STEP Trust and Estate Law 3 — Questions and Answers
Question 1: A trustee holds legal title to trust property 'in trust.' Under the doctrine of merger, a trust will fail if:
- The trust instrument is not witnessed
- The same person is both the sole trustee and sole beneficiary (Correct answer)
- The trust lacks a spendthrift clause
- The trust term exceeds the perpetuities period
Correct answer: The same person is both the sole trustee and sole beneficiary
The doctrine of merger extinguishes a trust when the same person holds both the entire legal interest (as trustee) and the entire equitable interest (as beneficiary).
Question 2: Which of the following best describes a 'silent trust' arrangement?
- A trust where beneficiaries are notified immediately upon creation
- A trust where the trustee is not obligated to inform beneficiaries of the trust's existence (Correct answer)
- A trust funded with non-income-producing assets
- A trust with an anonymous settlor
Correct answer: A trust where the trustee is not obligated to inform beneficiaries of the trust's existence
A silent trust (permitted under some UTC jurisdictions) allows the settlor to direct the trustee to withhold information about the trust from beneficiaries for a specified period.
Question 3: Under US federal law, what is the estate tax treatment of property passing to a surviving spouse who is NOT a US citizen?
- The unlimited marital deduction applies automatically
- The property qualifies for the marital deduction only if held in a Qualified Domestic Trust (QDOT) (Correct answer)
- The property is fully taxable with no deduction available
- The property qualifies for the marital deduction if the non-citizen spouse becomes a resident
Correct answer: The property qualifies for the marital deduction only if held in a Qualified Domestic Trust (QDOT)
A QDOT is required to obtain the marital deduction for a non-citizen surviving spouse, ensuring the IRS can collect deferred estate tax.
Question 4: Which generation-skipping transfer (GST) tax exemption strategy involves allocating exemption to a trust so that its inclusion ratio is zero?
- Reverse QTIP election
- Deemed allocation
- Zeroing-out allocation (Correct answer)
- Automatic allocation to direct skips
Correct answer: Zeroing-out allocation
Allocating sufficient GST exemption to make the inclusion ratio zero means all distributions and terminations from that trust are exempt from GST tax.
Question 5: A trustee who delegates investment management to an external advisor remains liable if the trustee fails to:
- Obtain court approval for the delegation
- Prudently select, instruct, and monitor the agent under the Uniform Prudent Investor Act (Correct answer)
- Notify all beneficiaries of the delegation in writing
- Limit delegation to assets under $1 million
Correct answer: Prudently select, instruct, and monitor the agent under the Uniform Prudent Investor Act
Under the UPIA, trustees may delegate but must prudently select the agent, define the scope of delegation, and periodically monitor the agent's performance.
Question 6: An irrevocable life insurance trust (ILIT) avoids inclusion of life insurance proceeds in the insured's gross estate if:
- The trust was created at least one year before death
- The insured possessed no incidents of ownership in the policy at death and the transfer occurred more than three years before death (Correct answer)
- The insured is not the trustee
- The policy premiums are paid by the beneficiaries
Correct answer: The insured possessed no incidents of ownership in the policy at death and the transfer occurred more than three years before death
IRC §2035 includes life insurance transferred within three years of death; avoiding inclusion requires the insured to hold no incidents of ownership and to survive the transfer by more than three years.
Question 7: In trust law, the 'no-contest' (in terrorem) clause is primarily designed to:
- Prevent the trustee from contesting beneficiary claims
- Deter beneficiaries from challenging the validity of the trust instrument (Correct answer)
- Restrict the trustee from making discretionary distributions
- Prohibit beneficiaries from requesting accountings
Correct answer: Deter beneficiaries from challenging the validity of the trust instrument
An in terrorem clause forfeits a beneficiary's interest if they challenge the trust, discouraging litigation that could undermine the settlor's intent.
STEP Trust and Estate Law 3
A trustee holds legal title to trust property 'in trust.' Under the doctrine of merger, a trust will fail if: