acquisition by a competitor. His average compensation over the five years prior to the acquisition was $800,000 per year. Upon his departure from the company William received a payment of $2.85 million. Which of the following statements concerning this payment is true?
I) An analysis comparing Mr. Katz’s $800,000 in compensation to the other employees of Make-U-More will be
required to determine how the payment will be taxed.
II) Only the first $2.4 million of this payment will be taxable to Mr. Katz.
III) $450,000 of this payment will not be classified as deductible compensation to Make-U-More or its acquirer.
IV) Mr. Katz will owe $90,000 in penalty taxes as a result of this payment.
Choose the best answer.
1) I and IV
2) II and III
3) I, III, and IV
4) I, II, and IV
3) I, III, and IV
