Chartered Life Underwriter (CLU) Planning for Business Owners and Professionals Syllabus

Planning for Business Owners and Professionals syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Planning for Business Owners and Professionals in Chartered Life Underwriter (CLU), not a summary of it.

1. 1

   Business Valuation and Continuation Needs

   3 topics

   • Approaches to Business Valuation
     • Asset-based and income approaches
     • Market and capitalization-of-earnings methods
   • Identifying Business Continuation Risks
     • Death, disability, and retirement of an owner
   • Forms of Business and Their Impact
2. 2

   Buy-Sell Agreements

   4 topics

   • Cross-Purchase Agreements
     • Funding among co-owners
     • Number-of-policies problem
   • Entity Redemption Agreements
     • Corporate redemption funding
     • Family attribution issues
   • Wait-and-See and Hybrid Agreements
   • Valuation and Tax Issues in Buy-Sell Design
     • Establishing estate tax value
     • Section 2703 requirements
3. 3

   Funding Business Agreements with Insurance

   3 topics

   • Life Insurance Funding
     • Policy ownership structures
     • Transfer-for-value concerns
   • Disability Buy-Out Funding
   • Key Person Insurance
     • Measuring key person value
     • Corporate-owned life insurance rules
4. 4

   Executive Benefits and Business Tax Issues

   3 topics

   • Nonqualified Deferred Compensation
     • Section 409A requirements
     • Informal funding methods
   • Executive Bonus and Split-Dollar Plans
     • Section 162 bonus arrangements
     • Economic benefit and loan regimes
   • Selecting an Entity for Tax Efficiency

Planning for Business Owners and Professionals flashcards for Chartered Life Underwriter (CLU)

23 of 51 cards from the Planning for Business Owners and Professionals deck — real questions with worked answers.

1. What are the three primary approaches to business valuation?

   The income approach (capitalizing or discounting future earnings/cash flow), the market approach (comparing to sales of similar businesses), and the asset (cost) approach (net value of assets minus liabilities).

2. Under the income approach, how is business value calculated using capitalization of earnings?

   Value = Normalized earnings / Capitalization rate. The cap rate reflects the required rate of return adjusted for growth (cap rate = discount rate minus expected growth rate).

3. What is the book value method of business valuation, and what is its main weakness?

   Book value equals assets minus liabilities as recorded on the balance sheet. Its weakness is that it reflects historical (depreciated) cost rather than fair market value and ignores intangibles like goodwill.

4. What is 'goodwill' in business valuation?

   Goodwill is the intangible value of a business exceeding the fair market value of its net tangible assets, reflecting reputation, customer base, and earning power above a normal return on assets.

5. What is the capitalization of earnings formula when normalized earnings are $200,000 and the cap rate is 20%?

   Value = $200,000 / 0.20 = $1,000,000.

6. What does the 'discounted cash flow' (DCF) method measure in valuation?

   It estimates value as the present value of projected future cash flows discounted at a rate reflecting the risk of those cash flows, plus the present value of a terminal value.

7. What IRS revenue ruling provides the foundational factors for valuing closely held business interests?

   Revenue Ruling 59-60, which lists factors such as the nature/history of the business, economic outlook, book value, earning capacity, dividend-paying capacity, goodwill, prior sales, and comparable company values.

8. What are the main risks that threaten business continuation?

   Death of an owner, disability of an owner, retirement/withdrawal of an owner, loss of a key employee, and lack of liquidity to buy out an owner's interest.

9. Why is the death of a co-owner a continuation risk for a closely held business?

   The deceased owner's interest passes to heirs who may be inactive or hostile, the surviving owners may lack funds to buy them out, and the heirs may demand cash or interfere in management.

10. What is a buy-sell agreement?

    A binding contract among business owners (or between owners and the entity) that requires the sale and purchase of an owner's interest upon a triggering event such as death, disability, or retirement, at a set price or formula.

11. What are the three basic forms of business organization affecting continuation planning?

    Sole proprietorship, partnership (general or limited), and corporation (C corporation or S corporation); also limited liability companies (LLCs).

12. What happens to a sole proprietorship at the owner's death?

    The business legally terminates; its assets pass through the owner's estate. Without a plan, the executor must sell, liquidate, or wind it down, often at a loss of going-concern value.

13. How does a partner's death affect a general partnership at common law?

    It causes dissolution of the partnership, requiring winding up unless a buy-sell agreement or partnership agreement provides for continuation by the surviving partners.

14. What is the key liability difference between a C corporation and a partnership/sole proprietorship?

    A C corporation provides limited liability (owners risk only their investment), while sole proprietors and general partners have unlimited personal liability for business debts.

15. How is a C corporation taxed compared to an S corporation?

    A C corporation is taxed at the entity level and again when dividends are paid (double taxation). An S corporation is a pass-through entity whose income is taxed only once at the shareholder level.

16. What is a cross-purchase buy-sell agreement?

    An agreement in which the individual surviving owners agree to purchase the interest of a deceased or withdrawing owner directly from that owner or their estate.

17. In a cross-purchase agreement funded with life insurance, who owns and is beneficiary of the policies?

    Each owner buys, owns, pays premiums on, and is beneficiary of a policy on each of the other owners' lives.

18. How many life insurance policies are needed to fund a cross-purchase agreement with n owners?

    n x (n - 1) policies. For example, 3 owners need 3 x 2 = 6 policies.

19. What is the major income-tax basis advantage of a cross-purchase agreement to surviving owners?

    Surviving purchasers receive a step-up (increase) in cost basis equal to the price paid for the deceased owner's interest, reducing capital gain on a later sale.

20. What is an entity (stock) redemption buy-sell agreement?

    An agreement in which the business entity itself agrees to purchase (redeem) the interest of a deceased or withdrawing owner.

21. How many life insurance policies does an entity redemption plan require for n owners?

    Only n policies—the entity owns one policy on each owner's life and is the beneficiary.

22. In an entity redemption, does the corporation's purchase of stock give surviving shareholders a basis increase?

    No. Because the entity buys the stock, surviving shareholders generally receive no increase in the cost basis of their own shares.

23. What corporate tax trap can arise when a C corporation uses life insurance to fund an entity redemption?

    Life insurance proceeds received by a C corporation may increase its alternative minimum tax exposure (via the adjusted current earnings adjustment, historically) and the redemption can implicate accumulated earnings issues.

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