Skip to content

ChFC Planning for Business Owners Practice Questions

Official outline
The American College ChFC designation (courses)
Questions on this page
7
Updated
Nov 3, 2026

  1. Question 1, hard

    A business owner transfers company shares to a 3-year grantor retained annuity trust (GRAT) and dies in the second year of the term. What is the estate tax result?

    • A.The trust assets are excluded from her gross estate, because the transfer was a completed gift for gift tax purposes
    • B.The amount of trust assets needed to produce the retained annuity is included in her gross estate
    • C.The remainder passes to the beneficiaries free of estate tax, and the annuity stops being taxed
    • D.The trust assets are included in her estate at their original funding-date value
    Show answer and explanationHide answer

    Correct answer: B. The amount of trust assets needed to produce the retained annuity is included in her gross estate

    If the grantor dies during the GRAT term, IRC Section 2036 pulls into the gross estate the portion of trust assets needed to generate the retained annuity. Much of the planned estate-freeze benefit is lost, which is the mortality risk of a GRAT.

    • A. The retained annuity interest causes partial inclusion if the grantor dies during the term, despite the completed gift for gift tax purposes.
    • B. This is the Section 2036 inclusion measured by assets needed to fund the annuity.
    • C. The remainder is not shielded from estate tax if the grantor dies during the term.
    • D. Inclusion is measured by the assets needed to support the annuity, not the original value.

  2. Question 2, medium

    A sole proprietor with no employees funds a SEP-IRA. The plan lets the employer contribute up to 25% of an employee's compensation. After the self-employment tax deduction, what is the effective maximum contribution rate on the owner's net self-employment earnings?

    • A.25%
    • B.12.5%
    • C.15%
    • D.20%
    Show answer and explanationHide answer

    Correct answer: D. 20%

    For a self-employed owner, the contribution is itself deductible in computing net earnings, so the 25% employee rate works out to an effective 20% of net self-employment earnings (after the deduction for half of self-employment tax).

    • A. The 25% rate applies to employee compensation, not to the owner's net earnings.
    • B. There is no 12.5% rule for sole-proprietor SEP contributions.
    • C. This is not the algebraic result of the circular deduction calculation.
    • D. The circular computation reduces the 25% rate to an effective 20%.

  3. Question 3, hard

    Under IRC Section 101(j), for death proceeds from an employer-owned life insurance (EOLI) contract to retain income tax-free treatment beyond the employer's basis, which conditions must generally be satisfied?

    • A.The employer must obtain the insured employee's written notice and consent before the policy is issued, and either satisfy an exception (such as the insured being a highly compensated employee/director within specified limits, or proceeds being paid to the insured's family/trust or used to buy out the insured's interest) or provide the required annual reporting.
    • B.The employer must be a tax-exempt nonprofit organization that holds the policy for charitable purposes, and the insured employee must have been given written notice of the employer's intent to insure and the amount of coverage before issuance.
    • C.The insured employee must be a rank-and-file employee earning below the Social Security wage base, and the employer must pay the full premiums from after-tax dollars while naming the employee's family as the beneficiary.
    • D.The policy must be a term life insurance contract rather than permanent insurance, and the face amount must not exceed the employee's annual compensation, with the employer receiving the proceeds without any employee notice requirement.
    Show answer and explanationHide answer

    Correct answer: A. The employer must obtain the insured employee's written notice and consent before the policy is issued, and either satisfy an exception (such as the insured being a highly compensated employee/director within specified limits, or proceeds being paid to the insured's family/trust or used to buy out the insured's interest) or provide the required annual reporting.

    IRC Section 101(j) generally requires the employer to obtain the insured employee's written notice and consent before policy issuance, and to either fall within an exception (e.g., the insured was a highly compensated employee or director within specified limits at issuance, or proceeds go to the insured's family, estate, or trust, or are used to buy out the insured's interest) or provide required annual reporting, in order for death proceeds on employer-owned life insurance to retain full income tax-free treatment. B, C, and D describe conditions that are not part of the 101(j) framework.

    • A. Correct. Section 101(j) requires advance written notice and consent from the employee before issuance, plus satisfaction of either an exception (e.g., HCE/director carve-out within limits, or proceeds paid to the employee's family/trust or used for a buy-out) or the annual reporting requirement.
    • B. Section 101(j) applies to employer-owned life insurance generally and is not limited to nonprofit employers; the employer's tax status is not a condition of the exclusion, and notice alone is not sufficient without consent and an exception or reporting.
    • C. There is no requirement limiting the exception to rank-and-file employees below the Social Security wage base; one of the exceptions in fact covers highly compensated employees and directors within defined limits.
    • D. Section 101(j) applies to employer-owned policies whether the coverage is term or permanent, and the framework requires notice and consent rather than waiving it; there is no term-only or compensation-cap requirement.

  4. Question 4, hard

    A decedent's closely held business interest equals 45% of her adjusted gross estate. Which statement about IRC Section 6166 deferral is correct?

    • A.It is unavailable, because the interest must exceed 50% of the adjusted gross estate
    • B.It is available, and the full tax may be paid in installments over 15 years starting at death, with interest charged at the market rate throughout the period
    • C.It is available, but the estate must first sell at least half of the business
    • D.It is available: principal may be deferred up to 5 years, then the tax attributable to the business is paid in up to 10 annual installments
    Show answer and explanationHide answer

    Correct answer: D. It is available: principal may be deferred up to 5 years, then the tax attributable to the business is paid in up to 10 annual installments

    Section 6166 applies when a closely held business interest exceeds 35% of the adjusted gross estate. The estate may defer payment of the attributable tax principal for up to 5 years and then pay it in up to 10 annual installments.

    • A. The threshold is 35%, not 50%, so the 45% interest qualifies.
    • B. The statute allows up to 5 years of deferral followed by up to 10 annual installments, not 15 years of installments from death, and a reduced interest rate applies to part of the deferred tax.
    • C. Section 6166 does not require selling any part of the business.
    • D. This states the 35% test, the 5-year deferral, and the 10-installment payout.

  5. Question 5, easy

    Which of the following is a requirement for a corporation to qualify and maintain S corporation status?

    • A.It may have an unlimited number of shareholders as long as they are all U.S. citizens.
    • B.It may have no more than 100 shareholders and only one class of stock (though differences in voting rights are permitted).
    • C.It must be owned entirely by other corporations or partnerships.
    • D.It must distribute all earnings annually to avoid double taxation.
    Show answer and explanationHide answer

    Correct answer: B. It may have no more than 100 shareholders and only one class of stock (though differences in voting rights are permitted).

    S corporations are limited to 100 shareholders (with certain family attribution rules allowing some flexibility) and may have only one class of stock, though differing voting rights among shares of that single class are permitted. A overstates shareholder limits; C misstates permissible shareholder types (most entities other than certain trusts, estates, and individuals cannot be S corp shareholders); D misstates distribution requirements.

    • A. S corporations are capped at 100 shareholders. There's no allowance for an unlimited count even if all are U.S. citizens.
    • B. An S corporation may have no more than 100 shareholders and only one class of stock, though the stock can carry differing voting rights without violating the one-class rule.
    • C. S corporations generally cannot be owned by other corporations or partnerships; eligible shareholders are individuals, certain trusts, and estates.
    • D. S corporations aren't required to distribute all earnings annually; profits can be retained, though undistributed earnings still pass through and are taxed to shareholders.

  6. Question 6, hard

    For a buy-sell agreement's fixed price or formula to be respected as the value of a business interest for federal estate tax purposes under IRC Section 2703 (for agreements between family members), which requirements must generally be met?

    • A.The agreement is respected if it is in writing and signed by all owners; the stated price, the family relationship of the parties, and arm's-length comparability are not relevant to valuation.
    • B.It must be a bona fide business arrangement, must not be a device to transfer the business to family members for less than full and adequate consideration, and its terms must be comparable to similar arrangements entered into by unrelated parties in arm's-length transactions.
    • C.The buy-sell price must equal the most recent appraised fair market value at the time of death, so a fixed price or formula set in advance is not respected for estate tax valuation purposes.
    • D.IRC 2703 applies to agreements involving publicly traded corporations and does not reach buy-sell agreements among family members of a closely held business, whose stated prices are respected.
    Show answer and explanationHide answer

    Correct answer: B. It must be a bona fide business arrangement, must not be a device to transfer the business to family members for less than full and adequate consideration, and its terms must be comparable to similar arrangements entered into by unrelated parties in arm's-length transactions.

    Under IRC Section 2703, a buy-sell agreement's price or formula will only be respected for federal estate (and gift) tax valuation purposes between family members if it is a bona fide business arrangement, is not a device to transfer the business to family members for less than full and adequate consideration, and its terms are comparable to arrangements that would be reached by unrelated parties negotiating at arm's length. A, C, and D each misstate or omit these requirements.

    • A. A writing alone is not sufficient under §2703; price adequacy and the arm's-length comparability of terms are exactly what the statute requires the agreement to satisfy, especially between family members.
    • B. For family agreements, §2703 requires the arrangement be bona fide, not a disguised gift/bargain sale to family (i.e., for full and adequate consideration), and its terms must be comparable to what unrelated parties would negotiate at arm's length.
    • C. A fixed price or formula can be respected for estate tax purposes if it meets the §2703 tests; the statute doesn't force use of date-of-death fair market value in place of a qualifying buy-sell price.
    • D. §2703 specifically targets restrictions and buy-sell agreements between family members (and closely held businesses generally), so family agreements are not automatically respected as stated.

  7. Question 7, medium

    A privately held company gives a key manager 1,000 phantom shares that track company value and pay cash in five years under a plan that complies with Section 409A. How is the payout taxed?

    • A.Long-term capital gain to the manager, with no deduction for the company
    • B.Ordinary income to the manager when paid, with a matching deduction for the company
    • C.Ordinary income to the manager at grant, with a deduction for the company at grant
    • D.Tax-free to the manager because no actual shares are issued
    Show answer and explanationHide answer

    Correct answer: B. Ordinary income to the manager when paid, with a matching deduction for the company

    Phantom stock pays cash tied to company value, so the payout is compensation. The manager reports ordinary income when paid, and the company deducts the same amount when paid (subject to reasonableness).

    • A. The manager never owns stock, so capital gain treatment does not apply to cash compensation.
    • B. Ordinary income to the manager and a deduction for the company both arise at payment.
    • C. Nothing is taxed at grant because the manager has not received value yet.
    • D. Cash paid for services is taxable compensation whether or not shares are issued.

Sources

Federal regulations

Other

Questions are drafted with help from AI and published only after a person reviews and approves them. How these questions are made

More Planning for Business Owners questions

Practice Planning for Business OwnersCustomize ChFC practice

Keep going

The same subject on other exams

More ChFC topics

Already working in the field?

Learn about Parsonex