CEA Trusts & Probate Administration 3 — Questions and Answers
Question 1: What is the 'prudent investor rule' as it applies to trustees?
- Trustees must invest only in government bonds
- Trustees must invest trust assets with reasonable care, skill, and caution considering the overall portfolio (Correct answer)
- Trustees must maximize returns regardless of risk
- Trustees must follow the investment instructions of beneficiaries
Correct answer: Trustees must invest trust assets with reasonable care, skill, and caution considering the overall portfolio
The prudent investor rule requires trustees to make investment decisions that a prudent person would make considering risk, return, diversification, and the trust's purposes.
Question 2: In probate, what is a 'creditor's claim period'?
- The time beneficiaries have to contest the will
- The statutory deadline by which creditors must file claims against the estate (Correct answer)
- The period during which the executor can pay debts
- The time allowed for the court to appoint an administrator
Correct answer: The statutory deadline by which creditors must file claims against the estate
State law sets a creditor's claim period — typically 3 to 6 months after notice — after which untimely claims are generally barred.
Question 3: A testamentary trust differs from a living trust because it:
- Can be revoked at any time by the grantor
- Is created by a will and only takes effect at death (Correct answer)
- Must be funded during the grantor's lifetime
- Avoids the probate process entirely
Correct answer: Is created by a will and only takes effect at death
A testamentary trust is established within a will and does not come into existence until the testator dies and the will is admitted to probate.
Question 4: Which trust provision prevents a beneficiary's creditors from attaching trust distributions before the beneficiary receives them?
- Spendthrift clause (Correct answer)
- Discretionary clause
- No-contest clause
- Perpetuities clause
Correct answer: Spendthrift clause
A spendthrift clause restricts beneficiaries from assigning their interest and prevents creditors from reaching trust assets before distribution.
Question 5: What is 'ancillary probate'?
- Probate conducted in a foreign country for U.S. citizens
- A secondary probate proceeding in a state where the decedent owned real property but was not domiciled (Correct answer)
- Probate that occurs when there is no will
- An expedited probate process for small estates
Correct answer: A secondary probate proceeding in a state where the decedent owned real property but was not domiciled
Ancillary probate is required in each state where a decedent owned real property, in addition to the primary (domiciliary) probate in the home state.
Question 6: Under the Uniform Trust Code, what is the trustee's duty of loyalty?
- To maximize returns for income beneficiaries over remainder beneficiaries
- To administer the trust solely in the interest of the beneficiaries, avoiding self-dealing (Correct answer)
- To follow grantor's investment preferences even after death
- To distribute assets equally among all beneficiaries
Correct answer: To administer the trust solely in the interest of the beneficiaries, avoiding self-dealing
The duty of loyalty requires trustees to act exclusively in the beneficiaries' best interests and prohibits transactions that benefit the trustee personally.
Question 7: What is a 'decanting' power in trust administration?
- The power to liquidate all trust assets
- The trustee's authority to transfer assets from an existing trust into a new trust with different terms (Correct answer)
- The process of distributing principal to beneficiaries early
- The power to change beneficiary designations on life insurance
Correct answer: The trustee's authority to transfer assets from an existing trust into a new trust with different terms
Trust decanting allows a trustee to pour assets from one trust into a new trust, often to update terms, fix errors, or improve tax efficiency, where state law permits.
CEA Trusts & Probate Administration 3
What is the 'prudent investor rule' as it applies to trustees?