Financial Advisor Certified Trust and Financial Advisor 4 — Questions and Answers
Question 1: A Special Needs Trust (SNT) is structured to provide supplemental support to a disabled beneficiary without disqualifying them from:
- Income tax deductions
- Government benefit programs like Medicaid and SSI (Correct answer)
- Social Security retirement benefits
- Veterans' benefits only
Correct answer: Government benefit programs like Medicaid and SSI
A properly drafted SNT supplements government benefits without counting as available resources that would disqualify the beneficiary from Medicaid or SSI.
Question 2: The Uniform Prudent Investor Act (UPIA) emphasizes that investment decisions should be evaluated:
- On an asset-by-asset basis in isolation
- In the context of the entire portfolio and overall strategy (Correct answer)
- Based solely on historical returns
- Only by comparing to an S&P 500 benchmark
Correct answer: In the context of the entire portfolio and overall strategy
UPIA adopts modern portfolio theory, evaluating each investment's risk and return in the context of the overall portfolio, not in isolation.
Question 3: A dynasty trust is designed primarily to:
- Benefit only the settlor's spouse
- Pass wealth across multiple generations while minimizing transfer taxes (Correct answer)
- Fund a charitable endowment in perpetuity
- Avoid income taxes for the first generation of beneficiaries
Correct answer: Pass wealth across multiple generations while minimizing transfer taxes
Dynasty trusts are long-term trusts structured to pass assets through multiple generations while using the GST tax exemption to minimize transfer taxes.
Question 4: Which trust type allows the settlor to retain an annuity for a fixed term, with the remainder passing to heirs at a reduced gift tax cost?
- Charitable Remainder Trust (CRT)
- Grantor Retained Annuity Trust (GRAT) (Correct answer)
- Qualified Terminal Interest Property Trust (QTIP)
- Spendthrift Trust
Correct answer: Grantor Retained Annuity Trust (GRAT)
A GRAT allows the grantor to receive fixed annuity payments for a set term; if the grantor outlives the term, the remaining assets pass to heirs with little or no gift tax.
Question 5: A trustee who delegates investment management to an outside advisor is still responsible for:
- Nothing, as liability transfers fully to the advisor
- Selecting a qualified advisor, setting scope, and monitoring performance (Correct answer)
- Filing all tax returns on the advisor's behalf
- Personally approving each individual investment trade
Correct answer: Selecting a qualified advisor, setting scope, and monitoring performance
Under the duty to delegate, a trustee must prudently select the agent, define their scope, and monitor their performance on an ongoing basis.
Question 6: For federal estate tax purposes, the unlimited marital deduction applies only if the surviving spouse is:
- Named as a contingent beneficiary
- A U.S. citizen (Correct answer)
- Over the age of 59½
- The sole heir under a will
Correct answer: A U.S. citizen
The unlimited marital deduction is only available when the surviving spouse is a U.S. citizen; a QDOT is required for non-citizen spouses.
Question 7: Under the Uniform Fiduciary Income and Principal Act (UFIPA), a trustee may make an 'equitable adjustment' to:
- Reduce trust taxes without beneficiary notice
- Reallocate receipts between income and principal to achieve fairness (Correct answer)
- Merge two separate trusts without court approval
- Change the trust's governing law unilaterally
Correct answer: Reallocate receipts between income and principal to achieve fairness
UFIPA allows trustees to adjust between income and principal accounts to treat all beneficiaries impartially when investment returns are skewed.
Financial Advisor Certified Trust and Financial Advisor 4
A Special Needs Trust (SNT) is structured to provide supplemental support to a disabled beneficiary without disqualifying them from: