CTFA Fiduciary Duties and Legal Compliance 1 — Questions and Answers
Question 1: Which of the following best describes a fiduciary's duty of loyalty?
- The fiduciary must act solely in the best interests of the beneficiaries, not in self-interest (Correct answer)
- The fiduciary must invest trust assets to maximize returns at all costs
- The fiduciary must distribute income equally among all beneficiaries
- The fiduciary must follow every instruction given by the trust grantor
Correct answer: The fiduciary must act solely in the best interests of the beneficiaries, not in self-interest
The duty of loyalty requires a fiduciary to act exclusively in the interest of the beneficiaries and avoid conflicts of interest or self-dealing.
Question 2: Under the Uniform Prudent Investor Act (UPIA), how should a trustee evaluate investment decisions?
- By considering each investment in the context of the overall portfolio (Correct answer)
- By evaluating each investment in isolation for its individual risk
- By maximizing the trust's income regardless of total return
- By following the legal list of approved investments in the trust document
Correct answer: By considering each investment in the context of the overall portfolio
UPIA requires a portfolio approach where individual investment decisions are evaluated in the context of the total portfolio strategy rather than in isolation.
Question 3: What is a trustee's duty of impartiality?
- The obligation to balance the interests of income beneficiaries and remainder beneficiaries fairly (Correct answer)
- The requirement to distribute equal dollar amounts to all trust beneficiaries
- The duty to invest trust assets without any preference for one asset class
- The obligation to treat co-trustees equally in all decision-making
Correct answer: The obligation to balance the interests of income beneficiaries and remainder beneficiaries fairly
The duty of impartiality requires a trustee to invest and administer the trust fairly, balancing the interests of current income beneficiaries and future remainder beneficiaries.
Question 4: Which legal standard defines a trustee's minimum level of care in managing trust assets?
- The prudent investor standard (Correct answer)
- The business judgment rule
- The reasonable person standard for personal finances
- The legal list standard
Correct answer: The prudent investor standard
The prudent investor standard, codified in the UPIA, requires trustees to invest with the care, skill, and caution of a prudent investor managing a portfolio.
Question 5: A trustee who profits personally from a trust transaction without beneficiary consent has committed which breach?
- Self-dealing (Correct answer)
- Negligent delegation
- Breach of confidentiality
- Commingling of assets
Correct answer: Self-dealing
Self-dealing occurs when a trustee enters into transactions with the trust for personal benefit, violating the duty of loyalty.
Question 6: What is the primary purpose of a trust protector in modern trust drafting?
- To provide flexibility by holding powers to modify trust terms or replace trustees (Correct answer)
- To serve as a co-trustee with investment authority only
- To act as the trust's registered agent in its situs state
- To represent minor beneficiaries in trust litigation
Correct answer: To provide flexibility by holding powers to modify trust terms or replace trustees
A trust protector holds specified powers—such as modifying administrative terms or replacing trustees—to maintain flexibility as laws and circumstances change.
CTFA Fiduciary Duties and Legal Compliance 1
Which of the following best describes a fiduciary's duty of loyalty?