Lesson 9 Flashcards
Which of the following statements concerning the retention by the business owner of a substantial
interest in the business until death is correct?
A. The executor’s election to defer payment of estate taxes under Section 6166 is only available if the
value of the closely held business is greater than 50 percent of the adjusted gross estate.
B. The estate of the business owner may face a severe liquidity shortfall.
C. The executor of the business owner’s estate should be able to find a purchaser relatively quickly if
the decedent owned a controlling interest in the business.
D. The family successors are likely to remain motivated because they understand that they will inherit
the business in the future.
B. The estate of the business owner may face a severe liquidity shortfall.
Mrs. Smith is the 60 percent owner of an LLC that is an operating business. The remaining ownership
of the business is held in equal shares by three children and one investor who provided some capital
when she formed the LLC. The operating agreement provides that the management of the LLC is
determined by majority vote. She has been advised to begin to reduce her potential estate tax liability.
One proposal is to transfer one-half of her current ownership (30 percent of the membership units) in
the LLC to a grantor retained annuity trust (GRAT). She will retain the right to receive 7 percent of her
initial contribution to the GRAT annually for 10 years. At the termination of the GRAT, the remainder
will be paid to her children in equal shares. Which of the following statements concerning this
transaction is correct?
A. She can partially shelter the gift of the GRAT by using her gift tax annual exclusion.
B. The principal of the GRAT will be removed from her gross estate if she dies within 10 years.
C. The income earned by the trust will be taxable to the trustee of the GRAT.
D. The value of her initial contribution to the GRAT can be discounted due to the minority
interest (lack of control) discount for value purposes.
D. The value of her initial contribution to the GRAT can be discounted due to the minority
interest (lack of control) discount for value purposes.
Which one of the following statements concerning the estate tax forecast for the estate of the owner
of a closely held business is correct?
A. The estate tax payable by the estate of the owner of a closely held business is increased if annual
exclusion gifts were made by the business owner in the year of his or her death.
B. One advantage of a binding buy-sell agreement is the ability to use the purchase price in
the agreement to establish the estate tax value of the business interest.
C. The estate taxes payable are deductible on the estate tax return.
D. The gross estate of the business owner is reduced if personally owned life insurance was
transferred to a trust two years prior to the owner’s death.
B. One advantage of a binding buy-sell agreement is the ability to use the purchase price in
the agreement to establish the estate tax value of the business interest.
Mrs. Hanford and her son respectively own 60 and 40 percent of the stock in the family corporation.
She has other children that she hopes will receive substantial inheritances. She has been advised to
form a buy-sell agreement with her son who will take over the control of the business at her death.
Which of the following statements concerning this scenario is correct?
A. If the buy-sell agreement has adequate funding, liquidity will be available to provide an
inheritance to her other children.
B. The purchase price of the stock that is subject to the buy-sell agreement can be discounted for lack
of control.
C. The buy-sell agreement should be designed as a stock redemption.
D. An appropriately designed cross-purchase agreement with her son could increase the corporation’s
exposure to the accumulated-earnings tax and the alternative minimum tax (AMT).
A. If the buy-sell agreement has adequate funding, liquidity will be available to provide an
inheritance to her other children.
Mr. Wright owns 60 percent of an S corporation. The remaining 40 percent is owned equally by his
two children who are active in the business. He would like to transfer the business interest to his
children in equal shares but wishes to retain some current income. Which of the following strategies
would be appropriate?
A. He should create a grantor-retained annuity trust (GRAT) and transfer the stock to the trustretaining
a fixed annuity for a period of years with a remainder to his two children who are
active in the business.
B. He should create a family trust benefitting his two children and immediately transfer all of his stock
to the trust.
C. He should enter into a buy-sell agreement with his two children effective at the time of his death.
D. He should transfer the stock in the S corporation to an LLC and retain all management authority.
A. He should create a grantor-retained annuity trust (GRAT) and transfer the stock to the trustretaining
a fixed annuity for a period of years with a remainder to his two children who are
active in the business.
Mr. Lubbok is the controlling owner of a closely held corporation. He is approaching the time that he
would like to retire and transfer the business. Which of the following statements concerning the
retirement and estate planning objectives is (are) correct?
I. He could sell the business to new management and form a consulting
arrangement with the buyers to supplement his retirement income.
II. It might be advisable that he consults with several advisors before deciding the
appropriate method to transfer the business and arrange his estate plan.
C. Both I and II
The owner of a closely held business is approaching retirement and has become concerned about
retirement planning and estate planning objectives. Which of the following statements concerning this
situation is (are) correct?
I. The use of estate-freezing techniques often results in some continued cash
flow from the business and a reduction in the value of the business owner’s
gross estate.
II. The owner of a closely held business can sell the business and use the
proceeds to fund retirement income needs.
C. Both I and II
A business owner, age 55, owns a majority interest in the stock of her closely held corporation. She
has two children who are active in the business but has not determined their capability for taking
over management. An estate-freeze transaction involving the stock she owns in the Corporation is
inappropriate for all the following reasons EXCEPT:
A. She would like to retain control of the business for a period of time.
B. She would like to retire within two years and receive a lump sum for her ownership
interest.
C. She would like to retain some cash flow from the business for a period of time.
D. Her children are not immediately capable of taking over management of the Corporation.
B. She would like to retire within two years and receive a lump sum for her ownership
interest.
Mrs. Laurence personally owns a large commercial building that is leased to her corporation. She
plans to sell the business to successor management. She would like to transfer the building to her
daughter to meet estate-freezing goals. The use of an installment sale to transfer the building to her
daughter would meet all the following objectives EXCEPT:
A. All growth in the value of the building after the sale is completed will belong to her daughter.
B. All value from the installment note is removed from her gross estate regardless of when
she dies.
C. The current low interest rate environment will minimize the interest income that Mrs. Laurence
must receive each year.
D. The installment payments will be useful to supplement her retirement income.
B. All value from the installment note is removed from her gross estate regardless of when
she dies.
All of the following are examples of estate tax freeze examples EXCEPT:
A. installment sale of a business or other asset
B. a grantor retained annuity trust
C. allocation of the annual gift tax exclusion to an appreciating asset
D. gifting a low basis asset to remove the current appreciation from the estate
D. gifting a low basis asset to remove the current appreciation from the estate
Mrs. Jacques is the owner of a closely held business valued at $20 million. It is the largest asset of
her estate. She is currently married but her husband has no role in the business. She has one child that is
active in the business and two other children. She is interested in providing a comfortable retirement for
her husband if he survives her. She also would like to provide relatively fair distributions from her estate to
all children. The creation of an irrevocable life insurance trust (ILIT) could be useful in the circumstances
for all of the following reasons EXCEPT:
A. The ILIT will be able to provide income and principal as necessary for her husband’s retirement.
B. The ILIT could be used to provide distributions to the inactive children if she leaves a significant
business interest to her child that is currently active in the business.
C. The ILIT provides her with the flexibility to change the terms later on to adapt to family
circumstances.
D. The ILIT can be useful to provide liquidity to her estate.
C. The ILIT provides her with the flexibility to change the terms later on to adapt to family
circumstances.
A business owner, age 60, owns 80 percent of the stock in an S corporation. The business owner
has begun investigating methods for business succession in coordination with her estate planning
objectives. Her estate is valued at $25 million and her interest in the business is valued at $15
million. She received a recommendation to begin making substantial transfers of her business to her
two children who are active in the business. An irrevocable life insurance trust (ILIT) with $10 million
face amount of life insurance on her life might be recommended immediately for all the following
reasons EXCEPT:
A. There are limitations on making tax-free gifts that will prevent her from divesting her estate of
much of her wealth and she could have a substantial estate tax liability forecast for the immediate
future.
B. The ILIT can be terminated and the policy redistributed to her when she completes the rest
of her estate planning steps.
C. The ILIT can be useful in providing liquidity because it can be designed to purchase non-liquid
assets from her estate at the time of her death.
D. She may have a substantial estate tax to pay regardless of whether her estate planning steps
have been completed.
B. The ILIT can be terminated and the policy redistributed to her when she completes the rest
of her estate planning steps.
