CTFA Trust and Financial Advisor Certification 5 — Questions and Answers
Question 1: A trustee receives competing instructions from co-trustees who are deadlocked on an investment decision. What is the most appropriate course of action under the Uniform Trust Code?
- The senior co-trustee's decision automatically prevails
- Petition the court for instructions to resolve the deadlock (Correct answer)
- Defer to the majority vote; if even, the status quo is maintained
- Resign and appoint a successor trustee to break the tie
Correct answer: Petition the court for instructions to resolve the deadlock
When co-trustees reach an impasse that cannot be resolved, seeking court instruction is the appropriate remedy to protect the trustees from liability and serve the beneficiaries' best interests.
Question 2: Which gift tax valuation technique uses the IRS §7520 rate to discount the present value of future interests, making transfers more gift-tax efficient when rates are low?
- Annual exclusion gifting strategy
- Intra-family loan at the applicable federal rate (AFR)
- Grantor retained interest trust techniques (GRATs, GRUTs, QPRTs) (Correct answer)
- Qualified opportunity zone investments
Correct answer: Grantor retained interest trust techniques (GRATs, GRUTs, QPRTs)
GRATs, GRUTs, and QPRTs use the §7520 rate to value retained interests; a lower §7520 rate increases the value of the retained interest, reducing the taxable gift of the remainder.
Question 3: A corporate fiduciary is named as trustee of a trust that also holds shares in the corporate trustee's parent company. This arrangement most directly implicates which fiduciary concern?
- Duty to diversify because the stock concentration is excessive
- Conflict of interest and self-dealing under the duty of loyalty (Correct answer)
- Duty to inform because beneficiaries are unaware of the holding
- Duty of prudence because bank stocks are inherently speculative
Correct answer: Conflict of interest and self-dealing under the duty of loyalty
Holding stock in the trustee's own affiliated company creates a classic conflict of interest, as the trustee has a financial stake in decisions regarding that holding.
Question 4: A generation-skipping transfer (GST) tax is triggered when assets pass to a 'skip person.' Which of the following is a skip person relative to the transferor?
- The transferor's child
- The transferor's grandchild whose parent (the transferor's child) is living (Correct answer)
- The transferor's sibling
- The transferor's spouse
Correct answer: The transferor's grandchild whose parent (the transferor's child) is living
A grandchild whose parent is alive is a skip person because they are two or more generations below the transferor, making transfers to them subject to the GST tax.
Question 5: A trust beneficiary requests a copy of the trust document from the corporate trustee. Under most state laws and the Uniform Trust Code, what is the trustee's obligation?
- Provide the entire document only if the beneficiary is also a co-trustee
- Provide a copy of the relevant portions or the full document to qualified beneficiaries upon request (Correct answer)
- Decline and direct the beneficiary to petition the court for disclosure
- Share only an annual accounting, not the trust instrument itself
Correct answer: Provide a copy of the relevant portions or the full document to qualified beneficiaries upon request
The UTC imposes a duty on trustees to provide qualified beneficiaries with a copy of the trust instrument or relevant terms upon request, as part of the duty to inform.
Question 6: A client establishes a qualified personal residence trust (QPRT) and transfers their primary home to it. After the trust term expires, what happens if the client continues to live in the home?
- The client may continue living there at no cost since they created the trust
- The client must pay fair market rent to the remainder beneficiaries who now own the home (Correct answer)
- The property reverts to the client and the gift tax exemption is recaptured
- The trust automatically renews for another equal term at the client's option
Correct answer: The client must pay fair market rent to the remainder beneficiaries who now own the home
Once the QPRT term ends, the remainder beneficiaries own the property; if the grantor continues to reside there without paying fair market rent, the IRS may include the property in the grantor's estate.
Question 7: A CTFA is assessing whether a client's estate plan should use a disclaimer strategy. For a disclaimer to be a qualified disclaimer under IRC §2518, which requirement must be met?
- The disclaimer must be filed within 18 months of the transfer
- The disclaimant must not have accepted any benefits from the interest before disclaiming (Correct answer)
- The disclaimed property must pass to the disclaimant's surviving spouse
- The disclaimer must be approved by the probate court before becoming effective
Correct answer: The disclaimant must not have accepted any benefits from the interest before disclaiming
A qualified disclaimer under §2518 requires, among other conditions, that the disclaimant not have accepted the interest or any of its benefits prior to making the disclaimer.
CTFA Trust and Financial Advisor Certification 5
A trustee receives competing instructions from co-trustees who are deadlocked on an investment decision.
What is the most appropriate course of action under the Uniform Trust Code?