STEP Documentation & Legal Requirements 3 — Questions and Answers
Question 1: A trustee seeking to avoid personal liability for trust contracts should ensure that all contracts are signed in what manner?
- In the trustee's personal name only
- As 'John Smith, Trustee of the ABC Trust' or similar fiduciary capacity notation (Correct answer)
- Under the trust's EIN only, without a signature
- Jointly with at least one beneficiary
Correct answer: As 'John Smith, Trustee of the ABC Trust' or similar fiduciary capacity notation
Signing in a fiduciary capacity (e.g., 'as Trustee') clearly identifies that the obligation belongs to the trust, not the individual, protecting the trustee from personal liability.
Question 2: Under the Hague Convention on the Law Applicable to Trusts and on their Recognition, which document is critical for establishing that a trust is recognized internationally?
- A notarized copy of the trust deed with an apostille (Correct answer)
- A local court order confirming trust validity
- The trust's tax identification number from the IRS
- A letter of undertaking from the trustee
Correct answer: A notarized copy of the trust deed with an apostille
For international recognition under the Hague Convention, a notarized trust deed with an apostille is the standard method of authenticating the document for use in signatory countries.
Question 3: Which type of documentation is specifically required when a trustee wishes to delegate investment functions to an external investment manager under the Uniform Prudent Investor Act?
- A trust amendment signed by the settlor
- A written delegation agreement specifying scope, terms, and standards (Correct answer)
- Court approval of the delegation
- Beneficiary consent signed by all adult beneficiaries
Correct answer: A written delegation agreement specifying scope, terms, and standards
UPIA requires a written delegation agreement that covers the scope of authority, investment standards, and terms of the agent's compensation before investment functions can be delegated.
Question 4: When documenting a charitable remainder trust (CRT), which IRS requirement must be included in the trust instrument itself to maintain tax-exempt status?
- A spendthrift clause protecting income beneficiaries
- An explicit prohibition on self-dealing transactions within the trust document
- A specific payout rate and term meeting IRC §664 requirements stated in the document (Correct answer)
- A corporate trustee requirement
Correct answer: A specific payout rate and term meeting IRC §664 requirements stated in the document
IRC §664 requires that the CRT instrument itself specify the payout percentage (at least 5%, no more than 50%) and term (fixed years up to 20 or life) to qualify for tax benefits.
Question 5: What documentation is required when a U.S. person receives a gift or bequest from a foreign person exceeding $100,000 in a tax year?
- Form 3520, Annual Return to Report Transactions with Foreign Trusts (Correct answer)
- Form 8938, Statement of Specified Foreign Financial Assets
- Form FinCEN 114 (FBAR)
- Form 5471, Information Return of U.S. Persons
Correct answer: Form 3520, Annual Return to Report Transactions with Foreign Trusts
Form 3520 must be filed by U.S. persons who receive gifts or bequests from foreign persons exceeding $100,000, or who have transactions with foreign trusts.
Question 6: For estate planning purposes, what is the critical legal requirement for a valid holographic will in states that recognize them?
- It must be typed and signed before two witnesses
- The material provisions and signature must be in the testator's own handwriting (Correct answer)
- It must be notarized to be enforceable
- It must be filed with the probate court before death
Correct answer: The material provisions and signature must be in the testator's own handwriting
A holographic will requires the material provisions and the testator's signature to be handwritten; no witnesses or notarization are required in states that recognize them.
Question 7: Which document is used to give a financial institution evidence of a trust's existence and the trustee's authority without disclosing the full trust terms?
- Trust amendment
- Certification (or certificate) of trust (Correct answer)
- Trustee affidavit of solvency
- Letters of administration
Correct answer: Certification (or certificate) of trust
A certification of trust (authorized under UTC §1013) allows trustees to prove the trust's existence and their authority to act without revealing confidential trust terms to third parties.
STEP Documentation & Legal Requirements 3
A trustee seeking to avoid personal liability for trust contracts should ensure that all contracts are signed in what manner?