CTFA Trust and Financial Advisor Certification 2 — Questions and Answers
Question 1: A trustee discovers that the trust document requires annual accountings to beneficiaries, but none have been provided for three years. What is the trustee's immediate obligation?
- Petition the court to waive the requirement retroactively
- Provide the overdue accountings promptly to cure the breach (Correct answer)
- Notify only the remainder beneficiaries since they are most affected
- Wait until the next trust anniversary to provide all accountings together
Correct answer: Provide the overdue accountings promptly to cure the breach
A trustee must fulfill mandatory accounting obligations promptly; failure to do so constitutes a breach of the duty to inform and account, which must be remedied immediately.
Question 2: Under the Uniform Trust Code, which standard governs a trustee's investment decisions when the trust is silent on investment authority?
- Legal list standard requiring only government-backed securities
- Prudent investor rule requiring portfolio diversification and risk-return analysis (Correct answer)
- Prudent man rule focusing on individual investment safety
- Conservative investor standard prohibiting equities above 30% of portfolio
Correct answer: Prudent investor rule requiring portfolio diversification and risk-return analysis
The Uniform Prudent Investor Act (adopted by most states) requires trustees to manage trust assets as a prudent investor would, considering overall portfolio risk and return.
Question 3: A CTFA is advising a client with a special needs trust (SNT) for a disabled beneficiary. Which distribution would most likely disqualify the beneficiary from Medicaid?
- Payment directly to a medical provider for dental services
- Distribution of cash to the beneficiary's bank account (Correct answer)
- Purchase of a computer for educational purposes
- Payment for a recreational vacation on behalf of the beneficiary
Correct answer: Distribution of cash to the beneficiary's bank account
Cash distributions directly to an SNT beneficiary are counted as income and can disqualify them from means-tested government benefits like Medicaid.
Question 4: When a corporate trustee receives a request from a beneficiary to delegate investment management to the beneficiary's preferred advisor, what fiduciary concern is most significant?
- Whether the advisor holds a CTFA designation
- Whether delegating abdicates the trustee's non-delegable core fiduciary duties (Correct answer)
- Whether the advisor charges fees lower than the trustee's investment department
- Whether the beneficiary's request was made in writing
Correct answer: Whether delegating abdicates the trustee's non-delegable core fiduciary duties
While trustees may delegate certain investment functions, they cannot abdicate non-delegable duties such as overall supervision and accountability for the delegated function.
Question 5: A decedent's estate includes a retirement account with no designated beneficiary. How is this asset typically treated?
- Passes directly to the surviving spouse by operation of law
- Becomes a probate asset distributed under the will or intestacy laws (Correct answer)
- Is forfeited to the retirement plan administrator
- Passes to the oldest living child regardless of the will
Correct answer: Becomes a probate asset distributed under the will or intestacy laws
Without a named beneficiary, retirement account proceeds become part of the probate estate and are distributed according to the decedent's will or state intestacy laws.
Question 6: In the context of CTFA ethics, what does 'duty of loyalty' most specifically require of a trust advisor?
- Maintaining loyalty to the employing institution above all other obligations
- Acting solely in the interest of the beneficiaries without conflicts of interest (Correct answer)
- Remaining loyal to the grantor's instructions even when they harm beneficiaries
- Prioritizing current income beneficiaries over remainder beneficiaries equally
Correct answer: Acting solely in the interest of the beneficiaries without conflicts of interest
The duty of loyalty requires fiduciaries to act exclusively in the best interest of the beneficiaries, avoiding self-dealing or conflicts of interest.
Question 7: A trustee holds closely-held business stock representing 80% of the trust's value. Under the prudent investor rule, what is the trustee's most appropriate action?
- Retain the concentrated position indefinitely as directed by the grantor's business legacy
- Evaluate whether diversification is appropriate and document the analysis (Correct answer)
- Immediately sell all shares to achieve diversification regardless of tax consequences
- Transfer the asset to beneficiaries immediately to remove fiduciary liability
Correct answer: Evaluate whether diversification is appropriate and document the analysis
The prudent investor rule requires trustees to review concentrated positions and determine whether diversification serves the beneficiaries' interests, even if the grantor originally contributed the asset.
CTFA Trust and Financial Advisor Certification 2
A trustee discovers that the trust document requires annual accountings to beneficiaries, but none have been provided for three years.
What is the trustee's immediate obligation?