STEP Documentation & Legal Requirements 2 — Questions and Answers
Question 1: Under the Uniform Trust Code, which document must be executed with the same formalities as a will when creating a testamentary trust?
- A revocable living trust agreement
- The decedent's last will and testament (Correct answer)
- A pour-over trust declaration
- A durable power of attorney
Correct 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.
Question 2: Which IRS form must be filed annually by a domestic trust with income exceeding the filing threshold?
- Form 709
- Form 1041 (Correct answer)
- Form 706
- Form 1040
Correct 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.
Question 3: What is the primary purpose of a trust protector clause included in trust documentation?
- To name an alternate trustee in case of incapacity
- To grant a third party authority to modify trust terms or remove trustees (Correct answer)
- To protect beneficiaries from creditor claims
- To establish a trust's tax-exempt status
Correct answer: To grant a third party authority to modify trust terms or remove trustees
A trust protector clause designates a third party with specific powers to modify trust terms, replace trustees, or adapt the trust to changed circumstances.
Question 4: Under FIRPTA, what documentation must a foreign beneficiary provide when receiving a distribution from a U.S. trust that holds real property?
- IRS Form W-9
- IRS Form 8288-B for withholding certificate or acceptance of 15% withholding (Correct answer)
- IRS Form 5471
- IRS Form 3520
Correct answer: IRS Form 8288-B for withholding certificate or acceptance of 15% withholding
Under FIRPTA, distributions from U.S. trusts holding real property to foreign beneficiaries are subject to 15% withholding unless a withholding certificate (Form 8288-B) is obtained.
Question 5: Which document formally transfers a trustee's duties and responsibilities to a successor trustee upon resignation?
- Certificate of trust
- Trustee resignation letter only
- Deed of appointment and retirement (Correct answer)
- Letters testamentary
Correct answer: Deed of appointment and retirement
A deed of appointment and retirement formally documents the outgoing trustee's retirement and the appointment of the successor, transferring all fiduciary duties.
Question 6: For a self-settled asset protection trust (DAPT) to be valid in a state that permits them, which documentation requirement is typically most critical?
- The trust must be witnessed by two disinterested parties
- The settlor must be a discretionary beneficiary, not a mandatory one (Correct answer)
- The trust must be recorded in the county deed registry
- The trust must have a minimum of $1 million in assets
Correct answer: The settlor must be a discretionary beneficiary, not a mandatory one
In DAPT jurisdictions, the settlor may be a discretionary beneficiary, but cannot have a mandatory right to distributions, as this would expose assets to creditors.
Question 7: What is the legal effect of a 'no-contest' (in terrorem) clause in a trust document under most U.S. state laws?
- It automatically disinherits any beneficiary who files any legal claim
- It disinherits a contestant who challenges the trust without probable cause (Correct answer)
- It is unenforceable in all U.S. jurisdictions
- It requires all disputes to go to binding arbitration
Correct answer: It disinherits a contestant who challenges the trust without probable cause
Most states enforce no-contest clauses only against beneficiaries who challenge the trust without probable cause, protecting good-faith challenges.
STEP Documentation & Legal Requirements 2
Under the Uniform Trust Code, which document must be executed with the same formalities as a will when creating a testamentary trust?