CTFA Trust and Financial Advisor Certification 4 ā Questions and Answers
Question 1: A trustee of a revocable trust receives notice that the grantor has become incapacitated. What typically happens to the trust's revocability?
- The trust automatically terminates and assets revert to the grantor's estate
- The trust continues in force; the successor trustee manages it but revocability is suspended during incapacity (Correct answer)
- The trust immediately becomes irrevocable and can never be amended
- A court must be petitioned to appoint a guardian before any trust action is taken
Correct answer: The trust continues in force; the successor trustee manages it but revocability is suspended during incapacity
During the grantor's incapacity, a revocable trust typically continues under successor trustee management, but the power to revoke is suspended since it is personal to a competent grantor.
Question 2: Which federal law governs the fiduciary standards applicable to employee benefit plan trustees under qualified retirement plans?
- Uniform Trust Code (UTC)
- Employee Retirement Income Security Act (ERISA) (Correct answer)
- Investment Advisers Act of 1940
- Bank Holding Company Act
Correct answer: Employee Retirement Income Security Act (ERISA)
ERISA sets the exclusive fiduciary standardsāincluding prudence, loyalty, diversification, and plan document adherenceāfor trustees and fiduciaries of qualified employee benefit plans.
Question 3: A trustee wants to invest trust assets in a limited partnership in which the trustee's sibling is a general partner. This situation is best described as:
- A permissible related-party transaction requiring only disclosure
- A self-dealing transaction that violates the duty of loyalty (Correct answer)
- An acceptable investment if the trust instrument permits alternative investments
- A conflict manageable through an independent co-trustee vote alone
Correct answer: A self-dealing transaction that violates the duty of loyalty
Investing in a venture where the trustee's close family member is the general partner creates a conflict of interest constituting self-dealing, which violates the fiduciary duty of loyalty regardless of the investment's merits.
Question 4: For federal estate tax purposes, assets held in a decedent's revocable living trust at death are:
- Excluded from the gross estate because the trust holds legal title
- Included in the gross estate because the decedent retained control (Correct answer)
- Taxed at capital gains rates instead of estate tax rates
- Exempt up to the annual exclusion amount per beneficiary
Correct answer: Included in the gross estate because the decedent retained control
Assets in a revocable trust are fully includable in the grantor's gross estate under IRC Ā§2038 because the grantor retained the power to revoke, amend, or control distributions.
Question 5: A CTFA is reviewing a trust that names an individual as both trustee and sole beneficiary. Which legal doctrine most commonly prevents this arrangement from collapsing the trust?
- Cy-pres doctrine modifying the trust purpose
- Merger doctrine, unless there are other beneficiaries or remainder interests (Correct answer)
- Spendthrift doctrine protecting the beneficiary's interest
- Pour-over doctrine directing assets to the estate
Correct answer: Merger doctrine, unless there are other beneficiaries or remainder interests
The merger doctrine holds that when the same person holds all beneficial and legal interests, the trust collapsesāunless remainder beneficiaries or other interests keep the legal and equitable title separate.
Question 6: A client age 72 has a traditional IRA and asks about required minimum distributions (RMDs). Under the SECURE 2.0 Act, what is the applicable beginning date for RMDs?
- April 1 of the year following the year the account owner turns 70Ā½
- April 1 of the year following the year the account owner turns 73 (Correct answer)
- December 31 of the year the account owner turns 72
- January 1 of the year the account owner turns 75
Correct answer: April 1 of the year following the year the account owner turns 73
SECURE 2.0 raised the RMD starting age to 73 (for those born 1951ā1959), with distributions required by April 1 of the year after the owner reaches that age.
Question 7: A trust contains a spendthrift clause. Which of the following creditors can typically still reach the beneficiary's trust interest despite this clause?
- Credit card companies seeking repayment of consumer debt
- Child support and alimony claimants under most state laws (Correct answer)
- Mortgage lenders seeking deficiency judgments
- Business creditors pursuing contract damages
Correct answer: Child support and alimony claimants under most state laws
Most states create exceptions to spendthrift protection for claims related to child support and alimony, recognizing that public policy favors enforcement of family support obligations.
CTFA Trust and Financial Advisor Certification 4
A trustee of a revocable trust receives notice that the grantor has become incapacitated.
What typically happens to the trust's revocability?