CTFA flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Fiduciary duty of loyalty

A trustee must act solely in the beneficiaries' interest, avoid conflicts, and refrain from self-dealing unless the trust instrument or law expressly authorizes it.

Prudent investor rule

A trustee must invest and manage trust assets as a prudent investor would, evaluating the portfolio as a whole for risk, return, diversification, liquidity, and cost.

Duty of impartiality

A trustee must treat beneficiaries fairly, balancing the interests of current income beneficiaries against remaindermen, unless the trust terms authorize a different approach.

Co-trustee unanimous action

Co-trustees generally must act unanimously unless the trust instrument or applicable law permits majority action or authorizes delegation to one trustee.

Trustee delegation

A trustee may delegate investment and management functions if prudent, but must select the agent carefully, set scope, and monitor performance.

Principal and income allocation

The Uniform Principal and Income Act provides default rules for allocating receipts and expenses between income and principal; the trust terms control if inconsistent.

Revocable trust administration

During the settlor's life, a revocable trust is administered for the settlor, who usually retains powers to amend, revoke, and direct investments.

Successor trustee duties

A successor trustee must review the trust, inventory assets, identify beneficiaries, provide required notices, and account for administration from acceptance of the role.

Gross estate inclusion

IRC sections 2033 through 2042 include property in a decedent's gross estate when the decedent owned it or retained specified interests, powers, or transfers.

Unlimited marital deduction

Qualifying transfers to a surviving spouse avoid estate or gift tax, including QTIP property that meets statutory income and beneficiary requirements.

Annual gift tax exclusion

The annual exclusion allows tax-free gifts up to an indexed amount per donee each year; gifts above it use the donor's lifetime exemption unless another exclusion applies.

Step-up in basis

Property included in a decedent's gross estate generally receives a new basis equal to fair market value at death under IRC section 1014.

Portability election

A timely estate tax return can elect to transfer a deceased spouse's unused exclusion amount to the surviving spouse for later gifts or estate tax.

General power of appointment

A power exercisable in favor of the holder, the holder's estate, creditors, or creditors of the estate causes included property to be taxed in the holder's gross estate.

QTIP trust requirements

A QTIP trust qualifies for the marital deduction if the surviving spouse receives all income at least annually and no person can appoint the property to anyone other than the spouse during life.

Intestacy distribution

When a person dies without a valid will, state intestacy statutes determine how probate property is distributed to surviving relatives.

Asset allocation

Asset allocation divides a portfolio among asset classes and should reflect time horizon, risk tolerance, liquidity needs, and the trust's distribution requirements.

Diversification benefit

Diversification reduces unsystematic risk by combining assets whose returns are not perfectly correlated; systematic market risk remains and is measured by beta.

Sharpe ratio formula

The Sharpe ratio equals the portfolio return minus the risk-free rate, divided by the portfolio's standard deviation; a higher ratio indicates better risk-adjusted return.

Bond duration

Duration approximates a bond's percentage price change for a one percent change in yield, calculated as negative duration times the yield change.

Time-weighted return

Time-weighted return measures investment performance by removing the effect of external cash flow timing, making it useful for comparing investment managers.

Money-weighted return

Money-weighted return reflects the actual investor experience by accounting for the size and timing of cash flows into and out of the portfolio.

Rebalancing threshold rule

A rebalancing threshold rule trades when an asset class drifts beyond a preset band from its target weight, restoring the intended allocation.

Capital needs analysis

Capital needs analysis estimates required savings or life insurance by subtracting available resources from projected future obligations and expenses.

Form 709 due date

The gift tax return is generally due April 15 of the year after the gift, although an extension of time to file the income tax return may extend it.

Form 706 due date

The estate tax return is generally due nine months after the decedent's death, and a six-month extension may be requested.

Distributable net income

Distributable net income limits an estate or trust's deduction for distributions and determines the character and amount of income taxable to beneficiaries.

Grantor trust rules

Grantor trust rules tax the grantor rather than the trust on income when the grantor retains specified powers or interests over the trust.

Simple trust rules

A simple trust must distribute all income currently, make no charitable contributions, and distribute no principal; trusts failing these tests are complex trusts.

Section 645 election

A section 645 election treats a qualified revocable trust as part of the decedent's estate for income tax purposes during the election period.

Basis consistency reporting

Certain estate tax filers must report beneficiaries' basis to the IRS and beneficiaries on Form 8971 with Schedule A to ensure consistent basis reporting.

Fiduciary accounting income

Fiduciary accounting income follows the governing instrument and state law, while taxable income follows the Internal Revenue Code; the two amounts can differ.