Mixed Deck — All CTFA Topics Flashcards

Which fixed-income measure describes the sensitivity of a bond's price to changes in interest rates?

Answer: Duration

Duration measures the approximate percentage change in a bond's price for a 1% change in interest rates—longer duration means greater interest rate sensitivity.

Based on how they are compensated, financial planners often fall into one of two types. ______________ charges fees based on the intricacy of the plan they produce, whereas commission-based planners are paid commissions on the financial items they sell.

Answer: Free only planners

Financial planners are often distinguished by their compensation models. Fee-only planners charge clients directly for their advice, typically through an hourly rate, a flat fee for a financial plan, or a percentage of assets under management. This contrasts with commission-based planners, who earn income from selling financial products, which can sometimes create conflicts of interest regarding the advice provided.

The IRC Section 7520 rate is used in charitable planning primarily to:

Answer: Calculate the present value of charitable and non-charitable interests in split-interest trusts

The Section 7520 rate (120% of the applicable federal midterm rate, published monthly) is used to calculate the actuarial present value of income and remainder interests in split-interest trusts such as CRTs and CLTs.

A trust contains a spendthrift clause. Which of the following creditors can typically still reach the beneficiary's trust interest despite this clause?

Answer: Child support and alimony claimants under most state laws

Most states create exceptions to spendthrift protection for claims related to child support and alimony, recognizing that public policy favors enforcement of family support obligations.

What is dollar-cost averaging and what is its primary behavioral benefit for long-term investors?

Answer: Investing fixed dollar amounts at regular intervals, which reduces the average cost per share and removes emotional market-timing decisions

Dollar-cost averaging invests fixed amounts on a schedule regardless of price, automatically buying more shares when prices fall and fewer when prices rise.

Which statute governs the delegation of trustee investment functions to agents such as investment advisors?

Answer: Uniform Prudent Investor Act (UPIA)

The UPIA expressly permits trustees to delegate investment functions to qualified agents and defines the standard of care trustees must apply when selecting, monitoring, and instructing agents.

The 10-year rule under the SECURE Act requires most non-spouse inherited IRA beneficiaries to do which of the following?

Answer: Distribute the entire inherited IRA within 10 years of the owner's death

The SECURE Act eliminated the stretch IRA for most non-spouse beneficiaries and requires full distribution of the inherited IRA within 10 years of the original owner's death.

Under the spousal rollover rules, a surviving spouse who inherits an IRA may do which of the following that other beneficiaries cannot?

Answer: Roll the inherited IRA into their own IRA and delay RMDs until they reach age 73

A surviving spouse can roll an inherited IRA into their own IRA, delaying RMDs until they themselves reach the required beginning date age.

A grantor establishes an irrevocable life insurance trust (ILIT) and transfers a policy to it. To avoid estate inclusion under IRC §2042, what transfer rule must be satisfied?

Answer: The grantor must survive the transfer by more than 3 years under IRC §2035

Under IRC §2035, a life insurance policy transferred within three years of death is pulled back into the taxable estate; the grantor must survive more than three years for the transfer to be effective.

A trust document grants the trustee discretionary authority to distribute principal for a beneficiary's 'health, education, maintenance, and support' (HEMS). This standard is significant because it:

Answer: Keeps trust assets outside the beneficiary's taxable estate if the beneficiary is also the trustee

The HEMS standard is an ascertainable standard under IRC §2041, which prevents trust assets from being included in a beneficiary-trustee's gross estate.

Which type of trust allows the grantor to retain a fixed annuity payment for a specified term, with the remainder passing to heirs at reduced gift tax value?

Answer: Grantor Retained Annuity Trust (GRAT)

A GRAT allows the grantor to retain fixed annuity payments for a term, transferring any appreciation above the IRS §7520 hurdle rate to beneficiaries gift-tax efficiently.

A decedent's estate includes a retirement account with no designated beneficiary. How is this asset typically treated?

Answer: Becomes a probate asset distributed under the will or intestacy laws

Without a named beneficiary, retirement account proceeds become part of the probate estate and are distributed according to the decedent's will or state intestacy laws.

A trustee receives competing instructions from co-trustees who are deadlocked on an investment decision. What is the most appropriate course of action under the Uniform Trust Code?

Answer: Petition the court for instructions to resolve the deadlock

When co-trustees reach an impasse that cannot be resolved, seeking court instruction is the appropriate remedy to protect the trustees from liability and serve the beneficiaries' best interests.

Which of the following is a trustee's duty when a conflict arises between co-trustees about an investment decision?

Answer: Follow the majority decision of co-trustees unless the decision is a clear breach of duty

When co-trustees disagree, the majority typically governs, but a dissenting trustee may be protected from liability if the dissent is properly documented.

Which type of employee benefit plan allows both employer and employee to contribute, and contributions are immediately 100% vested?

Answer: SIMPLE IRA

SIMPLE IRA contributions—both employee deferrals and employer matching contributions—are immediately 100% vested at the time of contribution.

A CTFA is reviewing a trust that names an individual as both trustee and sole beneficiary. Which legal doctrine most commonly prevents this arrangement from collapsing the trust?

Answer: Merger doctrine, unless there are other beneficiaries or remainder interests

The merger doctrine holds that when the same person holds all beneficial and legal interests, the trust collapses—unless remainder beneficiaries or other interests keep the legal and equitable title separate.

What is a trustee's duty of impartiality?

Answer: The obligation to balance the interests of income beneficiaries and remainder beneficiaries fairly

The duty of impartiality requires a trustee to invest and administer the trust fairly, balancing the interests of current income beneficiaries and future remainder beneficiaries.

Which type of asset generally passes outside of probate directly to a named beneficiary?

Answer: Life insurance with a named beneficiary

Life insurance proceeds payable to a named beneficiary pass outside of probate and are not subject to the terms of the will.

A charitable remainder unitrust (CRUT) pays the income beneficiary a fixed percentage of the trust's fair market value as revalued annually. How does this differ from a charitable remainder annuity trust (CRAT)?

Answer: A CRUT pays a fixed percentage of annually revalued assets while a CRAT pays a fixed dollar amount

CRUTs recalculate the payout each year based on the current fair market value, while CRATs pay a fixed dollar amount determined at inception regardless of asset performance.

A trustee's duty to diversify investments can be overridden in which circumstance?

Answer: When the trust document expressly permits retention of a concentrated position

Under the UPIA, a trustee is not required to diversify if the trust document contains express language permitting or directing retention of a concentrated position.