CEA Family Governance & Wealth Transfer 4 — Questions and Answers
Question 1: When drafting an incentive trust, a common concern is the 'dead hand' problem, which refers to:
- Difficulty valuing illiquid trust assets after the grantor's death
- The grantor controlling beneficiary behavior from the grave through restrictive trust provisions (Correct answer)
- The trustee's liability for investment losses after the grantor dies
- Failure to update the trust before the grantor becomes incapacitated
Correct answer: The grantor controlling beneficiary behavior from the grave through restrictive trust provisions
The 'dead hand' problem occurs when trust provisions so tightly control beneficiary behavior that they may be counterproductive or unenforceable.
Question 2: A family limited liability company (FLLC) offers estate planning benefits similar to an FLP but is generally preferred because:
- It avoids all income taxes on distributions
- It offers greater flexibility in management structure and fewer formalities than a limited partnership (Correct answer)
- It qualifies for a 100% estate tax deduction
- It eliminates the need for annual gift tax returns
Correct answer: It offers greater flexibility in management structure and fewer formalities than a limited partnership
FLLCs provide comparable valuation discount benefits with fewer formal requirements and more flexible governance structures than FLPs.
Question 3: In a multi-generational wealth transfer plan, 'human capital' refers to:
- The total market value of all family-owned businesses
- The skills, education, health, and earning potential of family members (Correct answer)
- Life insurance death benefits payable to heirs
- The family's real estate portfolio
Correct answer: The skills, education, health, and earning potential of family members
Human capital encompasses the productive capacity of individuals — their knowledge, skills, and health — which is a core focus of holistic family governance.
Question 4: A charitable lead annuity trust (CLAT) differs from a charitable remainder trust (CRT) in that the CLAT:
- Provides income to the grantor for life, then passes remainder to charity
- Pays a fixed annuity to charity first, with the remainder passing to non-charitable beneficiaries (Correct answer)
- Is irrevocable only for a term of five years or more
- Must be funded exclusively with cash or publicly traded securities
Correct answer: Pays a fixed annuity to charity first, with the remainder passing to non-charitable beneficiaries
In a CLAT, the charity receives the lead interest (fixed annuity payments) during the trust term, and non-charitable heirs receive the remainder.
Question 5: Which principle of the Uniform Trust Code (UTC) allows a court to modify an irrevocable trust when circumstances have changed in ways the settlor did not anticipate?
- Cy-pres doctrine
- Equitable deviation (Correct answer)
- Spendthrift provision
- Pour-over clause
Correct answer: Equitable deviation
Equitable deviation permits courts to modify trust administrative or dispositive terms when unanticipated circumstances arise that would frustrate the settlor's intent.
Question 6: A private foundation differs from a donor-advised fund (DAF) primarily in that a private foundation:
- Offers an immediate income tax deduction while a DAF does not
- Requires the donor to maintain operational control and file annual IRS returns (Form 990-PF) (Correct answer)
- Is exempt from the 5% minimum distribution requirement
- Can only invest in US government bonds
Correct answer: Requires the donor to maintain operational control and file annual IRS returns (Form 990-PF)
Private foundations require active management, annual IRS filings, and adherence to minimum distribution rules, unlike DAFs which are managed by a sponsoring organization.
Question 7: A family governance 'values audit' is best described as:
- An IRS review of a family's charitable deductions
- A structured process to identify and articulate the family's core beliefs and priorities to guide decision-making (Correct answer)
- An annual financial statement review by an outside CPA
- A legal assessment of trust document compliance
Correct answer: A structured process to identify and articulate the family's core beliefs and priorities to guide decision-making
A values audit is a facilitated family process to surface shared beliefs and priorities, which then inform governance documents, investment policies, and philanthropic strategies.
CEA Family Governance & Wealth Transfer 4
When drafting an incentive trust, a common concern is the 'dead hand' problem, which refers to: