STEP Fiduciary Responsibilities and Ethics 2 — Questions and Answers
Question 1: A trustee discovers that a beneficiary is pressuring a co-trustee to make unauthorized distributions. What is the primary ethical obligation of the non-pressured trustee?
- Comply with the majority decision of the trustees
- Report the coercion to the court or appropriate authority (Correct answer)
- Defer to the beneficiary's wishes to preserve relationships
- Resign to avoid being implicated in the misconduct
Correct answer: Report the coercion to the court or appropriate authority
Trustees have an independent duty to act in the best interests of all beneficiaries, and coercion must be reported to protect the integrity of the trust.
Question 2: Under the prudent investor rule, how should a trustee approach a beneficiary's request to retain a highly speculative asset in the trust portfolio?
- Retain it unconditionally to honor the beneficiary's wishes
- Evaluate it within the context of the total portfolio and trust objectives (Correct answer)
- Liquidate it immediately to minimize risk
- Seek a second opinion only if the asset exceeds 10% of trust value
Correct answer: Evaluate it within the context of the total portfolio and trust objectives
The prudent investor rule requires portfolio-level analysis rather than evaluating each asset in isolation.
Question 3: Which scenario best illustrates a breach of the duty of impartiality in trust administration?
- Allocating capital gains to the remainder beneficiary per trust terms
- Consistently investing in income-producing assets to the detriment of remaindermen (Correct answer)
- Distributing income to current beneficiaries as mandated
- Applying state principal and income allocation rules
Correct answer: Consistently investing in income-producing assets to the detriment of remaindermen
Systematically favoring income beneficiaries over remaindermen by skewing investments violates the duty of impartiality.
Question 4: A STEP practitioner learns that a client's proposed estate plan would technically comply with the law but exploit a loophole the legislature clearly intended to close. The ethical course of action is to:
- Proceed because legality is the only professional standard
- Advise the client of the risks and consider whether the plan reflects good ethical practice (Correct answer)
- Refuse to assist with any tax-minimization strategy
- Report the client to the tax authority immediately
Correct answer: Advise the client of the risks and consider whether the plan reflects good ethical practice
STEP's ethical standards require practitioners to consider not just legality but also the spirit of the law and professional integrity.
Question 5: What distinguishes a constructive trust from an express trust in the context of fiduciary liability?
- A constructive trust is created by written instrument; an express trust is court-imposed
- A constructive trust is a remedy imposed by courts to prevent unjust enrichment; an express trust arises from the settlor's intent (Correct answer)
- Both require a formal trust deed to be enforceable
- A constructive trust applies only to real property
Correct answer: A constructive trust is a remedy imposed by courts to prevent unjust enrichment; an express trust arises from the settlor's intent
Courts impose constructive trusts as an equitable remedy where one party would be unjustly enriched without it, independent of any express agreement.
Question 6: A trustee who is also a licensed attorney provides legal advice to the trust for a fee without prior disclosure. This most likely constitutes:
- Permissible dual-capacity service if the fee is reasonable
- A self-dealing breach of fiduciary duty requiring disclosure and consent (Correct answer)
- An acceptable arrangement under the corporate trustee exception
- Appropriate compensation for professional services rendered
Correct answer: A self-dealing breach of fiduciary duty requiring disclosure and consent
A trustee profiting from the trust in a dual capacity without disclosure and beneficiary consent violates the duty to avoid self-dealing.
Question 7: Under STEP ethical standards, when a practitioner has a conflict of interest that cannot be managed, the appropriate resolution is to:
- Disclose the conflict and continue acting
- Withdraw from acting and refer the client to independent advisors (Correct answer)
- Obtain a waiver from only the most financially significant client
- Proceed only if both clients are related by blood or marriage
Correct answer: Withdraw from acting and refer the client to independent advisors
When a conflict cannot be adequately managed through disclosure and consent, withdrawal and referral is the only ethically sound course.
STEP Fiduciary Responsibilities and Ethics 2
A trustee discovers that a beneficiary is pressuring a co-trustee to make unauthorized distributions.
What is the primary ethical obligation of the non-pressured trustee?