STEP Fiduciary Responsibilities and Ethics 3 — Questions and Answers
Question 1: Which of the following best describes the 'no-conflict rule' as applied to trustees?
- Trustees must avoid any personal views that conflict with beneficiary preferences
- Trustees must not place themselves in a position where their personal interests conflict with their duties (Correct answer)
- Trustees must resolve all disputes between beneficiaries before distributing assets
- Trustees are prohibited from holding any personal investments
Correct answer: Trustees must not place themselves in a position where their personal interests conflict with their duties
The no-conflict rule prohibits fiduciaries from allowing personal interests to compete with or override their duty to beneficiaries.
Question 2: A trustee receives a commission from a third-party financial institution for placing trust assets in that institution's products. Without disclosure and consent, this is best characterized as:
- A permissible finder's fee under common law
- An unauthorized profit in breach of fiduciary duty (Correct answer)
- A standard industry practice exempt from disclosure
- Compensation that offsets trustee fees and benefits beneficiaries
Correct answer: An unauthorized profit in breach of fiduciary duty
Secret profits made by a fiduciary from their position must be disgorged regardless of whether the trust suffered any loss.
Question 3: In the context of discretionary distributions, which standard best describes the 'fraud on a power' doctrine?
- A trustee distributing to a non-object of the power for their own benefit (Correct answer)
- A beneficiary filing a fraudulent claim for distribution
- A settlor misrepresenting assets when establishing the trust
- A trustee failing to exercise a mandatory distribution power
Correct answer: A trustee distributing to a non-object of the power for their own benefit
Fraud on a power occurs when a trustee exercises a discretionary power for an improper purpose, such as benefiting a non-object or themselves.
Question 4: A trust protector has the power to remove and replace trustees. What fiduciary standard, if any, applies to the trust protector's exercise of this power?
- No fiduciary standard applies because trust protectors are not trustees
- The trust protector must exercise the power in good faith for the benefit of the beneficiaries (Correct answer)
- The trust protector owes duties only to the settlor
- The trust protector may act in their own interest unless the trust deed states otherwise
Correct answer: The trust protector must exercise the power in good faith for the benefit of the beneficiaries
Courts increasingly hold that trust protectors exercising significant powers over trust administration owe fiduciary duties to beneficiaries.
Question 5: When administering a charitable trust, which fiduciary duty is uniquely elevated compared to a private trust?
- Duty of loyalty to named individuals
- Duty to further the charitable purpose and act for the public benefit (Correct answer)
- Duty of impartiality between income and capital beneficiaries
- Duty to maximize short-term investment returns
Correct answer: Duty to further the charitable purpose and act for the public benefit
Charitable trustees owe their primary duty to advancing the charitable purpose for public benefit, enforceable by the Attorney General rather than private beneficiaries.
Question 6: Under the STEP Code of Professional Conduct, a practitioner who discovers a deceased client's estate plan contains evidence of historical fraud should:
- Proceed with estate administration without disclosure
- Seek legal advice on duties of confidentiality versus disclosure obligations (Correct answer)
- Immediately report the fraud to all beneficiaries
- Destroy the evidence to protect the client's reputation
Correct answer: Seek legal advice on duties of confidentiality versus disclosure obligations
Practitioner obligations around post-death disclosure of client wrongdoing require careful legal analysis of confidentiality, professional duties, and applicable law.
Question 7: The exculpatory clause in a trust instrument attempts to relieve the trustee of liability for negligence. Under most modern trust law, such a clause is:
- Fully enforceable for all acts including wilful misconduct
- Enforceable for ordinary negligence but not for gross negligence or wilful misconduct (Correct answer)
- Invalid as contrary to public policy in all circumstances
- Only enforceable if drafted by an independent attorney
Correct answer: Enforceable for ordinary negligence but not for gross negligence or wilful misconduct
Exculpatory clauses are generally upheld for ordinary negligence but courts will not excuse gross negligence, wilful default, or fraud.
STEP Fiduciary Responsibilities and Ethics 3
Which of the following best describes the 'no-conflict rule' as applied to trustees?