CES Ethical Standards & Professional Conduct 3 — Questions and Answers
Question 1: A CES professional serves as trustee and also receives commissions from insurance products sold to the trust. This arrangement MOST likely violates which duty?
- Duty of prudent investment
- Duty to keep records
- Duty to avoid conflicts of interest (Correct answer)
- Duty to diversify
Correct answer: Duty to avoid conflicts of interest
Receiving undisclosed commissions on products sold to a trust one administers is a classic conflict of interest that violates fiduciary duty.
Question 2: When a CES professional is uncertain whether a client action is legal, the BEST course of action is to:
- Proceed if the client insists it is acceptable
- Seek legal counsel or refer the matter to an attorney before proceeding (Correct answer)
- Document the uncertainty and proceed anyway
- Resign immediately from the engagement
Correct answer: Seek legal counsel or refer the matter to an attorney before proceeding
When legal uncertainty arises, CES professionals must seek qualified legal guidance before taking action to avoid facilitating potential violations.
Question 3: Which standard requires a CES professional to keep accurate and complete records of all trust transactions?
- Duty of loyalty
- Duty of prudence
- Duty to account (Correct answer)
- Duty of confidentiality
Correct answer: Duty to account
The duty to account requires trustees and fiduciaries to maintain complete, accurate records and provide periodic accountings to beneficiaries.
Question 4: A beneficiary requests copies of all trust investment records. A CES professional acting as trustee should GENERALLY:
- Deny the request to protect other beneficiaries' privacy
- Provide the requested information unless a valid legal basis exists to withhold it (Correct answer)
- Charge a high fee to discourage the request
- Consult only the attorney before deciding
Correct answer: Provide the requested information unless a valid legal basis exists to withhold it
Beneficiaries are generally entitled to trust information, and a trustee must provide it unless a specific legal provision or court order justifies withholding.
Question 5: What does the prudent investor rule primarily govern for a CES trustee?
- How to draft trust documents
- The standard of care applied to investment decisions for trust assets (Correct answer)
- The frequency of beneficiary distributions
- The professional fees a trustee may charge
Correct answer: The standard of care applied to investment decisions for trust assets
The prudent investor rule requires trustees to invest trust assets with the care, skill, and caution of a prudent investor, considering risk and return in the context of the whole portfolio.
Question 6: A CES professional learns that a client intends to use a trust structure to defraud creditors. The professional's ethical obligation is to:
- Proceed if the client says it is their right to do so
- Assist only if the client signs a waiver of liability
- Refuse to participate and, if necessary, withdraw from the engagement (Correct answer)
- Complete the work but add a disclaimer to the documents
Correct answer: Refuse to participate and, if necessary, withdraw from the engagement
Facilitating fraudulent transfers or creditor fraud violates legal and ethical standards; the professional must refuse and withdraw rather than assist.
Question 7: In estate and trust practice, 'surcharge' refers to:
- An additional fee charged for complex estate administration
- A penalty imposed on a trustee personally for breach of fiduciary duty causing loss (Correct answer)
- The tax assessed on estate distributions
- A lien placed on estate real property
Correct answer: A penalty imposed on a trustee personally for breach of fiduciary duty causing loss
A surcharge is the personal financial liability imposed on a trustee who breaches fiduciary duty, requiring them to make the trust whole for any resulting loss.
CES Ethical Standards & Professional Conduct 3
A CES professional serves as trustee and also receives commissions from insurance products sold to the trust.
This arrangement MOST likely violates which duty?