CEA Trusts & Probate Administration 5 — Questions and Answers
Question 1: What is a 'dynasty trust' and what is its primary estate planning benefit?
- A trust that terminates upon the grantor's death and distributes to heirs
- A long-term or perpetual trust designed to pass wealth across multiple generations while avoiding estate and GST taxes (Correct answer)
- A trust that must distribute all income annually to current beneficiaries
- A charitable trust that benefits multiple generations of a family foundation
Correct answer: A long-term or perpetual trust designed to pass wealth across multiple generations while avoiding estate and GST taxes
A dynasty trust is structured to last many generations, using the generation-skipping transfer (GST) tax exemption to transfer wealth while minimizing estate taxes at each generational level.
Question 2: In probate administration, what is the role of a 'guardian ad litem'?
- An attorney who drafts the decedent's will
- A court-appointed representative who protects the interests of minor or incapacitated beneficiaries in proceedings (Correct answer)
- The person who serves as successor executor if the primary executor cannot serve
- A creditor's representative who monitors estate administration
Correct answer: A court-appointed representative who protects the interests of minor or incapacitated beneficiaries in proceedings
A guardian ad litem is appointed by the court to represent and advocate for the interests of beneficiaries who cannot represent themselves, such as minors or incapacitated adults.
Question 3: What is the generation-skipping transfer (GST) tax designed to prevent?
- Wealthy families from moving assets offshore to avoid estate taxes
- Estates from avoiding estate tax by skipping a generation and transferring assets directly to grandchildren (Correct answer)
- Trustees from distributing trust assets without court approval
- Beneficiaries from disclaiming assets to avoid income taxes
Correct answer: Estates from avoiding estate tax by skipping a generation and transferring assets directly to grandchildren
The GST tax imposes an additional transfer tax when assets pass to beneficiaries two or more generations below the transferor, preventing avoidance of estate tax at each generation.
Question 4: What is 'lapse' in the context of testamentary gifts, and how do anti-lapse statutes address it?
- Lapse occurs when a will is not signed properly; anti-lapse statutes validate improperly executed wills
- Lapse occurs when a beneficiary predeceases the testator; anti-lapse statutes redirect the gift to the deceased beneficiary's descendants (Correct answer)
- Lapse occurs when estate assets are insufficient; anti-lapse statutes require creditors to share losses equally
- Lapse occurs when a trust has no named trustee; anti-lapse statutes allow courts to appoint one
Correct answer: Lapse occurs when a beneficiary predeceases the testator; anti-lapse statutes redirect the gift to the deceased beneficiary's descendants
At common law, a lapsed gift fails; anti-lapse statutes in most states save the gift by passing it to the predeceased beneficiary's descendants, if they are related to the testator.
Question 5: Under the Uniform Fiduciary Income and Principal Act (UFIPA), what is the trustee's power to 'adjust'?
- To reduce trustee compensation to benefit beneficiaries
- To transfer amounts between income and principal to achieve a fair and reasonable return for all beneficiaries (Correct answer)
- To reinvest principal into higher-yield assets without beneficiary consent
- To convert a discretionary trust into a mandatory distribution trust
Correct answer: To transfer amounts between income and principal to achieve a fair and reasonable return for all beneficiaries
The power to adjust allows trustees to reallocate between income and principal accounts when following the prudent investor rule would otherwise unfairly benefit one class of beneficiaries over another.
Question 6: What is 'surcharge' in the context of trustee liability?
- An additional fee trustees charge for extraordinary services
- A monetary remedy requiring a trustee to compensate the trust for losses caused by a breach of fiduciary duty (Correct answer)
- A court-imposed penalty on beneficiaries who file frivolous claims
- An IRS penalty on trusts that fail to distribute required minimum amounts
Correct answer: A monetary remedy requiring a trustee to compensate the trust for losses caused by a breach of fiduciary duty
Surcharge is the primary remedy for trustee misconduct, requiring the breaching trustee to make the trust whole for any losses resulting from the breach of fiduciary duty.
Question 7: What is the purpose of a 'Crummey power' in an irrevocable trust?
- To allow the grantor to reclaim assets placed in the trust
- To give beneficiaries a temporary right of withdrawal so that contributions qualify for the annual gift tax exclusion (Correct answer)
- To permit the trustee to make distributions without beneficiary consent
- To exempt trust assets from the generation-skipping transfer tax
Correct answer: To give beneficiaries a temporary right of withdrawal so that contributions qualify for the annual gift tax exclusion
A Crummey power gives trust beneficiaries a short window (typically 30-60 days) to withdraw contributions, converting future-interest gifts into present-interest gifts eligible for the annual exclusion.
CEA Trusts & Probate Administration 5
What is a 'dynasty trust' and what is its primary estate planning benefit?