AEP Fiduciary Responsibilities & Professional Collaboration 2 — Questions and Answers
Question 1: An AEP serving as a trustee discovers that a co-trustee has been self-dealing by purchasing trust assets at below-market prices. What is the AEP's primary fiduciary obligation?
- Notify the beneficiaries and take steps to remedy the breach (Correct answer)
- Defer to the co-trustee's judgment since they share equal authority
- Report the issue only if the amount exceeds a material threshold
- Document the transaction and continue administering the trust
Correct answer: Notify the beneficiaries and take steps to remedy the breach
A trustee who discovers a co-trustee's breach of fiduciary duty must take reasonable steps to remedy the breach and notify beneficiaries, as inaction can constitute a separate breach.
Question 2: When an attorney, CPA, and financial advisor collaborate on an estate plan, which professional bears primary responsibility for ensuring the legal documents accurately reflect the client's intent?
- The financial advisor who gathered the client's goals
- The CPA who analyzed the tax implications
- The attorney who drafts and is responsible for the legal documents (Correct answer)
- All professionals share exactly equal responsibility
Correct answer: The attorney who drafts and is responsible for the legal documents
The drafting attorney bears primary responsibility for ensuring legal documents accurately reflect the client's intent, as document preparation constitutes legal practice.
Question 3: A fiduciary learns that a beneficiary plans to use a trust distribution to fund an illegal activity. What is the most appropriate response?
- Distribute the funds as required by the trust terms regardless
- Seek legal counsel and potentially withhold distribution pending court guidance (Correct answer)
- Immediately terminate the trust to avoid liability
- Distribute to a different beneficiary instead
Correct answer: Seek legal counsel and potentially withhold distribution pending court guidance
A fiduciary faced with distributions that may facilitate illegal activity should seek legal counsel and may petition the court for instructions rather than distributing or unilaterally withholding funds.
Question 4: In a multi-disciplinary estate planning team, an AEP detects a significant discrepancy between the client's stated risk tolerance and the investment strategy recommended by the investment advisor. The AEP's best course of action is to:
- Override the investment advisor's recommendation and adjust the portfolio
- Document the concern and raise it directly with the team and the client (Correct answer)
- Defer entirely to the investment advisor as it falls outside the AEP's scope
- Immediately report the advisor to their licensing board
Correct answer: Document the concern and raise it directly with the team and the client
An AEP should document the discrepancy and raise it with both the team and the client, ensuring the client's best interests are served through collaborative communication.
Question 5: Which of the following best describes the 'duty of impartiality' as it applies to a trustee administering a trust with both income beneficiaries and remainder beneficiaries?
- Maximizing total return regardless of its allocation between income and principal
- Balancing investment and distribution decisions so neither class of beneficiaries is unreasonably favored (Correct answer)
- Distributing all income annually to current beneficiaries as required by law
- Investing solely for growth to maximize the remainder estate
Correct answer: Balancing investment and distribution decisions so neither class of beneficiaries is unreasonably favored
The duty of impartiality requires a trustee to balance the competing interests of income and remainder beneficiaries rather than favoring one class over the other.
Question 6: An AEP acting as a personal representative discovers the decedent's estate includes a closely held business with no formal valuation. What is the most critical fiduciary step?
- Use the decedent's original purchase price as fair market value
- Engage a qualified independent business valuator (Correct answer)
- Distribute the business to the residuary beneficiary at book value
- Sell the business immediately to avoid ongoing fiduciary exposure
Correct answer: Engage a qualified independent business valuator
A personal representative must engage a qualified independent appraiser to determine the fair market value of a closely held business for proper estate administration and tax reporting.
Question 7: A successor trustee takes over administration and discovers the prior trustee failed to diversify a concentrated stock position as required under the trust's investment policy. The successor trustee's obligation is to:
- Continue holding the position to avoid realizing capital gains
- Promptly remedy the diversification failure and consider whether to pursue the predecessor for damages (Correct answer)
- Hold the position unchanged since the breach preceded their tenure
- Notify the IRS of the prior trustee's failure
Correct answer: Promptly remedy the diversification failure and consider whether to pursue the predecessor for damages
A successor trustee must remedy ongoing breaches from prior trustees and has an obligation to consider whether to pursue the predecessor trustee for damages caused by the prior breach.
AEP Fiduciary Responsibilities & Professional Collaboration 2
An AEP serving as a trustee discovers that a co-trustee has been self-dealing by purchasing trust assets at below-market prices.
What is the AEP's primary fiduciary obligation?