CES Trust Administration & Fiduciary Duties 3 — Questions and Answers
Question 1: Under the Uniform Prudent Investor Act, which factor is NOT explicitly listed as relevant to the trustee's investment decisions?
- General economic conditions
- The beneficiary's other resources
- The trustee's personal investment philosophy (Correct answer)
- Expected tax consequences
Correct answer: The trustee's personal investment philosophy
The UPIA requires trustees to consider economic conditions, beneficiary resources, tax consequences, and other objective factors — not the trustee's personal investment preferences.
Question 2: A trust document is silent on trustee compensation. In most states, the trustee is entitled to:
- No compensation because the duty is gratuitous by default
- Reasonable compensation based on services rendered (Correct answer)
- A fixed percentage of 1% of trust assets annually
- Compensation only if approved annually by all beneficiaries
Correct answer: Reasonable compensation based on services rendered
When a trust is silent on compensation, most state statutes and the Uniform Trust Code allow the trustee to receive reasonable compensation for services.
Question 3: A trustee fails to file required tax returns for a trust, resulting in penalties. This is most likely a breach of:
- Duty of loyalty
- Duty to inform beneficiaries
- Duty to administer the trust prudently (Correct answer)
- Duty of impartiality
Correct answer: Duty to administer the trust prudently
The duty to administer the trust prudently encompasses compliance with all legal and tax filing obligations on behalf of the trust.
Question 4: When a co-trustee disagrees with the majority on a trust decision, which action is most appropriate under the Uniform Trust Code?
- The dissenting trustee must comply with the majority and has no further obligation
- The dissenting trustee should document the objection to avoid personal liability (Correct answer)
- The dissenting trustee may unilaterally veto any majority decision
- The dissenting trustee must immediately resign to avoid liability
Correct answer: The dissenting trustee should document the objection to avoid personal liability
A dissenting co-trustee who records their objection is generally protected from liability for the majority's improper decision under the UTC.
Question 5: Which type of trust provision protects a beneficiary's interest from claims of the beneficiary's creditors?
- Pour-over provision
- Spendthrift clause (Correct answer)
- Discretionary distribution standard
- Dynasty trust clause
Correct answer: Spendthrift clause
A spendthrift clause prevents beneficiaries from voluntarily transferring their trust interests and shields those interests from creditor attachment.
Question 6: A trustee who has a conflict of interest in a transaction but proceeds without disclosure is most likely violating the duty of:
- Impartiality
- Loyalty (Correct answer)
- Prudent investment
- Confidentiality
Correct answer: Loyalty
The duty of loyalty requires the trustee to act solely in the beneficiaries' interests and to disclose any conflicts of interest before proceeding.
Question 7: In a trust with both income and remainder beneficiaries, converting a traditional trust to a 'unitrust' primarily addresses:
- Estate tax liability on trust termination
- The impartiality problem between current and future beneficiaries (Correct answer)
- The trustee's compensation calculation method
- Creditor protection for discretionary distributions
Correct answer: The impartiality problem between current and future beneficiaries
Converting to a unitrust (distributing a fixed percentage of assets) balances income and remainder beneficiary interests better than a traditional income-only distribution.
CES Trust Administration & Fiduciary Duties 3
Under the Uniform Prudent Investor Act, which factor is NOT explicitly listed as relevant to the trustee's investment decisions?