CTFA Fiduciary Duties and Legal Compliance 3

Question 1

When a trustee fails to diversify trust investments and the trust suffers a resulting loss, the trustee may be liable for which remedy?

Accepted Answer

Surcharge equal to the loss caused by the failure to diversify

Answer

Removal from office without any monetary penalty

Answer

Disgorgement of all trustee fees earned during the period

Answer

Criminal penalties under state trust law

Question 2

Under ERISA, what is the 'exclusive benefit rule' for qualified retirement plan trustees?

Accepted Answer

Plan assets must be managed solely for the benefit of plan participants and beneficiaries

Answer

Plan trustees must maximize short-term income for retirees

Answer

Plan assets must be invested exclusively in government securities

Answer

Trustees must distribute all plan earnings annually to participants

Question 3

What is the significance of the 'no further inquiry' rule in trust law?

Accepted Answer

Courts will void self-dealing transactions without requiring proof of actual harm

Answer

Courts must investigate all trustee decisions before approving distributions

Answer

Beneficiaries need not prove intent when alleging breach of fiduciary duty

Answer

Trustees are presumed prudent without inquiry into specific investment decisions

Question 4

A trustee receives a request from a current income beneficiary to invade principal for an elective expense. Under the UTC, which standard typically governs discretionary principal distributions?

Accepted Answer

The trustee's discretion guided by the trust's ascertainable standard (health, education, maintenance, support)

Answer

The majority vote of all named beneficiaries

Answer

The trustee's absolute discretion without any standard required

Answer

The probate court's approval before any principal invasion

Question 5

Which of the following is a trustee's duty when a conflict arises between co-trustees about an investment decision?

Accepted Answer

Follow the majority decision of co-trustees unless the decision is a clear breach of duty

Answer

Unilaterally override the majority to protect the trust

Answer

Resign immediately to avoid any liability

Answer

Obtain beneficiary consent before proceeding with any investment

Question 6

What is the primary purpose of a trust's investment policy statement (IPS)?

Accepted Answer

To document the investment objectives, risk tolerance, and guidelines for managing trust assets

Answer

To limit the trustee's legal liability for all investment losses

Answer

To satisfy IRS reporting requirements for complex trusts

Answer

To authorize the trustee to make distributions without beneficiary consent