Section 1. Nature and Characteristics of Account Relationships

Question 0

2. Which of the following is not a common law requirement to create a trust?
   a. Intent to create a trust by a settlor
   b. Existence of trust corpus
   c. Identification of beneficiaries
   d. A written document specifying the terms of a trust

Answer 0

d.
The five common law requirements of an express trust are (i) intent to create a trust by a legally competent settlor, (ii) present declaration or act of transfer by the settlor, (iii) existence of a trust corpus, (iv) naming of a trustee, and (v) identification of identifiable beneficiaries.

Question 1

1. What are the two title interests in property and how are those interests divided under a trust?
   a. Income and principal
   b. Contingent and vested
   c. Income and remainder
   d. Equitable and legal

Answer 1

d.
An owner holds legal and equitable title to property. In a trust, legal title is held by the trustee; equitable title is held by the trust beneficiaries. Thus, the trustee is the record owner of the property, and the beneficiaries are entitled to use and enjoy the property within the confines of the trust and applicable law.

Question 2

3. Who are all of the parties necessary to create a trust?
   a. The settlor and the beneficiaries
   b. The trustee and the beneficiaries
   c. The settlor, the trustee, and the beneficiaries
   d. The settlor and the trustee

Answer 2

c.

The settlor, the trustee, and the beneficiaries

Question 3

4. Constructive trusts and resulting trusts are always?
   a. Expressed trusts
   b. Implied trusts
   c. Irrevocable trusts
   d. Revocable trusts

Answer 3

b.
The two types of implied trusts are constructive trusts and resulting trusts. A constructive trust essentially is a fraud-rectifying trust, imposed by a court to protect those who lose property to a wrongdoer. A resulting trust is an intent-enforcing trust, based upon the presumed intent of a transferor of property

Question 4

5. Which of the following contains one or more precatory words:
   a. My trustee shall pay the net income of the trust to my spouse for any purpose.
   b. My trustee may sell or exchange trust assets as my trustee may deem necessary.
   c. I desire that my trustee retain my principal residence in trust during my lifetime.
   d. I direct my trustee to retain my principal residence in trust during my lifetime.

Answer 4

c.
The use of precatory words, such as I desire or I request, without more, do not create legally enforceable duties in a trustee.

Question 5

6. Egbert creates a trust under which he declares that any interests in real property that he receives under the will of his dear Uncle Ned are held in trust for the benefit of Egbert’s 11-year-old son, Devon. Uncle Ned is thrilled because devon is his favorite grandnephew. An enforceable trust has not been created because:
   a. An expectancy under a will is not a transferable property interest.
   b. Uncle Ned is not competent because a grandnephew cannot be the natural object of his bounty.
   c. A minor cannot hold an interest in real property, not even an equitable interest held in trust.
   d. The transfer violates the rule against prepetuities because Uncle Ned may survive for 21 years after the creation of the trust.

Answer 5

a.
At common law, the corpus of a trust must consist of a transferable property interest, and expectancy under a will does not constitute such an interest. The existence of a statute allowing a settlor to make testamentary additions to an inter vivos trust does not affect this result. Devon reasonably could be the object of his granduncle’s bounty; therefore, b is not the correct answer. C. is incorrect because a child may be a beneficiary under a trust, regardless of the nature of the trust corpus. D is not the best answer because even if Egbert had a contingent interest in Uncle Ned’s property at the time of the trust’s creation, that interest would have vested in Devon, or his heirs, immediately upon Uncle Ned’s death, which is within the period set forth in the rule.

Question 6

7. What are some of the nontax reasons that a settlor may have for creating an express trust?
   a. Probate avoidance
   b Creditor protection
   c. Special needs planning
   d. All of the above

Answer 6

d.
Among the any nontax reasons for creating a trust are (i) professional asset management; (ii) greater flexibility in selecting a post-mortem fiduciary than under most probate laws; (iii) asset protection from creditors or spendthrift beneficiaries; (iv) expert management of special asses, such as a closely held business; (v)special needs of disabled beneficiaries; and (vi) special nontax goals, such as a vehicle for making contributions to charity.

Question 7

8. What are the primary reasons that a settlor may have for creating an irrevocable trust?
   a. To provide for the settlor’s family after the settlor’s death
   b. To ensure that the trustee cannot be changed
   c. To make a completed gift for tax purposes while retaining some control over the use and enjoyment of the gifted property
   d. All of the above

Answer 7

c.
The primary reasons for creating an irrevocable trust are (i) providing a vehicle for making a completed gift while retaining some control over the use and enjoyment of the property; and (ii) tax savings that accompany the making of a completed gift.

Question 8

9. What are the primary advantages of using a trust rather than a will to dispose of one’s assets at death?
   a. Court supervision and administration of the trust
   b. Probate avoidance and privacy regarding the trust’s assets and terms
   c. The savings and lower costs to create
   d. A trust is more flexible and easier to change than a will

Answer 8

b.
The two primary advantages of using a trust rather than a will to dispose of one’s assets at death are (i) the avoidance of probate administration of one’s estate; and (ii) the valuation of trust assets and the disposition terms of the trust are not made available to the public.

Question 9

10. What is the primary difference between an inter vivos trust and a testamentary trust?
    a. A testamentary trust requires a writing
    b. A testamentary trust requires court approval
    c. An inter vivos trust becomes operative during the settlor`s lifetime
    d. An inter vivos trust can be modified with court approval

Answer 9

c.
An inter vivos trust becomes operative during the lifetime of the settlor. A testamentary trust is created under a will. Thus, a testamentary trust must be executed with the formalities required for a will under state law. Additionally, property passing under a testamentary trust is subject to probate administration, and the governing instrument is available for public inspection.

Question 10

11. What are the two components of a typical A-B estate plan?
    a. A pour-over will and a revocable trust
    b. A trust that provides for the settlor for life and for the settlor’s family ater the settlor’s death
    c. A revocable trust for Spouse A and a revocable trust for Spouse B
    d. A credit shelter trust and a marital trust or bequest

Answer 10

d.
An A-B estate plan consists of (i) a unified credit shelter trust and (ii) a marital ltrust or bequest. Under current law (2015) $5,430,000 reduced by the amount of taxable gifts made by a decedent during his or her lifetime - may be sheltered from federal transfer tax at death under the applicable exclusion amount. Additionally, a decedent may transfer an unlimited amount of property to a surviving spouse without the imposition of federal transfer tax at the decedent’s death. Therefore, an A-B plan generally creates a formula under which $5,430,000 or the decedent’s remaining applicable exclusion amount, is allocated to the unified credit shelter trust or bequests, and the balance of the decedent’s estate is allocated to the marital trust or bequest. Such a plan results in no imposition of federal transfer tax at the death of the decedent.

Question 11

12. Under a credit shelter trust, what is the difference between the one-pot and several-pot structures upon the death of the second spouse to die?
    a. The trustee of a one-pot trust does not have to diversity the investment of the trust’s assets.
    b. The several-pot approach divides the trust assets into different trusts for children from different marriages, whereas a one-pot approach consolidates all of the trust assets for all children regardless of parentage.
    c. The several-pot approach divides the trust assets into different trusts for the income and remainder beneficiaries.
    d. The several-pot approach divides the trust assets into seperate trusts for each of the spouses’ children, and assets of one trust are not available to the other children.

Answer 11

d.
Under the several-pot approach, property of the credit shelter trust is divided upon the death of the surviving spouse into seperate trusts for each of the spouses’ children; property from one child’s trust ordinarily is not available to another child. Under the one-pot approach, property of the credit shelter trust is retained in a single trust until the occurrence of a particular condition, such as the youngest child reaching a stated age. The single-pot approach is used when funds are insufficient to establish seperate trusts or the parents are concerned about the special needs, especially the medical needs, of a particular child.

Question 12

13. Which of the following is NOT one of the four categories of marital trusts?
    a. Power of appointment trust
    b. Estate trust
    c. Grantor retained annuity trust
    d. Qualified terminable interest property trust

Answer 12

c.
The four types of marital trusts are the (i) power of appointment trust, (ii) estate trust, (iii) qualified terminable interest poperty (QTIP) trust, and (iv) qualified domestic trust (QDOT)

Question 13

14. Which of the following provisions will disqualify a power of appointment trust for the marital deduction?
    a. Spouse is entitled to 80 percent of the trust income, payable quarterly.
    b. Spouse has a power of appoitment over the trust property, exercisable by the spouse alone and without restricction.
    c. Spouse is entitled to all of the trust income, payable twice a year.
    d. No one else has the power to appoint the trust property.

Answer 13

d.
A power of appointment trust will qualify for the marital deduction if (i) the spouse is entitled to all trust income generated during his or her lifetime; (ii) the trust income is payable to the spouse at least as frequently as annually; (iii) the spouse is given an inter vivos or testamentary power of appointment over the trust property that is excercisable by the spouse alone and in all events; and (iv) no person other than the spouse has the power to appoint trust property to anyone other than the spouse.

Question 14

15. How does an estate trust differ from a power of appointment trust?
    a. Income does not need to be paid to the spouse
    b. An estate trust can be established by a testamentary trust
    c. An estate can only be used for foreign citizen spouses
    d. A power of appointment trust can be irrevocable

Answer 14

a.
Under an estate trust, the surviving spouse and his or her estate are the only trust beneficiaries. Therefore, income need not be paid to the spouse, and underproductive property may be retained in the trust without jeopardizing the marital deduction. Upon the surviving spouse’s death, all of the trust property is distributed to that spouse’s estate. The primary disadvantage of an estate trust is that the surviving spouse cannot appoint trust property during his or her lifetime to family members.

Question 15

16. How does a qualified terminable interest property (QTIP) trust differ from a power of appointment trust?
    a. A QTIP trust will be includable in the surviving spouse’s estate for estate tax purposes, but a power of appointment trust will not be includable.
    b. A QTIP trust does not give a power of appointment to the surviving spouse.
    c. A QTIP trust does not pay all of the trust income to the surviving spouse.
    d. The trustee of a QTIP trust may not be the surviving spouse.

Answer 15

b.
A qualified terminable interest property (QTIP) trust is like a power of appointment trust without the power of appointment. Thus, the surviving spouse must be entitled to all of the income of the trust during his or her lifetime, payable at least annually. Under a QTIP trust, at the death of the surviving spouse, the trust property is distributed as directed by the donor spouse in the trust instrument. To qualify the trust for the marital deduction, an irrevocable QTIP election must be made on the donor spouse’s estate tax return.

Question 16

17. What is the difference between a charitable remainder trust and a charitable lead trust?
    a. A charitable remainder trust receives the remainder of the decedent’s probate estate, while a charitable lead trust does not.
    b. A charitable remainder trust is includable in the settlor’s taxable estate, but a charitable lead trust is not.
    c. A charitable remainder trust must have only charitable beneficiaries, while a charitable lead trust may have noncharitable remainder beneficiaries.
    d. A charitable remainder trust has noncharitable current beneficiaries and charitable remainder beneficiaries, while a charitable lead trust has charitable current beneficiaries and noncharitable remainder beneficiaries.,

Answer 16

d.
Under a charitable remainder trust, noncharitable beneficiaries are the current beneficiaries of the trust, and one or more charities are the remainder beneficiaries of the trust. A charitable lead trust is the flip side of a charitable remainder trust, thus, under a charitable lead trust, one or more charities are the current beneficiaries and the noncharitable beneficiaries are the remainder beneficiaries.

Question 17

18. What is the difference between an annuity trust and a unitrust?
    a. Each year, an annuity trust pays a fixed sum whereas a unitrust pays the fair market value of the trust assets.
    b. Each year, an annuity trust pays the fair market value of the trust assets whereas a unitrust pays a fixed sum.
    c. Each year, an annuity trust pays the net trust income whereas a unitrust pays gross trust income.
    d. Each year, an annuity trust pays the gross trust income whereas a unitrust pays the net trust income.

Answer 17

a.
An annuity trust pays a sum certain, which is determined when the trust is created, to the current beneficiaries each year. In contrast, a unitrust pays a fixed percentage of the fair market value of trust principal to the current beneficiaries each year.

Question 18

19. What are the primary differences between a grantor-retained income trust (GRIT), a grantor-retained annuity trust (GRAT), and a grantor-retained unitrust (GRUT)?
    a. The corpus of a GRIT is sometimes restricted to a certain type of asset, but GRATs and GRUTs are not similarly restricted.
    b. A GRAT pays fixed annuity payments to the grantor for a term of years
    c. A GRUT pays a fixed percentage to the grantor for a term of years.
    d. All of the above.

Answer 18

d.
Under a grantor-retained income trust (GRIT), the grantor retains the right to receive all of the income of the trust for a fixed term of years. Unde curent law, the corpus of a GRIT is limited to a personal residence of the grantor, unless the GRIT is set up for the benefit of certain collateral relatives or other unrelated third parties. Under a grantor-retained annuity trust (GRAT), the grantor retains the right to recieve fixed annuity payments for a term of years. The corpus of a GRAT is not limited to a particular type of asset. Under a grantor-retained unitrust (GRUT), the grantor retains the right to recieve a fixed percentage of the fair market value of the trust corpus each year. Like a GRAT, the trust corpus of a GRUT is not limited to a particular type of asset. Administration of a GRUT may be burdensome because of the requirement that assets be valued on an annual basis to determine the amount payable to the grantor each year.

Question 19

20. What characteristics do GRITs, GRATs, and GRUTs have in common?
    a. They are all revocable trusts
    b. They all qualify for the marital deduction
    c. They are irrevocable trusts
    d. They are all trusts under which the grantor retains a current interest for the rest of his or her lifetime.

Answer 19

c.
GRITs, GRATs, and GRUTs are irrevocable trusts under which the grantor retains a current interest for a fixed term of years. The trust’s irrevocability enables the grantor to make a complete gift of the remainder interest at the time of the trust’s creation. Because the remainder interest represents a future benefit, the amount of the gift is discounted under applicalb Treasury Department valuation tables.

Question 20

21. How does a qualifying annual exclusion trust differ from a Crummey trust?
    a. A Crummey trust must terminate when the beneficiary reaches age 21.
    b. A Crummey trust must give trust beneficiaries a temporary power to withdraw recent contributions to the trust.
    c. A Crumey trust may only have one beneficiary
    d A Crummey trust must make income or principal available for the benefit of any minor beneficiary.

Answer 20

b.
Section 2503(c) of the Internal Revenue Code requires that a qualifying annual exclusion trust (i) have only one current beneficiary; (ii) make income or principal or both available for the benefit of the minor beneficiary until the beneficiary attains age 21: (iii) provide that the trust property will pass to the beneficiary upon his or her reaching age 21; and (iv) if the minor dies prior to reching age 21, provide that trust property is payable to the beneficiary's estate or as the beneficiary may appoint under a general power of appointment. A Crummy trust, on the other hand may (i) have multiple beneficiaries; (ii) give trust beneficiaries a power to withdraw only recent contributions to the trust for a short period after such contributions are made; and (iii) continue to operate beyond a beneficiary's reaching age 21. Thus, a beneficiary under a Crummey trust, unlike the beneficiary of a qualifying annual exclusion trust, cannot unilaterally require distribution of the entire trust principal upon reaching age 21,