Mixed Deck — All STEP Topics Flashcards

In a charitable remainder trust (CRT), what is the primary financial risk to the income beneficiary if the trust is underfunded?

Answer: Failure to meet the required annuity or unitrust payments if the trust corpus is depleted

If a CRT's assets decline and corpus is exhausted, the trust cannot continue making required annuity or unitrust payments to the income beneficiary.

For a special needs trust (SNT) to preserve a beneficiary's eligibility for Medicaid and SSI, which documentation requirement is most critical at creation?

Answer: The trust must contain a Medicaid payback provision and be for the sole benefit of the disabled individual

A first-party SNT under 42 U.S.C. §1396p(d)(4)(A) must include a Medicaid payback provision upon the beneficiary's death and be for the sole benefit of the disabled individual to preserve benefits eligibility.

What is the fundamental duty of a fiduciary?

Answer: To prioritize beneficiary interests

The fundamental duty of a fiduciary is to prioritize the interests of the beneficiary above all else, including their own. This means acting with utmost loyalty, good faith, and prudence in managing assets or making decisions on the beneficiary's behalf. Fiduciaries are held to a high legal and ethical standard to ensure the beneficiary's well-being and objectives are always paramount.

What is residual risk?

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.

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

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.

Under U.S. law, what is the maximum period for which a generation-skipping trust can hold assets before the rule against perpetuities terminates it in most traditional states?

Answer: A life or lives in being at the trust's creation plus 21 years

The traditional common law rule against perpetuities limits trust duration to lives in being at creation plus 21 years, though many states have modified or abolished this rule.

What role does cash flow management play in financial health?

Answer: It ensures adequate liquidity to meet obligations and fund operations

Cash flow management ensures adequate liquidity to meet obligations, fund operations, and invest in growth, regardless of reported profitability.

What is the consequence of practicing outside the defined scope of practice?

Answer: Potential license revocation, legal liability, and risk to public safety

Practicing outside scope carries serious consequences including license revocation, legal liability, and potentially endangering the public, regardless of the outcome.

How should competitive intelligence be gathered ethically?

Answer: Through publicly available sources, industry events, and market research

Ethical competitive intelligence relies on publicly available information, industry events, and legitimate market research, maintaining professional integrity.

Which factor is most important when evaluating market trends?

Answer: The sustainability and direction of the trend over time

Evaluating trend sustainability and direction helps distinguish lasting market shifts from temporary fluctuations, supporting sound strategic decisions.

When faced with a conflict of interest, what is the appropriate course of action?

Answer: Disclose the conflict and recuse yourself from the situation

Disclosing conflicts of interest and recusing oneself ensures objective decision-making and maintains professional integrity.

What happens to a revocable trust upon the death of the settlor?

Answer: It continues and becomes irrevocable

A revocable trust typically becomes irrevocable upon the settlor’s death, meaning its terms can no longer be changed.

Which IRS form must be filed annually by a domestic trust with income exceeding the filing threshold?

Answer: Form 1041

Form 1041 (U.S. Income Tax Return for Estates and Trusts) must be filed annually by domestic trusts with gross income above the filing threshold.

Which section of the Internal Revenue Code governs the reporting requirements for foreign trusts with U.S. owners, requiring annual filing of Form 3520-A?

Answer: IRC §6048

IRC §6048 imposes reporting obligations on U.S. persons who are owners or beneficiaries of foreign trusts, requiring the foreign trust to file Form 3520-A annually.

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?

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.

Which risk does the 'reciprocal trust doctrine' address in estate planning?

Answer: The IRS unwinding interrelated trusts created by spouses to treat each as owner of the other's trust

The reciprocal trust doctrine causes the IRS to uncross trusts created by spouses for each other when the trusts are interrelated, restoring the assets to each grantor's taxable estate.

What is the primary obligation of a certified professional regarding patient/client confidentiality?

Answer: Protect all personal information and disclose only with proper authorization

Protecting confidential information and disclosing only with proper authorization is a fundamental ethical and legal obligation of all certified professionals.

A trustee receives a demand from a creditor claiming the grantor transferred assets to an irrevocable trust with intent to defraud. Under the Uniform Fraudulent Transfer Act (UFTA), what is the maximum look-back period for constructive fraud?

Answer: 4 years

Under UFTA, the statute of limitations for constructive fraud (transfers made without reasonably equivalent value) is generally four years from the date of transfer.

Under the Uniform Prudent Investor Act (UPIA), which factor is NOT explicitly listed as relevant when assessing portfolio risk?

Answer: The beneficiary's personal credit score

The UPIA lists economic conditions, tax consequences, and portfolio role as relevant factors but does not mention the beneficiary's personal credit score.

Under the Uniform Trust Code, which document must be executed with the same formalities as a will when creating a testamentary trust?

Answer: The decedent's last will and testament

A testamentary trust is created within a valid will, which must comply with the state's will execution formalities including signature and witness requirements.