Question 1

Credit checking customers is an example of a risk reduction strategy.

Accepted Answer

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Question 2

Part of risk-reducing strategies is taking steps to build some safety into a situation.

Accepted Answer

Building safety measures into a situation is a common strategy for reducing risks. It can involve things like implementing safety protocols, having backup plans in place, and providing training or resources to help people avoid dangerous situations.

Question 3

Nearly all business owners think that their heirs will need to sell part or all of the business to satisfy estate taxes.

Accepted Answer

This is a common belief among business owners, as estate taxes can be substantial and difficult to pay without liquidating assets. However, there are strategies that can be used to minimize the impact of estate taxes without selling the business. It is important for business owners to work with financial and legal professionals to develop a comprehensive estate plan that takes all factors into consideration.

Question 4

An irrevocable asset trust is designated to pass insurance proceeds on to the small business owner's heirs without them having to pass through probate or be subject to estate taxes.

Accepted Answer

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Question 5

The risk behind self-insurance is that if there aren't sufficient funds set aside,the business will suffer losses.

Accepted Answer

Self-insurance relies on the business setting aside funds to cover potential losses, so if there aren't enough funds, the business could suffer financial harm from the risks it is self-insuring against.

Question 6

Risk management is deciding what type of insurance or other precautions need to be implemented to decrease a business's exposure to loss.

Accepted Answer

Risk management involves identifying and assessing potential risks to a business and taking necessary steps to mitigate or prevent them. Insurance is one tool that can be used to transfer some of the risks to an insurance company. Therefore, risk management does involve deciding on what type of insurance or other precautions need to be implemented to decrease a business's exposure to loss.

Question 7

A buy/sell agreement often also uses life and disability insurance to ensure the surviving co-owners have the means to buy the business.

Accepted Answer

A buy/sell agreement often includes provisions for life and disability insurance to provide funding for the surviving co-owners to buy out the deceased or disabled owner's share of the business.

Question 8

An estate freeze minimizes estate taxes by creating two classes of stock,preferred and nonvoting common stock,and only allowing the preferred stock,which the owner holds,to appreciate.

Accepted Answer

An estate freeze is a legitimate tax planning tool that allows individuals to freeze the value of their estate by transferring ownership of their business or assets to another party, typically an irrevocable trust. The preferred stock represents the ownership interest in the underlying assets, while the nonvoting common stock represents a passive investment with limited voting rights. By retaining ownership of the preferred stock, the owner can control the business while ensuring that the appreciation in value is not subject to estate tax. Thus, an estate freeze is an effective way to pass down a business or assets to the next generation while minimizing future tax liabilities.

Question 9

A bypass trust allows the business owner to keep life insurance proceeds out of his/her estate as long as the owner doesn't die within three years of establishing the trust.

Accepted Answer

A bypass trust is designed to reduce the estate tax liability by allowing each spouse to use their estate tax exemption, not specifically to keep life insurance proceeds out of the estate. The three-year rule applies to life insurance policies transferred into an irrevocable life insurance trust (ILIT), not a bypass trust.

Question 10

Installing a sprinkler system to minimize the threat of fire would be a risk reduction strategy.

Accepted Answer

Installing a sprinkler system is a risk reduction strategy as it can help to minimize the threat of fire by detecting and extinguishing it before it becomes a major problem.

Question 11

Identify and explain the essential qualities to a successful family business.

Accepted Answer

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Question 12

Anti-theft and anti-shoplifting equipment are risk avoidance devices.

Accepted Answer

Anti-theft and anti-shoplifting equipment are risk mitigation devices, designed to reduce the risk and impact of theft, rather than avoiding the risk entirely.

Question 13

A small business establishing a self-insurance fund is following a risk transferring strategy.

Accepted Answer

Self-insurance involves retaining the risk within the organization rather than transferring it to an insurance company. Therefore, it is a risk retention strategy rather than a risk transferring strategy.

Question 14

Every risk can be insured.

Accepted Answer

There are certain risks that cannot be insured such as intentional acts of damage or harm, war, and illegal activities.

Question 15

Self-insurance is entirely a large business phenomenon.

Accepted Answer

Self-insurance is not limited to large businesses, it is also used by small businesses and individuals to manage their own risk and avoid paying premiums to traditional insurance companies.

Question 16

Small businesses can lower their insurance premiums by banding together to purchase coverage.

Accepted Answer

By forming a group and purchasing insurance together, small businesses can spread the risk of claims across the group, which can lead to lower premiums for each individual business. This is known as group or association insurance.

Question 17

A trust is a contract between a grantor and a trustee which shields all assets from any federal tax and permits the small business owner to pass on his/her business without tax loss.

Accepted Answer

A trust can provide various tax benefits and help in estate planning, but it does not universally shield all assets from federal tax, nor does it guarantee the ability to pass on a business without any tax implications.

Question 18

The process of transferring power should be quick and absolute.

Accepted Answer

The process of transferring power should be carefully planned and executed to ensure stability, legality, and the maintenance of trust in the governing system. A quick and absolute transfer might overlook necessary legal, procedural, and societal considerations.

Question 19

Risk anticipation strategies promote self-insurance.

Accepted Answer

Risk anticipation strategies are aimed at identifying potential risks and taking measures to minimize their impact. By doing so, individuals and organizations are essentially self-insuring, in that they are taking steps to protect themselves rather than relying on an insurance company to provide coverage. Therefore, risk anticipation strategies do promote self-insurance.

Question 20

Insurance coverage is an example of risk transfer.

Accepted Answer

Insurance coverage involves transferring the risk of financial loss from an individual or organization to an insurance company. This is done through payment of premiums or fees, which give the policyholder protection against potential losses. Therefore, insurance coverage is an example of risk transfer.

Quiz 22: Management Succession and Risk Management Strategies in the Family Business