CES Risk Assessment & Mitigation 2 — Questions and Answers
Question 1: A trustee holds concentrated stock representing 80% of a trust portfolio. Which fiduciary duty is most at risk if no action is taken?
- Duty of loyalty
- Duty of prudent diversification (Correct answer)
- Duty of confidentiality
- Duty of impartiality between beneficiaries
Correct answer: Duty of prudent diversification
The Uniform Prudent Investor Act imposes a duty to diversify unless special circumstances justify retention of concentrated positions.
Question 2: Which type of trust provision most directly mitigates the risk of a beneficiary losing assets in a divorce settlement?
- Spendthrift clause (Correct answer)
- Mandatory distribution clause
- Pour-over will provision
- Crummey withdrawal right
Correct answer: Spendthrift clause
A spendthrift clause prevents beneficiaries from assigning their interests and blocks creditors, including divorcing spouses, from reaching trust assets.
Question 3: An estate plan relies heavily on a single life insurance policy to fund an estate tax obligation. What is the primary concentration risk here?
- Carrier insolvency risk
- Premium lapse risk (Correct answer)
- Interest rate risk on policy loans
- Gift tax exposure on premium payments
Correct answer: Premium lapse risk
Premium lapse risk is primary because if premiums go unpaid the policy terminates, eliminating the liquidity intended to cover estate taxes.
Question 4: A 90-year-old client has a revocable living trust but no durable power of attorney. Which risk does this create?
- The trust assets will be subject to probate
- A guardian may need court appointment to manage non-trust assets (Correct answer)
- Trust assets cannot be retitled after incapacity
- The trustee loses authority at client incapacity
Correct answer: A guardian may need court appointment to manage non-trust assets
Assets outside the trust require a durable power of attorney or court-appointed guardian for management during incapacity.
Question 5: Which risk mitigation strategy is most appropriate when a closely held business represents 70% of an estate's value?
- Immediate liquidation of the business
- IRC Section 6166 installment payment election (Correct answer)
- Disclaiming the business interest
- Converting to an S corporation
Correct answer: IRC Section 6166 installment payment election
IRC §6166 allows estate taxes attributable to a closely held business to be paid in installments over up to 14 years, preventing forced liquidation.
Question 6: A grantor retained annuity trust (GRAT) fails to achieve its transfer tax savings goal primarily when:
- The grantor survives the annuity term
- The trust assets underperform the IRC §7520 hurdle rate (Correct answer)
- The annuity payments are made in kind
- The remainder beneficiaries are grandchildren
Correct answer: The trust assets underperform the IRC §7520 hurdle rate
A GRAT produces no gift tax savings if asset growth does not exceed the §7520 rate, leaving nothing in the remainder for beneficiaries.
Question 7: When assessing longevity risk for a surviving spouse, which planning tool most directly addresses the risk of outliving assets?
- Charitable remainder trust
- Qualified longevity annuity contract (QLAC) (Correct answer)
- Generation-skipping trust
- Qualified personal residence trust
Correct answer: Qualified longevity annuity contract (QLAC)
A QLAC allows deferral of RMDs and provides guaranteed income beginning at a late age, directly insuring against outliving retirement assets.
CES Risk Assessment & Mitigation 2
A trustee holds concentrated stock representing 80% of a trust portfolio.
Which fiduciary duty is most at risk if no action is taken?