Risk Assessment & Mitigation Flashcards

A trustee holds a concentrated position in a single stock representing 80% of a trust's assets. Which risk mitigation strategy is most appropriate without triggering immediate capital gains?

Answer: Employ an exchange fund structure

An exchange fund allows a trustee to contribute appreciated securities and receive a diversified interest without triggering immediate capital gains tax.

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.

A testamentary trust holds real property in a flood zone. The trustee fails to obtain flood insurance and the property is destroyed. What is the primary legal risk to the trustee?

Answer: Personal liability for breach of the duty of prudence

Failing to adequately insure trust assets against foreseeable risks constitutes a breach of the trustee's duty of prudence.

Which type of trust structure is specifically designed to mitigate estate tax risk for married couples while retaining access to assets?

Answer: Spousal Lifetime Access Trust (SLAT)

A SLAT allows one spouse to make a gift to an irrevocable trust for the other spouse's benefit, removing assets from the estate while retaining indirect access.

A family office identifies that a client's trust portfolio has significant correlation risk. Which approach best addresses this concern?

Answer: Adding uncorrelated asset classes such as commodities or absolute return strategies

Adding uncorrelated asset classes reduces the portfolio's sensitivity to any single market event, directly addressing correlation risk.

Under US law, which document most effectively protects trust assets from a beneficiary's future creditors?

Answer: A discretionary spendthrift trust

A discretionary spendthrift trust restricts voluntary and involuntary transfers of a beneficiary's interest, shielding assets from most creditor claims.

When conducting a risk assessment for a dynasty trust, which time-horizon consideration is most unique compared to a standard trust?

Answer: Multi-generational inflation risk eroding purchasing power

Dynasty trusts may span many generations, making long-term inflation risk a uniquely significant concern that can erode real asset values over decades.