Risk Assessment & Mitigation Flashcards

A trustee receives notice that a beneficiary has filed for bankruptcy. What immediate action should the trustee take to protect discretionary trust assets?

Answer: Consult counsel and suspend discretionary distributions pending review of the trust's spendthrift provisions

The trustee should pause discretionary distributions and obtain legal advice to ensure spendthrift protections are valid and not circumvented by the bankruptcy proceeding.

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.

A trustee is managing a trust with both US and foreign assets. Which regulatory risk requires filing IRS Form 3520?

Answer: Transactions with foreign trusts or receipt of large foreign gifts

Form 3520 must be filed to report transactions with foreign trusts and receipt of large foreign gifts, with substantial penalties for non-compliance.

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.

Which approach best mitigates the risk of a trustee making an imprudent investment decision when the trustee lacks specialized knowledge in a particular asset class?

Answer: Delegating investment authority to a qualified investment adviser under UPIA Section 9

UPIA Section 9 expressly permits trustees to delegate investment functions to qualified agents, satisfying the prudence standard when proper oversight is maintained.

A grantor dies while a GRAT still has annuity payments outstanding. What is the primary estate tax risk?

Answer: A portion of the trust corpus is includible in the estate based on the present value of outstanding annuity payments

Under IRC Section 2036, the portion of GRAT assets needed to satisfy remaining annuity payments is includible in the grantor's gross estate if the grantor dies during the GRAT term.

A trustee is evaluating whether to accept a trust that holds environmental cleanup liability. Which risk management step is most critical before accepting trusteeship?

Answer: Conducting a Phase I and Phase II environmental site assessment to quantify potential liability

Environmental assessments quantify potential CERCLA liability, which can far exceed asset values and expose a trustee to personal liability for cleanup costs.