CTFA common mistakes
CTFA · Understand the traps and how to avoid them.
Answers a trustee-powers or distribution question from the statutory default rule or from 'how trusts usually work' instead of from the specific power language in the fact pattern.
Candidates memorize the Uniform Prudent Investor Act and state default rules and mentally treat them as the answer. The exam is usually testing whether you noticed that the instrument narrowed or expanded the power (for example, prohibiting delegation, or requiring a specific asset be retained).
What to do instead
Before evaluating conduct, write down three items pulled directly from the fact pattern: the specific power or restriction, who holds it, and whether the disputed act falls inside or outside it. Apply the statutory default only after you have confirmed the instrument is silent.
Labels a trustee's self-dealing or conflict-of-interest transaction as acceptable because the price or terms were fair to the trust.
Candidates collapse the duty of loyalty into the duty of prudence. Fairness addresses whether a decision was prudent; it generally does not cure self-dealing unless the instrument or a statute authorizes the transaction and the material facts are disclosed.
What to do instead
Sort every conflict into one of three buckets before answering: authorized by instrument or statute; permitted only with full disclosure and beneficiary consent; prohibited outright. Answer from the bucket first, then discuss price or fairness only if the transaction survives that step.
Delegates investment or administrative authority to an agent or co-trustee and never evaluates the agent's performance, compliance with the governing instrument, or the terms of the delegation.
Delegation is treated as a complete transfer of responsibility. Under modern prudent-investor standards, delegation is permitted but the trustee keeps a duty to select, monitor, and set the scope of the agent's authority.
What to do instead
For any delegation fact pattern, answer three sub-questions: was the delegation permitted (statute or instrument), was the agent selected with reasonable care, and was there ongoing monitoring? A missing monitoring fact usually decides the question.
Divides a disposition at the wrong generation in per stirpes questions, typically splitting equally among grandchildren whenever a child has predeceased the testator.
Candidates use 'per stirpes' as shorthand for modern per-capita-at-each-generation, which divides at the first generation with a surviving member rather than at the children's generation.
What to do instead
Draw the family tree, mark the deceased, and explicitly ask 'at which generation do I make the division?' Strict per stirpes always divides at the children's generation; per capita at each generation divides at the first generation with a survivor, and then shares within that generation are equal regardless of lineage.
Assumes a funded revocable living trust eliminates federal estate tax, creditor claims, or all court involvement.
Marketing shorthand ('avoid probate') gets remembered as a broader legal effect. A revocable trust generally leaves the settlor's estate tax position unchanged, remains reachable by the settlor's creditors, and does not prevent litigation over the trust.
What to do instead
For any revocable-trust question, run four separate tests: is it funded, does it avoid probate for the assets actually titled to it, does it change the transfer-tax base (usually no), and does it change creditor exposure (usually no). Answer only the test being asked.
Builds an asset allocation from the beneficiary's age or a generic risk-tolerance label without first translating the trust's required distributions and remainder-beneficiary horizon into an investment constraint.
Candidates default to a retail financial-planning reflex (age-based glide path) and skip the step that makes trust investing different: the trust document, not the beneficiary's preference, sets the return objective and liquidity needs.
What to do instead
Before choosing an allocation, write the cash-flow requirement (dollar amount and timing), the time horizon of the remainder beneficiaries, and any instrument-imposed restrictions. The allocation must satisfy those three constraints; risk tolerance is a secondary filter.
Compares a taxable bond to a municipal bond, or two funds, using pre-tax yields or pre-tax returns.
Yield figures are quoted pre-tax by convention, and candidates forget that the client's marginal bracket, state tax treatment of in-state versus out-of-state issues, and the alternative minimum tax all change the ranking.
What to do instead
Convert every fixed-income option to an after-tax yield using the client's marginal federal and state rates before comparing, and state the breakeven tax rate explicitly. If the comparison still favors the taxable bond at the client's bracket, the pre-tax number is not the answer.
Treats realized capital gains as part of tier 1 fiduciary accounting income (or distributes them as income) without checking the instrument and the power to adjust.
Candidates learn 'income is distributed first' as a rule of thumb and then apply it mechanically to every receipt, ignoring that capital gains generally fall outside distributable net income and outside fiduciary accounting income unless the instrument or local law provides otherwise.
What to do instead
Classify each receipt twice before answering: is it fiduciary accounting income or principal, and is it included in distributable net income? Distributions come first from tier 1 (income) and then tier 2 (principal/other), and capital gains only enter the analysis with an explicit instrument provision, a unitrust conversion, or a valid adjustment power.
Assumes the GST exemption will be allocated optimally, or forgets the automatic allocation rules and the timely election to opt out or to allocate to a trust with a retained interest.
Candidates treat GST exemption as a plug number chosen later at filing. In practice, exemption is automatically allocated to direct skips and to many indirect skips, an ETIP can delay allocation to a trust in which the transferor retains an interest, and an affirmative election is often needed to move the allocation.
What to do instead
For each transfer, identify whether allocation is automatic, elective, or blocked by an ETIP, and state the deadline (generally the timely-filed gift tax return for the transfer). Answer the allocation-mechanics question before computing any inclusion ratio.
Advises that the deceased spouse's unused exclusion amount carries over to the survivor automatically, or that a late portability election is unavailable.
Portability is frequently described conversationally as 'automatic for married couples,' but it requires an affirmative election on a timely filed estate tax return, and relief for a late election exists only through specified procedural routes.
What to do instead
Whenever a question involves DSUE, check three things: was a Form 706 filed, was it timely (or is relief available), and was the election actually made? If any of the three is missing, the surviving spouse has no portable exclusion regardless of how the estate was planned.