Certified Estate and Trust Specialist (CES) — Questions and Answers

Question 1: A trust has both income and remainder beneficiaries with conflicting interests. What principle guides the trustee in managing assets for both?

Impartiality principle (Correct answer)
Total return principle
Remainder protection principle
Income maximization principle

Correct answer: Impartiality principle

The impartiality principle requires a trustee to act fairly among all beneficiaries, balancing the income beneficiary's desire for current distributions against the remainder beneficiary's interest in preserving principal.

Question 2: What is the legal effect of a trust's 'no-contest' (in terrorem) clause?

It requires all disputes to go to mandatory arbitration
It gives the trustee power to amend the trust
It prevents any beneficiary from receiving distributions during litigation
It disinherits a beneficiary who unsuccessfully challenges the trust (Correct answer)

Correct answer: It disinherits a beneficiary who unsuccessfully challenges the trust

A no-contest clause disinherits any beneficiary who challenges the trust and loses, discouraging frivolous litigation against the trust's terms.

Question 3: Which estate settlement strategy uses the marital deduction to defer estate taxes until the death of the surviving spouse?

Generation-skipping transfer
Charitable remainder trust (CRT)
Irrevocable life insurance trust (ILIT)
Qualified terminable interest property (QTIP) trust (Correct answer)

Correct answer: Qualified terminable interest property (QTIP) trust

A QTIP trust qualifies for the unlimited marital deduction, deferring estate taxes until the surviving spouse's death while allowing the first spouse to control the ultimate disposition of assets.

Question 4: Under the concept of 'income in respect of a decedent' (IRD), which of the following is TRUE?

IRD assets receive a step-up in basis at death, eliminating any income tax liability
IRD creates a capital loss deduction for the estate equal to the income tax owed
IRD applies only to Roth IRA accounts inherited by non-spousal beneficiaries
IRD assets do not receive a step-up in basis; beneficiaries owe income tax when they receive the income (Correct answer)

Correct answer: IRD assets do not receive a step-up in basis; beneficiaries owe income tax when they receive the income

IRD items—such as traditional IRA distributions and unpaid wages—do not receive a step-up in basis and remain taxable as ordinary income when received by the beneficiary.

Question 5: Which document formally authorizes a personal representative to collect assets, pay debts, and distribute a decedent's estate?

Power of attorney
Letters testamentary (Correct answer)
Certificate of trust
Deed of trust

Correct answer: Letters testamentary

Letters testamentary are issued by the probate court and grant the executor legal authority to administer the decedent's probate estate.

Question 6: When should a risk register be updated?

When a risk event actually occurs
Only during annual reviews
Continuously as new risks emerge and existing risks change (Correct answer)
Only when auditors request it

Correct answer: Continuously as new risks emerge and existing risks change

Continuous updates to the risk register ensure it reflects the current risk landscape, enabling timely responses to new and changing risks.

Question 7: What is the purpose of regular client reviews?

To sell additional services
To reduce the number of active clients
To reassess needs, evaluate progress, and adjust strategies as circumstances change (Correct answer)
To meet quota requirements

Correct answer: To reassess needs, evaluate progress, and adjust strategies as circumstances change

Regular reviews ensure strategies remain aligned with evolving client needs and circumstances, demonstrating proactive service and building long-term relationships.

Question 8: Under professional conduct standards, which situation would MOST require a CES professional to withdraw from an engagement?

A client who hires a second advisor for a second opinion
A client who is slow to return phone calls
A client who insists the professional assist in falsifying estate documents (Correct answer)
A client who changes trust beneficiaries during the engagement

Correct answer: A client who insists the professional assist in falsifying estate documents

A client's insistence on participating in document falsification is an illegal act that ethically compels the professional to withdraw from the engagement.

Question 9: When a trust beneficiary dies with a vested remainder interest, how is that interest treated for estate tax purposes?

It is excluded from the estate because it is contingent
It is included in the gross estate at its actuarial present value (Correct answer)
It is treated as income in respect of a decedent
It passes automatically to the next beneficiary with no tax consequence

Correct answer: It is included in the gross estate at its actuarial present value

A vested remainder interest is included in the deceased beneficiary's gross estate at its actuarial present value under IRC §2033.

Question 10: Under the Uniform Principal and Income Act, how are stock dividends generally classified?

As income
As principal (Correct answer)
As a capital gain
As a return of capital

Correct answer: As principal

Under the Uniform Principal and Income Act, stock dividends are allocated to principal because they represent growth in the underlying investment, not a yield on the investment.

Question 11: What is a 'spendthrift provision' designed to do in a trust?

Increase the rate of mandatory distributions
Require annual distribution of all income
Prevent beneficiaries from transferring their interest to creditors (Correct answer)
Allow beneficiaries to withdraw principal at any time

Correct answer: Prevent beneficiaries from transferring their interest to creditors

A spendthrift provision restricts beneficiaries from voluntarily or involuntarily transferring their trust interest, protecting it from their creditors.

Question 12: A trust that is required to distribute all of its income currently and makes no corpus distributions is classified as:

A complex trust
A charitable remainder trust
A grantor trust
A simple trust (Correct answer)

Correct answer: A simple trust

A simple trust must distribute all current income, makes no principal distributions, and cannot make charitable contributions in the tax year.

Question 13: A trustee holds a concentrated position (60% of portfolio) in a single stock inherited by the trust. What is the trustee's primary fiduciary obligation?

Diversify within a reasonable time unless the trust instrument permits retention (Correct answer)
Retain the position indefinitely to honor the grantor's intent
Obtain beneficiary consent before taking any action
Sell immediately regardless of tax consequences

Correct answer: Diversify within a reasonable time unless the trust instrument permits retention

Under the Uniform Prudent Investor Act, trustees must diversify trust assets within a reasonable time unless circumstances justify retention, balancing tax costs against concentration risk.

Question 14: What is the stepped-up basis rule, and how does it benefit heirs?

It resets the cost basis of inherited assets to fair market value at the date of death, reducing capital gains tax on a future sale (Correct answer)
It allows the estate to deduct funeral expenses on the income tax return
It permits the executor to sell assets without recognizing gain
It increases the estate tax exclusion for surviving spouses

Correct answer: It resets the cost basis of inherited assets to fair market value at the date of death, reducing capital gains tax on a future sale

Under IRC §1014, inherited assets receive a new basis equal to fair market value at the date of death, eliminating the unrealized capital gain that accrued during the decedent's lifetime.

Question 15: A client wants to pass a family vacation home to three adult children equally while avoiding probate and family disputes. Which advisory structure best accomplishes this?

Execute separate quitclaim deeds to each child for an undivided one-third interest now
Transfer the property to a limited liability company (LLC) or family limited partnership (FLP) with a succession plan or into a qualified personal residence trust
Place the property in the client's revocable living trust with equal shares to the three children and a co-trustee governance provision (Correct answer)
Title the property as joint tenancy with right of survivorship among the three children immediately

Correct answer: Place the property in the client's revocable living trust with equal shares to the three children and a co-trustee governance provision

A revocable living trust with co-trustee governance provisions allows seamless transfer at death while establishing rules for shared use, maintenance cost-sharing, and dispute resolution among the children.

Question 16: Which of the following BEST illustrates the duty of prudence in estate administration?

Investing all trust assets in a single high-yield bond to maximize income
Following a systematic asset allocation strategy aligned with the trust's investment policy statement (Correct answer)
Distributing all trust assets immediately to avoid management responsibility
Delegating all decisions to the largest beneficiary

Correct answer: Following a systematic asset allocation strategy aligned with the trust's investment policy statement

The duty of prudence requires trustees to follow a systematic, disciplined investment process consistent with the trust's objectives and an investment policy statement.

Question 17: Which ethical principle requires a CES professional to place the interests of trust beneficiaries above their own financial gain?

Confidentiality
Transparency
Loyalty (Correct answer)
Competence

Correct answer: Loyalty

The duty of loyalty requires fiduciaries to act solely in the best interests of beneficiaries, never for personal gain.

Question 18: A 'pour-over will' works in conjunction with which estate planning document?

A testamentary trust
A durable power of attorney
A revocable living trust (Correct answer)
An irrevocable life insurance trust

Correct answer: A revocable living trust

A pour-over will directs any probate assets to 'pour over' into a previously established revocable living trust at death.

Question 19: What is the difference between estate tax and inheritance tax?

They are the same tax.
Estate tax is paid by the deceased, inheritance tax is paid by the beneficiaries. (Correct answer)
Estate tax applies only to real estate.
Inheritance tax is imposed only on cash assets.

Correct answer: Estate tax is paid by the deceased, inheritance tax is paid by the beneficiaries.

The key difference lies in who bears the tax burden. Estate tax is a federal tax (and some states have it) levied on the deceased person's entire estate before it is distributed to heirs. In contrast, inheritance tax is a state-level tax paid by the beneficiaries on the assets they receive from the estate.

Question 20: Which type of trust interest is NOT subject to estate tax in the beneficiary's estate?

A vested remainder interest
A 5-and-5 power exceeding the annual limit
A general power of appointment over trust assets
A support interest in a discretionary trust with an ascertainable standard held by a third-party trustee (Correct answer)

Correct answer: A support interest in a discretionary trust with an ascertainable standard held by a third-party trustee

A purely discretionary support interest administered by an independent trustee under an ascertainable standard is generally not includible in the beneficiary's estate because the beneficiary lacks control.

Question 21: A 'bargain sale' to a charity occurs when:

A donor contributes mortgaged property to a charity
A donor sells appreciated stock to a charity at a gain
A donor sells property to a charity for less than its fair market value (Correct answer)
A donor contributes cash that exceeds the AGI deduction limit for the year

Correct answer: A donor sells property to a charity for less than its fair market value

In a bargain sale, the donor sells property to a charity at below fair market value; the excess of fair market value over the sale price is treated as a charitable contribution, and the sale portion triggers partial gain recognition.

Question 22: Under the Uniform Prudent Investor Act, what is the primary duty of a trustee when setting investment policy?

Invest solely in government-backed securities
Diversify investments and balance interests of all beneficiaries (Correct answer)
Maximize current income for income beneficiaries
Follow the specific instructions of the trust grantor regardless of market conditions

Correct answer: Diversify investments and balance interests of all beneficiaries

UPIA requires trustees to diversify trust investments and to balance the competing interests of current income beneficiaries and remainder beneficiaries within an overall investment strategy.

Question 23: A CES professional is asked to serve as both the drafter of a trust and as its trustee. Which ethical concern is MOST significant?

Trustees are prohibited from having drafted the trust instrument
The professional will be unable to claim privilege over the trust documents
The dual role creates potential conflicts between the professional's drafting choices and their later trustee discretion (Correct answer)
The professional may charge two separate fees for the same work

Correct answer: The dual role creates potential conflicts between the professional's drafting choices and their later trustee discretion

Drafting a trust and then administering it as trustee creates a potential conflict because the drafter may have built in provisions that expand their own discretion or compensation.

Question 24: Which document allows a beneficiary to formally request a change in trustee when dissatisfied with administration?

Letter of instruction
Certificate of trust
Trust amendment
Petition for removal (Correct answer)

Correct answer: Petition for removal

A beneficiary can file a petition for removal of a trustee with the appropriate court when there is cause, such as breach of fiduciary duty or failure to communicate.

Question 25: A discretionary trust gives the trustee sole authority over distributions. Which standard best protects a beneficiary challenging an improper distribution denial?

Reasonable person standard
Strict liability standard
Abuse of discretion standard (Correct answer)
Negligence per se standard

Correct answer: Abuse of discretion standard

Courts review discretionary distribution denials under the abuse of discretion standard, meaning the trustee must act in good faith and within the bounds of the trust document.

Question 26: For income tax purposes, what is the holding period of inherited capital assets at the date of death?

Is irrelevant because inherited assets are tax-exempt
Starts fresh on the date of death as short-term
Carries over from the decedent's original purchase date
Automatically qualifies as long-term regardless of how long the decedent held the asset (Correct answer)

Correct answer: Automatically qualifies as long-term regardless of how long the decedent held the asset

Under IRC §1223(11), inherited property is deemed to have a long-term holding period, so any sale immediately produces long-term capital gain or loss.

Question 27: Under the installment payment rules of IRC §6166, which condition allows an estate to defer estate tax payments over 14 years?

The surviving spouse inherits more than 50% of the estate
The decedent held life insurance exceeding the estate tax owed
The estate includes a closely held business interest exceeding 35% of the adjusted gross estate (Correct answer)
The estate's liquid assets are less than 10% of total assets

Correct answer: The estate includes a closely held business interest exceeding 35% of the adjusted gross estate

IRC §6166 allows deferral of estate taxes attributable to a closely held business interest for up to 14 years (5-year deferral + 9 annual installments) when that interest exceeds 35% of the adjusted gross estate.

Question 28: What is the primary advantage of a funded revocable living trust over a will in terms of estate settlement?

It avoids probate, allowing assets to pass privately and quickly (Correct answer)
It reduces the decedent's income taxes during life
It protects assets from creditors during the grantor's life
It eliminates the need for an estate tax return

Correct answer: It avoids probate, allowing assets to pass privately and quickly

Assets held in a funded revocable living trust pass directly to beneficiaries without probate, reducing delays, costs, and public disclosure.

Question 29: What is the 'portability' election in federal estate tax, and when must it be made?

An election to transfer unused gift tax exclusion to the surviving spouse, made by filing Form 706 within nine months of death (extended to five years for timely-filed estates) (Correct answer)
An election allowing beneficiaries to choose between cash and property distributions
An election transferring the marital deduction to a trust
An election to defer estate tax payments over 10 years for illiquid estates

Correct answer: An election to transfer unused gift tax exclusion to the surviving spouse, made by filing Form 706 within nine months of death (extended to five years for timely-filed estates)

Portability allows the estate of the first deceased spouse to transfer any unused applicable exclusion to the surviving spouse by timely filing Form 706, even if no estate tax is owed.

Question 30: Which asset is NOT included in the probate estate?

Real property titled solely in the decedent's name
Personal property listed in the decedent's will
Business interest owned solely by the decedent
Bank account with a payable-on-death (POD) beneficiary (Correct answer)

Correct answer: Bank account with a payable-on-death (POD) beneficiary

A payable-on-death bank account passes directly to the named beneficiary by contract, bypassing probate entirely.

Question 31: What is the executor's primary fiduciary duty during estate administration?

Prudently administer the estate in the best interests of both creditors and beneficiaries (Correct answer)
Follow the instructions of the largest beneficiary
Distribute assets as quickly as possible regardless of outstanding debts
Minimize estate taxes at all costs

Correct answer: Prudently administer the estate in the best interests of both creditors and beneficiaries

The executor has a fiduciary duty to prudently collect and protect estate assets, pay valid debts and taxes, and distribute the remainder to beneficiaries according to the will and applicable law.

Certified Estate and Trust Specialist (CES)

The CES designation, offered by the Institute of Business & Finance, certifies financial advisors in comprehensive estate planning, trust administration, beneficiary rights, probate, tax strategies, and client advisory skills. It covers 5 modules across 16 chapters and requires passing 3 proctored online exams plus a written case study.

Questions

35 min

Time Limit

70%

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