Financial Advisor Certified Trust and Financial Advisor 3 — Questions and Answers
Question 1: A trustee who self-deals by purchasing trust property for personal use without authorization has breached the duty of:
- Prudence
- Loyalty (Correct answer)
- Impartiality
- Delegation
Correct answer: Loyalty
Self-dealing violates the duty of loyalty because the trustee is placing personal interests above those of the beneficiaries.
Question 2: Which document authorizes an agent to make financial decisions on behalf of a principal if the principal becomes incapacitated?
- Revocable living trust
- Durable power of attorney (Correct answer)
- Health care proxy
- Testamentary trust
Correct answer: Durable power of attorney
A durable power of attorney remains effective (or takes effect) upon the principal's incapacity, allowing the agent to manage financial affairs.
Question 3: A trustee managing a trust with both current income beneficiaries and remainder beneficiaries must observe the duty of:
- Confidentiality
- Impartiality (Correct answer)
- Loyalty to the settlor
- Sole benefit to income beneficiaries
Correct answer: Impartiality
The duty of impartiality requires a trustee to balance the competing interests of current income beneficiaries and future remainder beneficiaries.
Question 4: A Qualified Personal Residence Trust (QPRT) is primarily used to:
- Avoid probate on a primary residence
- Transfer a residence out of the estate at a reduced gift tax value (Correct answer)
- Provide income to charity from a residence
- Establish a special needs trust for a disabled beneficiary
Correct answer: Transfer a residence out of the estate at a reduced gift tax value
A QPRT allows the grantor to transfer a home to heirs at a discounted gift tax value by retaining the right to live there for a set term.
Question 5: Under ERISA, which fiduciary standard applies to the management of pension plan assets?
- Suitability standard
- Prudent expert standard (Correct answer)
- Business judgment rule
- Best efforts standard
Correct answer: Prudent expert standard
ERISA imposes the 'prudent expert' standard, requiring plan fiduciaries to act as a knowledgeable expert in managing plan assets.
Question 6: A trust that holds life insurance policies and is designed to keep death benefits out of the taxable estate is called an:
- ILIT (Irrevocable Life Insurance Trust) (Correct answer)
- QTIP Trust
- Grantor Retained Annuity Trust
- Blind Trust
Correct answer: ILIT (Irrevocable Life Insurance Trust)
An ILIT owns the life insurance policy, so proceeds are excluded from the insured's gross estate if structured properly.
Question 7: When a trust instrument is silent on a specific matter, the trustee should generally look to:
- The beneficiaries' preferences exclusively
- The applicable state trust law for default rules (Correct answer)
- The original attorney who drafted the trust
- Internal Revenue Code provisions
Correct answer: The applicable state trust law for default rules
State trust law provides default rules that govern trust administration when the trust document does not address a particular situation.
Financial Advisor Certified Trust and Financial Advisor 3
A trustee who self-deals by purchasing trust property for personal use without authorization has breached the duty of: