STEP Society of Trust and Estate Practitioners (TEP) Certification — Questions and Answers

Question 1: A practitioner is engaged to advise a client on the use of a family limited partnership (FLP) for estate planning. Which benefit is most commonly cited for this structure?

Elimination of all gift and estate taxes
Valuation discounts for lack of control and marketability, reducing the taxable value of transferred interests (Correct answer)
Avoidance of fiduciary duties owed to limited partners
Conversion of ordinary income to capital gains automatically

Correct answer: Valuation discounts for lack of control and marketability, reducing the taxable value of transferred interests

FLPs can generate valuation discounts on transferred interests, reducing the gift or estate tax value, though they must have legitimate non-tax business purposes.

Question 2: How should a professional handle a client disagreement about recommendations?

Insist the professional recommendation is always correct
Listen actively, explain the rationale, and document the client decision (Correct answer)
Withdraw the recommendation immediately
Ignore the disagreement and proceed

Correct answer: Listen actively, explain the rationale, and document the client decision

Active listening, clear explanation of rationale, and documenting the client final decision respects client autonomy while ensuring professional obligations are met.

Question 3: Under current federal tax law, what is the adjusted gross income (AGI) limitation for cash contributions to public charities?

100% of AGI
30% of AGI
50% of AGI
60% of AGI (Correct answer)

Correct answer: 60% of AGI

The Tax Cuts and Jobs Act of 2017 permanently increased the AGI limitation for cash contributions to public charities from 50% to 60%, with excess amounts carried forward for up to five years.

Question 4: What is residual risk?

Risk that has been completely eliminated
Risk that only affects other organizations
The original risk before any action
The risk remaining after mitigation measures have been applied (Correct answer)

Correct answer: The risk remaining after mitigation measures have been applied

Residual risk is what remains after mitigation measures are applied, and it must be accepted, further reduced, or transferred based on organizational risk tolerance.

Question 5: How should client communications be documented?

Rely on memory for routine conversations
Maintain detailed records of all substantive communications and decisions (Correct answer)
Document only when the client requests it
Only document written communications

Correct answer: Maintain detailed records of all substantive communications and decisions

Documenting all substantive communications protects both parties, prevents misunderstandings, and creates an audit trail for compliance purposes.

Question 6: The GST (Generation-Skipping Transfer) tax exemption for 2024 is indexed for inflation. What is the primary purpose of the GST tax?

To replace the estate tax for transfers to lineal descendants
To tax transfers that skip one or more generations, preventing indefinite wealth transfer without transfer tax (Correct answer)
To limit the marital deduction for transfers to non-citizen spouses
To impose an additional income tax on trust distributions to grandchildren

Correct answer: To tax transfers that skip one or more generations, preventing indefinite wealth transfer without transfer tax

The GST tax prevents wealthy families from avoiding estate and gift taxes by transferring wealth directly to grandchildren or later generations, skipping the intervening taxable transfer.

Question 7: At what minimum age may an IRA owner make a Qualified Charitable Distribution (QCD) directly from the IRA to an eligible charity?

65
70½ (Correct answer)
73
59½

Correct answer: 70½

Under IRC Section 408(d)(8), an IRA owner who has reached age 70½ may exclude up to $105,000 (indexed) per year from gross income by directing a QCD directly to an eligible charity.

Question 8: Which of the following most accurately describes the 'half-secret trust' and its fiduciary significance?

A trust where half the beneficiaries are unknown to the trustee
A secret trust where only one of two trustees is aware of the terms
A trust where only half the estate is held on trust
A testamentary trust where the will acknowledges a trust exists but does not reveal its terms, enforced in equity to prevent fraud (Correct answer)

Correct answer: A testamentary trust where the will acknowledges a trust exists but does not reveal its terms, enforced in equity to prevent fraud

A half-secret trust is acknowledged on the face of the will but its terms are communicated privately; equity enforces it to prevent the trustee from taking beneficially.

Question 9: Under the excess business holdings rules of IRC Section 4943, what is the combined ownership limit for a private foundation and all its disqualified persons in any one business enterprise?

35% of voting stock
10% of voting stock
20% of voting stock (Correct answer)
No ownership is permitted in any for-profit business

Correct answer: 20% of voting stock

Section 4943 generally prohibits a private foundation and its disqualified persons from together holding more than 20% of the voting stock (or profits interest) of any business enterprise, subject to a de minimis 2% exception.

Question 10: Following the Taxpayer Certainty and Disaster Tax Relief Act of 2019, what flat excise tax rate applies to the net investment income of most private foundations?

1.39% (Correct answer)
2%
5%
1%

Correct answer: 1.39%

The Act replaced the prior two-tier 2%/1% regime with a single flat rate of 1.39% on net investment income for private foundations, effective for tax years beginning after December 20, 2019.

Question 11: A settlor creates a trust but retains the power to revoke it. For federal estate tax purposes, how is the trust treated at the settlor's death?

The trust assets are included in the gross estate under IRC §2038 (Correct answer)
Only income earned after creation is included
The trust is treated as a completed gift at creation
The trust assets are excluded from the gross estate

Correct answer: The trust assets are included in the gross estate under IRC §2038

Under IRC §2038, assets in a revocable trust are fully includible in the settlor's gross estate because the settlor retained the power to alter, amend, or revoke.

Question 12: A beneficiary requests complete access to all trust documents, including the trustee's deliberative notes. Under fiduciary duty principles, the trustee should:

Provide access only upon a court order
Deny all access to protect trust administration confidentiality
Provide trust accounts and relevant documents while potentially withholding deliberative materials subject to applicable law (Correct answer)
Provide all documents without restriction to avoid breach of duty

Correct answer: Provide trust accounts and relevant documents while potentially withholding deliberative materials subject to applicable law

Beneficiaries have a right to trust information sufficient to enforce their rights, but deliberative trustee notes may be withheld depending on jurisdiction.

Question 13: What is the foundation of effective client advisory services?

Understanding client needs, goals, and risk tolerance through thorough discovery (Correct answer)
Following a standardized approach for all clients
Recommending the most profitable products
Minimizing time spent with each client

Correct answer: Understanding client needs, goals, and risk tolerance through thorough discovery

Effective advisory begins with thorough discovery of client needs, goals, and risk tolerance, ensuring recommendations are truly aligned with client interests.

Question 14: In the context of discretionary distributions, which standard best describes the 'fraud on a power' doctrine?

A trustee failing to exercise a mandatory distribution power
A settlor misrepresenting assets when establishing the trust
A trustee distributing to a non-object of the power for their own benefit (Correct answer)
A beneficiary filing a fraudulent claim for distribution

Correct answer: A trustee distributing to a non-object of the power for their own benefit

Fraud on a power occurs when a trustee exercises a discretionary power for an improper purpose, such as benefiting a non-object or themselves.

Question 15: A practitioner discovers mid-consultation that a client's stated goals conflict with the interests of a beneficiary the client is also seeking advice about. What is the most appropriate first step?

Advise only the primary client without disclosure
Refer the beneficiary to the same firm
Proceed if the conflict seems minor
Disclose the conflict and obtain informed consent or decline to act for one party (Correct answer)

Correct answer: Disclose the conflict and obtain informed consent or decline to act for one party

STEP ethics require disclosure of conflicts of interest and either obtaining informed consent or ceasing to act for one of the parties.

Question 16: What does the term 'forced heirship' mean in the context of international estate planning advisory?

A tax imposed on heirs who decline their inheritance
A legal requirement that heirs accept the estate regardless of debts
A trust structure that forces equal distribution among all descendants
A legal regime in certain jurisdictions that reserves a mandatory share of the estate for specific heirs, limiting testamentary freedom (Correct answer)

Correct answer: A legal regime in certain jurisdictions that reserves a mandatory share of the estate for specific heirs, limiting testamentary freedom

Forced heirship laws, common in civil law countries, reserve a portion of the estate (the réserve héréditaire) for specific relatives, restricting the testator's ability to disinherit them.

Question 17: A trustee is approached by a third party offering to purchase trust real estate at a price that benefits only the income beneficiaries. The trustee should:

Accept the offer as income beneficiaries are the primary concern
Evaluate the offer in light of the interests of all beneficiaries, including remaindermen (Correct answer)
Decline immediately to avoid any appearance of bias
Accept only if the remaindermen do not object within 30 days

Correct answer: Evaluate the offer in light of the interests of all beneficiaries, including remaindermen

The duty of impartiality requires the trustee to weigh the interests of both income beneficiaries and remaindermen in any major asset disposition.

Question 18: What is the primary planning advantage of a Donor-Advised Fund (DAF) compared to making direct charitable gifts each year?

DAFs provide the donor with a lifetime income stream
The donor retains legal ownership and control of donated assets
DAF contributions are permanently exempt from all federal taxes
The donor receives an immediate income tax deduction and can recommend grant distributions to charities over time (Correct answer)

Correct answer: The donor receives an immediate income tax deduction and can recommend grant distributions to charities over time

A DAF allows a donor to make an irrevocable, deductible contribution in a high-income year and then advise the sponsoring organization on grants to charities over future years.

Question 19: A client asks a practitioner to explain the difference between a revocable and irrevocable trust in plain terms. Which statement is most accurate?

Irrevocable trusts automatically terminate upon the settlor's death
Both types give the settlor ongoing control over the assets
Only irrevocable trusts can hold real property
A revocable trust can be amended or terminated by the settlor; an irrevocable trust generally cannot without beneficiary and court consent (Correct answer)

Correct answer: A revocable trust can be amended or terminated by the settlor; an irrevocable trust generally cannot without beneficiary and court consent

The key distinction is the settlor's ability to modify or revoke: revocable trusts retain that flexibility while irrevocable trusts generally surrender it to achieve tax and asset-protection benefits.

Question 20: How should a fiduciary handle potential conflicts of interest?

Ignore the conflict
Pursue personal gain first
Transfer responsibility to another party
Disclose and address the conflict appropriately (Correct answer)

Correct answer: Disclose and address the conflict appropriately

When a potential conflict of interest arises, a fiduciary has an ethical and legal obligation to disclose and address the conflict appropriately. This involves fully informing the beneficiary of the conflict and then taking steps such as recusing themselves from the decision, obtaining informed consent, or eliminating the conflict. Ignoring the conflict or prioritizing personal gain would constitute a breach of their duty of loyalty.

Question 21: During a consultation, a client's adult child who is also a beneficiary attempts to participate and influence the client's decisions. The practitioner should:

Politely request to meet with the client alone and assess whether the client's instructions are free from undue influence (Correct answer)
Ask the beneficiary to provide written confirmation of the client's wishes
Terminate the consultation until the beneficiary leaves voluntarily
Welcome the beneficiary's input as it aligns family interests

Correct answer: Politely request to meet with the client alone and assess whether the client's instructions are free from undue influence

Best practice requires the practitioner to speak privately with the testator to confirm instructions are voluntary and free from third-party influence.

Question 22: When a trust instrument contains a 'spendthrift clause,' the primary fiduciary effect on the trustee is that the trustee:

Is required to make distributions directly to beneficiary creditors
Must obtain court approval before each distribution
Is prohibited from honoring a beneficiary's assignment of their trust interest to creditors (Correct answer)
Must restrict distributions to necessary living expenses only

Correct answer: Is prohibited from honoring a beneficiary's assignment of their trust interest to creditors

A spendthrift clause prevents voluntary or involuntary transfer of a beneficiary's interest, and the trustee must not recognize purported assignments.

Question 23: A UK-domiciled settlor establishes a US trust for US beneficiaries. Which primary risk must the estate planner assess at the outset?

Whether the beneficiaries must report the trust on their FBAR
The risk of the trust being treated as a PFIC
The interaction between US estate tax treaties and UK inheritance tax on the same assets (Correct answer)
Whether the trust qualifies as a domestic trust under IRC Section 7701

Correct answer: The interaction between US estate tax treaties and UK inheritance tax on the same assets

When a non-US-domiciled settlor creates a trust, the planner must analyze how the US estate tax treaties interact with the UK's inheritance tax regime to avoid double taxation.

Question 24: Which type of trust receives a $300 personal exemption for federal income tax purposes rather than the standard $100?

Complex trust
Simple trust (Correct answer)
Foreign grantor trust
Qualified disability trust

Correct answer: Simple trust

A simple trust—one that is required to distribute all income currently and makes no charitable contributions—receives a $300 personal exemption under IRC Section 642(b).

Question 25: In a Charitable Remainder Trust (CRT), what happens to the trust assets at the end of the trust term?

Assets pass to the income beneficiary's estate
Assets revert to the original grantor
Assets are liquidated and distributed equally among all beneficiaries
The remaining assets pass to the designated charitable beneficiary (Correct answer)

Correct answer: The remaining assets pass to the designated charitable beneficiary

A CRT is designed so that a non-charitable beneficiary receives income for a period, after which the remaining corpus passes irrevocably to the designated charitable remainder beneficiary.

Question 26: A trustee holds farmland as a trust asset in a state experiencing prolonged drought. Which risk category does this most directly represent?

Market risk
Regulatory risk
Counterparty risk
Environmental/climate risk (Correct answer)

Correct answer: Environmental/climate risk

Prolonged drought affecting farmland value and productivity is a manifestation of environmental and climate risk, a subset of non-financial risk in trust portfolios.

Question 27: What market trend has driven rapid growth in Donor-Advised Funds (DAFs) relative to private foundations?

DAFs offer simpler administration, immediate tax deductions, and lower costs compared to private foundations (Correct answer)
Private foundations have become subject to prohibitive regulatory requirements
DAFs allow anonymous philanthropy not possible through any other vehicle
DAFs provide greater control over grant timing and investment decisions for donors

Correct answer: DAFs offer simpler administration, immediate tax deductions, and lower costs compared to private foundations

DAFs offer immediate charitable deductions, low administrative burdens, and flexibility in grant timing, making them a cost-effective alternative to private foundations for many donors.

Question 28: A beneficiary contacts a STEP member acting as trustee and asks to see all trust correspondence. What governs the trustee's obligation?

Correspondence is always privileged and need not be disclosed
The trustee must exercise a discretionary balancing exercise, considering the type of document and potential harm (Correct answer)
The beneficiary has an absolute right to all trust documents on request
Only the settlor can authorise disclosure of trust documents

Correct answer: The trustee must exercise a discretionary balancing exercise, considering the type of document and potential harm

Trustees have a discretionary duty to consider beneficiary requests, balancing transparency obligations against factors such as confidential third-party communications or potential prejudice.

Question 29: Which type of charitable trust requires the trustee to pay a fixed annuity amount to charity for a specified term, with the remainder passing to non-charitable beneficiaries?

Charitable Lead Annuity Trust (CLAT) (Correct answer)
Grantor Retained Annuity Trust (GRAT)
Charitable Remainder Annuity Trust (CRAT)
Net Income Makeup Charitable Remainder Unitrust (NIMCRUT)

Correct answer: Charitable Lead Annuity Trust (CLAT)

A Charitable Lead Annuity Trust pays a fixed annuity to one or more charities during the trust term, and at termination the remaining assets pass to the grantor's heirs or other non-charitable beneficiaries.

Question 30: A Charitable Gift Annuity (CGA) is best described as:

A pooled trust vehicle that distributes income to multiple charities on a pro-rata basis
A contract in which a donor transfers assets irrevocably to a charity in exchange for fixed periodic payments for life, with the residual benefiting the charity (Correct answer)
A government-backed annuity product where payments are guaranteed by a federal agency
A revocable agreement that allows the donor to reclaim donated assets within three years

Correct answer: A contract in which a donor transfers assets irrevocably to a charity in exchange for fixed periodic payments for life, with the residual benefiting the charity

A CGA is a bilateral contract between a donor and a charity; the charity provides the annuity from its general assets and retains the remainder after the annuitant's death.

Question 31: Which scenario best illustrates a breach of the duty of impartiality in trust administration?

Distributing income to current beneficiaries as mandated
Consistently investing in income-producing assets to the detriment of remaindermen (Correct answer)
Allocating capital gains to the remainder beneficiary per trust terms
Applying state principal and income allocation rules

Correct answer: Consistently investing in income-producing assets to the detriment of remaindermen

Systematically favoring income beneficiaries over remaindermen by skewing investments violates the duty of impartiality.

Question 32: Under STEP ethical standards, when a practitioner has a conflict of interest that cannot be managed, the appropriate resolution is to:

Disclose the conflict and continue acting
Obtain a waiver from only the most financially significant client
Withdraw from acting and refer the client to independent advisors (Correct answer)
Proceed only if both clients are related by blood or marriage

Correct answer: Withdraw from acting and refer the client to independent advisors

When a conflict cannot be adequately managed through disclosure and consent, withdrawal and referral is the only ethically sound course.

STEP Society of Trust and Estate Practitioners (TEP) Certification

The STEP TEP certification validates expertise in trust and estate planning, fiduciary duties, charitable giving, and client advisory services, awarding the globally recognized Trust and Estate Practitioner (TEP) designation.

100

Questions

180 min

Time Limit

65%

To Pass

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