CES Trust Administration & Fiduciary Duties 2 — Questions and Answers
Question 1: A trustee who invests all trust assets in the stock of a single company is most likely violating which fiduciary duty?
- Duty of loyalty
- Duty to diversify (Correct answer)
- Duty to account
- Duty of impartiality
Correct answer: Duty to diversify
The Uniform Prudent Investor Act imposes a duty to diversify trust investments unless circumstances reasonably warrant otherwise.
Question 2: Under the Uniform Trust Code, a trustee must provide a trust accounting to beneficiaries at least:
- Monthly
- Quarterly
- Annually (Correct answer)
- Only upon request
Correct answer: Annually
The UTC generally requires trustees to provide an annual accounting to current beneficiaries and other qualified beneficiaries.
Question 3: Which of the following best describes the 'duty of impartiality' in trust administration?
- Treating all beneficiaries as equal recipients of distributions
- Balancing the interests of current income beneficiaries against remainder beneficiaries (Correct answer)
- Refusing to favor any co-trustee's investment preferences
- Distributing trust assets without regard to tax consequences
Correct answer: Balancing the interests of current income beneficiaries against remainder beneficiaries
The duty of impartiality requires the trustee to balance the competing interests of income beneficiaries (who want yield) and remainder beneficiaries (who want growth).
Question 4: A trustee who uses trust funds to purchase property for personal benefit has committed:
- A technical violation only if done without court approval
- Self-dealing, which is a per se breach of fiduciary duty (Correct answer)
- A breach only if the beneficiaries suffer actual loss
- An acceptable transaction if at fair market value
Correct answer: Self-dealing, which is a per se breach of fiduciary duty
Self-dealing is a per se breach of the duty of loyalty, regardless of whether the trustee paid fair market value or the trust suffered a loss.
Question 5: When a trustee delegates investment management to an outside advisor, the trustee's primary ongoing obligation is to:
- Relinquish all investment responsibility to the agent
- Monitor the agent's performance and compliance with the delegation scope (Correct answer)
- Obtain court approval for all transactions initiated by the agent
- Guarantee the investment returns promised by the agent
Correct answer: Monitor the agent's performance and compliance with the delegation scope
Even when investment management is delegated, the trustee retains a non-delegable duty to monitor the agent's performance and adherence to the scope of delegation.
Question 6: A discretionary trust provision that allows the trustee to distribute income 'for the health, education, maintenance, and support' of a beneficiary is known as:
- A spendthrift clause
- An ascertainable standard (Correct answer)
- A spray trust provision
- A Crummey power
Correct answer: An ascertainable standard
HEMS (health, education, maintenance, and support) is a recognized ascertainable standard that limits the trustee's discretion and has important estate tax implications.
Question 7: Which action would most likely constitute a breach of the trustee's duty to keep trust property separate?
- Holding multiple trust accounts at the same bank
- Depositing trust income into the trustee's personal checking account temporarily (Correct answer)
- Investing in a mutual fund alongside other trust clients
- Maintaining detailed records of each beneficiary's interest
Correct answer: Depositing trust income into the trustee's personal checking account temporarily
Commingling trust funds with the trustee's personal assets is a direct breach of the duty to keep trust property separate and identifiable.
CES Trust Administration & Fiduciary Duties 2
A trustee who invests all trust assets in the stock of a single company is most likely violating which fiduciary duty?