Risk Assessment & Mitigation Flashcards

A trustee is considering making a high-risk venture capital investment. Under the total return investing approach, what is the primary consideration before proceeding?

Answer: Whether the risk-return profile is appropriate for the trust's overall portfolio objectives

Total return investing requires evaluating each investment's contribution to the portfolio's risk-return profile rather than focusing solely on income generation.

Which scenario creates an 'ethical wall' risk concern for a corporate trustee serving a trust that also holds shares in a company the bank advises?

Answer: Conflict of interest arising from the duty of loyalty

A corporate trustee with concurrent advisory relationships faces a duty of loyalty conflict that must be managed through disclosure, consent, or divestment.

A grantor creates a GRAT during a period of low Section 7520 rates. What is the primary risk mitigation benefit of this timing?

Answer: It lowers the hurdle rate the assets must exceed to transfer wealth tax-free

Lower Section 7520 rates reduce the annuity hurdle rate, increasing the probability that actual asset growth will exceed the rate and pass wealth to remaindermen tax-free.

Which fiduciary risk arises when a trustee delegates investment management to a sub-adviser without establishing appropriate oversight mechanisms?

Answer: Failure to exercise prudent oversight of the delegatee

Under UPIA Section 9, a trustee who delegates investment functions must exercise prudent oversight of the agent and establish appropriate scope and monitoring protocols.

A trust beneficiary in a high-asset-risk profession (e.g., surgeon) requests that the trustee distribute all assets outright. What risk does the trustee mitigate by declining?

Answer: Creditor and malpractice judgment risk to the assets

Retaining assets in a discretionary spendthrift trust protects them from creditors and professional liability judgments that would attach to assets distributed outright.

In the context of trust risk assessment, what does 'volatility drag' refer to?

Answer: The reduction in compound returns caused by portfolio variability

Volatility drag describes how higher variance reduces geometric (compound) returns even when arithmetic average returns appear acceptable.

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

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.