AEP Fiduciary Responsibilities & Professional Collaboration 3 ā Questions and Answers
Question 1: Under the Uniform Prudent Investor Act (UPIA), which factor is NOT among those a trustee must consider when making investment decisions?
- General economic conditions
- The role each investment plays within the overall portfolio
- The personal investment preferences of the trustee (Correct answer)
- Tax consequences of investment decisions
Correct answer: The personal investment preferences of the trustee
The UPIA requires trustees to consider economic conditions, portfolio context, and tax consequences, but a trustee's personal investment preferences are irrelevant and may constitute a conflict of interest.
Question 2: When a CPA in an estate planning team identifies a potential tax-saving strategy that would also require restructuring the client's business entity, the most appropriate professional collaboration step is to:
- Implement the restructuring directly as it falls within the CPA's tax authority
- Share the strategy with the attorney and business advisor before presenting to the client (Correct answer)
- Present the strategy to the client without involving other team members to avoid billing conflicts
- Decline to raise the strategy as it falls outside the CPA's scope
Correct answer: Share the strategy with the attorney and business advisor before presenting to the client
Effective professional collaboration requires the CPA to share identified strategies with the full teamāattorney and business advisorābefore presenting to ensure legal, operational, and planning alignment.
Question 3: A fiduciary holds a trust with a spendthrift provision. A creditor of the income beneficiary demands that the trustee redirect income distributions directly to them. The trustee should:
- Comply with the creditor's demand to avoid personal liability
- Refuse the demand, as spendthrift provisions generally protect trust distributions from creditor claims prior to receipt (Correct answer)
- Seek court approval before distributing to either the beneficiary or creditor
- Distribute half to the beneficiary and half to the creditor as a compromise
Correct answer: Refuse the demand, as spendthrift provisions generally protect trust distributions from creditor claims prior to receipt
A valid spendthrift provision prevents creditors from attaching trust distributions before the beneficiary actually receives them, so the trustee should refuse the creditor's demand.
Question 4: An AEP who is also a licensed insurance agent recommends a client purchase a life insurance policy that pays the AEP a significant commission. This situation primarily raises which fiduciary concern?
- Breach of the duty of loyalty due to a conflict of interest (Correct answer)
- Violation of the duty of prudent investment
- Breach of the duty to diversify
- Violation of the duty of impartiality between beneficiaries
Correct answer: Breach of the duty of loyalty due to a conflict of interest
Recommending a product that generates personal compensation for the fiduciary is a classic conflict of interest that implicates the duty of loyalty, requiring full disclosure or recusal.
Question 5: In estate planning team meetings, which practice best supports each professional's independent ethical obligations while promoting effective collaboration?
- Designating one professional as decision-maker to eliminate conflicting advice
- Maintaining separate client engagement letters that define each professional's distinct role and responsibilities (Correct answer)
- Having all professionals sign a single joint engagement letter to simplify billing
- Limiting inter-professional communication to avoid potential malpractice cross-liability
Correct answer: Maintaining separate client engagement letters that define each professional's distinct role and responsibilities
Separate engagement letters that clearly define each professional's role protect independent ethical duties, establish individual accountability, and prevent scope-of-practice confusion.
Question 6: A trustee receives a request from the primary beneficiary to invest the entire trust corpus in a single real estate venture the beneficiary controls. Under the UPIA, the trustee's most appropriate response is to:
- Comply as the primary beneficiary's wishes should take precedence
- Refuse and maintain a diversified portfolio absent compelling circumstances (Correct answer)
- Request approval from the remainder beneficiaries before deciding
- Invest half in the venture as a compromise position
Correct answer: Refuse and maintain a diversified portfolio absent compelling circumstances
The UPIA requires diversification as a default standard of prudence, and investing the entire corpus in a single venture controlled by a beneficiary would also create a prohibited conflict of interest.
Question 7: When an estate planning attorney uncovers during document review that the client's existing irrevocable trust was improperly drafted by a prior attorney, the AEP on the team should:
- Remain silent to avoid creating inter-professional conflict
- Encourage the attorney to advise the client of the issue and potential remedies such as trust decanting or court modification (Correct answer)
- Draft corrective documents independently to fix the problem
- Advise the client to ignore the issue if it has not yet caused harm
Correct answer: Encourage the attorney to advise the client of the issue and potential remedies such as trust decanting or court modification
The AEP should support the attorney in fully disclosing the drafting problem to the client and exploring remedies such as decanting, non-judicial modification, or court reformation.
AEP Fiduciary Responsibilities & Professional Collaboration 3
Under the Uniform Prudent Investor Act (UPIA), which factor is NOT among those a trustee must consider when making investment decisions?