CES Risk Assessment & Mitigation 3 — Questions and Answers
Question 1: A trustee receives conflicting investment instructions from co-beneficiaries with different distribution interests. Which risk management approach is most appropriate?
- Follow the current income beneficiary's instructions
- Apply the total return investment approach under the Uniform Principal and Income Act (Correct answer)
- Invest solely in fixed income to protect the remainder
- Petition the court for removal as trustee
Correct answer: Apply the total return investment approach under the Uniform Principal and Income Act
The total return approach balances growth and income, satisfying both income and remainder beneficiaries while meeting the duty of impartiality.
Question 2: Which estate planning risk does a no-contest (in terrorem) clause primarily mitigate?
- Estate tax audit risk
- Will contest litigation risk (Correct answer)
- Creditor claims against the estate
- Fiduciary liability risk
Correct answer: Will contest litigation risk
An in terrorem clause deters beneficiaries from challenging the will by forfeiting their share if the contest is unsuccessful.
Question 3: A client owns real property in three states. Which risk does a revocable living trust best mitigate compared to a will?
- Estate tax exposure
- Multi-state ancillary probate (Correct answer)
- Capital gains on death
- Medicaid look-back penalties
Correct answer: Multi-state ancillary probate
Holding out-of-state real property in a revocable trust avoids ancillary probate proceedings in each state where property is located.
Question 4: What is the primary risk associated with naming a minor child as a direct beneficiary of a life insurance policy?
- The death benefit is subject to income tax
- A court-appointed guardian must manage the funds until the child reaches majority (Correct answer)
- The policy proceeds are included in the child's gross estate
- The beneficiary designation is void under ERISA
Correct answer: A court-appointed guardian must manage the funds until the child reaches majority
Minors cannot legally receive large sums directly, so a court must appoint a guardian to manage the proceeds, causing delay and expense.
Question 5: A client's estate plan includes a charitable bequest via will. Which risk does a charitable remainder trust (CRT) better mitigate compared to the outright bequest?
- The charity failing to qualify under IRC §501(c)(3)
- Insufficient liquidity for heirs during the client's lifetime (Correct answer)
- Post-death estate tax on the charitable portion
- The will being contested by heirs
Correct answer: Insufficient liquidity for heirs during the client's lifetime
A CRT provides the client with an income stream during life while mitigating the risk of heirs having no current benefit from assets earmarked for charity.
Question 6: Which risk is specifically addressed by purchasing a survivorship (second-to-die) life insurance policy inside an irrevocable life insurance trust (ILIT)?
- Income tax on policy cash value growth
- Estate liquidity risk at the death of the surviving spouse (Correct answer)
- Gift tax on premium transfers exceeding the annual exclusion
- GST tax on distributions to grandchildren
Correct answer: Estate liquidity risk at the death of the surviving spouse
The ILIT-held survivorship policy provides estate tax liquidity precisely when it is most needed—at the death of the second spouse when the marital deduction is no longer available.
Question 7: A client drafts a power of attorney that becomes effective only upon incapacity. Which risk does this 'springing' POA create compared to an immediately effective POA?
- The agent cannot act during the principal's lifetime
- Difficulty proving incapacity when urgent financial action is needed (Correct answer)
- Third parties may refuse to honor the document entirely
- The document automatically expires after five years
Correct answer: Difficulty proving incapacity when urgent financial action is needed
Springing POAs require proof of incapacity, which can delay access to funds during a medical emergency when time-sensitive financial decisions must be made.
CES Risk Assessment & Mitigation 3
A trustee receives conflicting investment instructions from co-beneficiaries with different distribution interests.
Which risk management approach is most appropriate?