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CTFA practice questions

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Question 1Trust Administration and Fiduciary Duties

A trustee sells a trust-owned parcel of land to a business entity that the trustee controls, and the price paid to the trust slightly exceeds the appraised value. This transaction most likely violates which fiduciary duty?

  1. Duty of impartiality among beneficiaries
  2. Duty to earmark trust property
  3. Duty of prudent diversification
  4. Duty of undivided loyalty Correct answer.

Explanation

A trustee may not deal with trust property for the trustee's own benefit, even at a fair or favorable price, unless the trust instrument or a court expressly permits it. This prohibition is the core of the duty of loyalty and is often described as the no-further-inquiry rule.

Question 2Trust Administration and Fiduciary Duties

A trustee's obligation to give beneficiaries periodic statements of receipts, disbursements, and the trust's assets and liabilities is best described as the duty to:

  1. delegate investment functions prudently
  2. preserve the trust res
  3. avoid commingling
  4. inform and account Correct answer.

Explanation

The duty to inform and account requires the trustee to keep qualified beneficiaries reasonably informed about the administration and to furnish accountings at least annually and on termination. It allows beneficiaries to enforce the trust and to know the condition of the fund.

Question 3Trust Administration and Fiduciary Duties

Which statement best reflects the prudent investor rule as adopted in most states?

  1. Any decline in portfolio value is evidence of imprudence
  2. Each individual holding must be conservative when viewed on its own
  3. Only investments on the state's statutory legal list are permitted
  4. Prudence is judged on the whole portfolio Correct answer.

Explanation

The prudent investor rule evaluates the trustee's conduct in the context of the trust portfolio as a whole, considering the purposes, terms, and distribution requirements of the trust. Individual holdings are not required to be prudent in isolation, and the rule is a standard of conduct rather than of results.

Question 4Trust Administration and Fiduciary Duties

A trustee deposits trust receipts into her personal checking account and pays trust expenses from that account. This practice most directly breaches the duty to:

  1. remain impartial among beneficiaries
  2. earmark and not commingle trust property Correct answer.
  3. follow the beneficiary's instructions
  4. diversify investments

Explanation

Trust property must be kept separate from the trustee's own property and titled in a way that identifies it as trust property. Commingling makes tracing difficult, obscures the trust's true financial condition, and creates an unacceptable opportunity for self-dealing.

Question 5Trust Administration and Fiduciary Duties

Under the traditional common-law standard, a trustee must administer the trust with the care and skill of:

  1. the highest degree of expert skill available in the community
  2. a licensed investment adviser managing client accounts
  3. a prudent person handling another's property Correct answer.
  4. an average beneficiary of similar age and experience

Explanation

The classic formulation requires the care and skill that a person of ordinary prudence would exercise in dealing with the property of another. A trustee who holds itself out as having special investment expertise may be held to that higher skill, but the baseline standard is ordinary prudence.

Question 6Trust Administration and Fiduciary Duties

A trust has three co-trustees, and the instrument is silent about how decisions are made. Under the Uniform Trust Code approach, trust business may generally be conducted by:

  1. the affirmative vote of the beneficiaries
  2. the decision of a majority of the co-trustees Correct answer.
  3. the unanimous consent of all co-trustees in every case
  4. the senior trustee acting alone

Explanation

The Uniform Trust Code default permits co-trustees to act by majority decision when the trust instrument does not specify otherwise, though some states require unanimity for certain acts. Each co-trustee retains a duty to participate and to prevent known breaches by the others.

Question 7Trust Administration and Fiduciary Duties

A person named as trustee in a trust instrument accepts the trusteeship by:

  1. substantially administering the trust or otherwise indicating acceptance Correct answer.
  2. signing the trust instrument as a witness
  3. notifying the Internal Revenue Service of the appointment
  4. filing a bond with the court

Explanation

Acceptance may be shown by substantially commencing performance of the trustee's duties or by any other conduct indicating acceptance, such as signing an acceptance or taking custody of trust assets. A person who has not accepted is not liable for failing to act.

Question 8Trust Administration and Fiduciary Duties

A spendthrift clause protects trust assets primarily by:

  1. restraining voluntary and involuntary transfers of a beneficiary's interest Correct answer.
  2. terminating the trust when the beneficiary reaches majority
  3. requiring court approval for every distribution
  4. barring the trustee from making discretionary distributions

Explanation

A spendthrift provision prevents a beneficiary from assigning an interest and prevents most creditors from reaching trust property before it is distributed. It does not change the trustee's distribution duties or powers.

Question 9Trust Administration and Fiduciary Duties

A trust instrument excuses the trustee from liability for all acts short of actual fraud. If the trustee commits a breach in bad faith, a court is most likely to:

  1. order the trustee to resign immediately with no further consequence
  2. void the entire trust ab initio
  3. enforce the clause exactly as written in every circumstance
  4. refuse to enforce the clause to the extent it shields bad faith or reckless indifference Correct answer.

Explanation

Exculpatory clauses are generally honored but cannot relieve a trustee of liability for breaches committed in bad faith, with reckless indifference, or intentionally. Public policy limits how far a settlor may immunize fiduciary misconduct.

Question 10Trust Administration and Fiduciary Duties

Under the Uniform Prudent Investor Act, a trustee may delegate investment and management functions to an agent provided the trustee:

  1. obtains prior court approval of the delegation
  2. delegates all decisions and retains no oversight
  3. obtains written consent from every beneficiary
  4. selects and monitors the agent with reasonable care Correct answer.

Explanation

Delegation is permitted when a prudent trustee of comparable skills could delegate under the circumstances. The delegating trustee must establish the scope and terms of the delegation and monitor the agent's performance, remaining liable for the agent's actions if the selection or monitoring is deficient.

Question 11Trust Administration and Fiduciary Duties

A trustee receives an ordinary cash dividend on stock held in the trust. Under the Uniform Principal and Income Act as adopted in most states, the dividend is:

  1. allocated entirely to principal
  2. held in a reserve until the trust terminates
  3. split equally between income and principal
  4. allocated entirely to income Correct answer.

Explanation

Ordinary cash dividends are classified as income, which is generally payable to the income beneficiary. Principal typically receives only certain extraordinary distributions such as liquidating dividends or proceeds of asset sales.

Question 12Trust Administration and Fiduciary Duties

Under the Uniform Principal and Income Act, when a trustee purchases a bond at a premium, the trustee should generally:

  1. disregard the premium entirely
  2. charge the full premium to income in the year of purchase
  3. amortize the premium against income Correct answer.
  4. treat the entire coupon payment as income

Explanation

Amortizing the premium allocates a portion of each interest payment to principal so that the trust is not overpaid as income at the expense of the remainder beneficiary. The result is that the bond's book value converges toward par at maturity.

Question 13Trust Administration and Fiduciary Duties

A trust authorizes distributions to a beneficiary for her 'health, education, maintenance, and support.' The trustee may properly make a distribution for:

  1. a luxury vacation
  2. graduate school tuition Correct answer.
  3. gifts to the beneficiary's friends
  4. a speculative business venture

Explanation

The health, education, maintenance, and support standard is an ascertainable standard tied to the beneficiary's accustomed living standard and needs. Tuition is a classic education expense within that standard.

Question 14Trust Administration and Fiduciary Duties

A trust gives the trustee discretion to pay income to the settlor's surviving spouse for life, with the remainder to the settlor's children. The trustee invests almost entirely in non-dividend-paying growth stocks. The trustee has most likely breached the duty of:

  1. impartiality Correct answer.
  2. confidentiality
  3. accounting
  4. loyalty

Explanation

A trustee must balance the interests of income beneficiaries and remainder beneficiaries in light of the trust's purposes. Investing solely for growth deprives the income beneficiary of the benefit the settlor intended for her.

Question 15Trust Administration and Fiduciary Duties

A successor trustee discovers evidence that the predecessor trustee improperly sold trust assets below market value. The successor trustee should:

  1. ignore the matter because liability is personal to the predecessor
  2. resign immediately to avoid entanglement
  3. take reasonable steps to compel the predecessor to redress the breach Correct answer.
  4. distribute all remaining trust assets to the beneficiaries at once

Explanation

A successor trustee must make reasonable efforts to compel a predecessor to redress a known breach and to deliver trust property. Failing to act can itself constitute a breach by the successor.

Question 16Trust Administration and Fiduciary Duties

A trustee learns that a third party is holding trust property and has refused repeated demands to return it. The trustee should:

  1. wait for a beneficiary to file suit against the holder
  2. write the asset off as a loss and move on
  3. take reasonable steps, including legal action, to recover the property Correct answer.
  4. resign in favor of a successor trustee

Explanation

The trustee has a duty to take control of trust property and to enforce claims belonging to the trust. Delay can prejudice the trust and may itself be a breach.

Question 17Trust Administration and Fiduciary Duties

A beneficiary requests a copy of the trust instrument and a current accounting. The trustee's best response is to:

  1. provide the information, because the duty to inform generally requires it Correct answer.
  2. provide the accounting but never the trust instrument
  3. refuse, because trust documents are confidential as a matter of law
  4. provide the information only after the beneficiary files suit

Explanation

The duty to inform requires the trustee to respond promptly to a beneficiary's reasonable request for relevant information about the administration, including the trust instrument and accountings. Confidentiality does not override this core disclosure obligation to qualified beneficiaries.

Question 18Trust Administration and Fiduciary Duties

A trust's stated purpose has become impracticable, and all beneficiaries agree to end it. A court will generally:

  1. convert the trust into a charitable foundation
  2. refuse to terminate under any circumstances
  3. terminate the trust if continuation is not necessary to carry out a material purpose Correct answer.
  4. order the trustee to continue the trust indefinitely

Explanation

Under the Claflin doctrine, beneficiaries may compel termination only if none of the trust's material purposes would be frustrated. A spendthrift or similar protective purpose will typically defeat termination despite unanimous consent.

Question 19Trust Administration and Fiduciary Duties

A trust instrument says nothing about trustee compensation. The trustee may properly charge:

  1. only fees approved in advance by a court
  2. whatever amount the trustee unilaterally chooses
  3. nothing at all
  4. a reasonable fee for services rendered Correct answer.

Explanation

In the absence of a governing provision, a trustee is entitled to compensation that is reasonable in light of the services performed and the trustee's skill and responsibility. Courts may review fees that are excessive or disproportionate.

Question 20Trust Administration and Fiduciary Duties

One of two co-trustees learns that the other is about to make a distribution that is clearly improper under the trust terms, and she does nothing. The passive co-trustee is:

  1. protected, because responsibility rests solely with the acting trustee
  2. not liable, because each trustee acts independently
  3. liable, because a co-trustee must take reasonable steps to prevent a known breach by another trustee Correct answer.
  4. liable only if she personally profited from the distribution

Explanation

Each co-trustee has an affirmative duty to participate in administration and to prevent a breach of trust by a co-trustee. Liability does not depend on personal profit; inaction with knowledge can itself constitute a breach.

Question 21Trust Administration and Fiduciary Duties

A trust instrument directs the trustee to follow a named investment adviser's directions on asset selection. Under the Uniform Trust Code, the trustee is:

  1. liable for the investment performance of the directed assets in all cases
  2. required to resign upon receiving any direction from the adviser
  3. required to override the adviser whenever the trustee disagrees
  4. generally shielded from liability for the adviser's investment decisions Correct answer.

Explanation

A directed trustee who acts in good faith within the scope of the direction is generally not liable for the adviser's decisions. The trustee remains responsible for matters outside the direction, such as monitoring for improper directions and performing non-directed duties.

Question 22Trust Administration and Fiduciary Duties

A trust executed in 1990 directs the trustee to retain a single concentrated stock position. Changed circumstances now make diversification prudent, and the settlor's purposes are being undermined by the concentration. The trustee's best course is to:

  1. seek modification by equitable deviation or an applicable modification statute Correct answer.
  2. resign and let the beneficiaries decide the investment policy
  3. sell the position immediately, because the prudent investor rule overrides the trust's terms
  4. continue holding the position and disregard the prudent investor rule

Explanation

A trustee must follow the trust terms, and a direction to retain assets overrides the normal diversification duty unless the terms are modified. Equitable deviation or statutory modification allows a court to adjust administrative terms when unanticipated circumstances threaten the trust's purposes.

Question 23Trust Administration and Fiduciary Duties

A trustee commingles trust funds with personal funds and later uses personal funds to buy a car. The beneficiaries may generally:

  1. recover only if the trustee is insolvent
  2. recover only the lowest intermediate balance in every case
  3. trace trust funds into property purchased with commingled assets Correct answer.
  4. recover nothing, because commingling destroys any claim to the funds

Explanation

Commingling shifts the burden to the trustee to distinguish trust property from personal property, and beneficiaries may trace trust funds into assets purchased with them. Ambiguity in commingled accounts is generally resolved against the trustee.

Question 24Trust Administration and Fiduciary Duties

A charitable trust's stated purpose becomes impossible to carry out as written, but the settlor had a general charitable intent. Under the doctrine of cy pres, a court may:

  1. terminate the trust and distribute the assets to the settlor's heirs
  2. convert the trust into a private trust benefiting the trustee
  3. apply the assets to a purpose as near as possible to the settlor's charitable intent Correct answer.
  4. order the trustee to fund the original purpose from personal assets

Explanation

Cy pres permits a court to redirect charitable assets to a purpose approximating the settlor's intent when the original purpose becomes impracticable or impossible. It applies only where the settlor had a general, rather than a narrowly specific, charitable intent.

Question 25Trust Administration and Fiduciary Duties

A trustee receives a distribution from a mutual fund or real estate investment trust held in the trust. Under the Uniform Principal and Income Act as amended in most states, the trustee generally allocates the distribution:

  1. entirely to income
  2. entirely to principal
  3. according to the character of the distribution as reported by the entity Correct answer.
  4. one-half to income and one-half to principal

Explanation

For regulated investment companies and real estate investment trusts, the trustee allocates distributions in accordance with the character reported by the entity, such as ordinary dividends, capital gain dividends, or return of capital. If the character is not reported, the trustee may look through to the underlying assets.

Question 26Trust Administration and Fiduciary Duties

A trustee who is also a beneficiary sells trust-owned real estate to himself at fair market value. The transaction is:

  1. Voidable only if the price was below fair market value
  2. Voidable at the election of the beneficiaries Correct answer.
  3. Valid because the price equals fair market value
  4. Valid if disclosed in the next annual accounting

Explanation

A trustee owes an undivided duty of loyalty and may not engage in self-dealing without authorization in the trust instrument or court approval. Fairness of price alone does not cure the conflict, so the beneficiaries may void the transaction.

Question 27Trust Administration and Fiduciary Duties

Within how many days after accepting a trusteeship must a trustee notify the qualified beneficiaries of the trust's existence under the Uniform Trust Code?

  1. 30 days
  2. 60 days Correct answer.
  3. 180 days
  4. 90 days

Explanation

UTC Section 813 requires the trustee to notify qualified beneficiaries of the trust's existence, their right to a copy of the instrument, and their right to an accounting within 60 days of accepting the trusteeship.

Question 28Trust Administration and Fiduciary Duties

A trustee opens a brokerage account to hold trust assets. To satisfy the duty to earmark trust property, the account should be titled:

  1. In the name of the trustee's wholly owned LLC
  2. As trustee for the trust Correct answer.
  3. In the trustee's individual name, with a memo notation
  4. In the beneficiaries' names as tenants in common

Explanation

Earmarking requires trust property to be held in a manner that identifies it as trust property, typically in the name of the trust or as trustee for the trust.

Question 29Trust Administration and Fiduciary Duties

A trustee reasonably needs legal advice about administering the trust. The trustee may properly:

  1. Pay the attorney only with beneficiary consent
  2. Avoid counsel because it creates a conflict of interest
  3. Pay the attorney only from personal funds
  4. Pay the attorney's reasonable fee from trust assets Correct answer.

Explanation

A trustee may incur reasonable expenses, including professional fees, that are necessary to administer the trust, and pay them from trust assets as administration expenses.

Question 30Trust Administration and Fiduciary Duties

A trust has current income beneficiaries and remainder beneficiaries. The trustee's duty of impartiality requires the trustee to:

  1. Follow the instructions of the settlor's oldest child
  2. Always preserve principal for the remainder beneficiary
  3. Balance income and remainder interests without favoring either Correct answer.
  4. Always favor the current income beneficiary

Explanation

The duty of impartiality requires the trustee to consider the interests of all beneficiaries and not unduly favor one class over another.

Question 31Trust Administration and Fiduciary Duties

Under the prudent investor rule, a trustee's duty to diversify generally requires the trustee to:

  1. Concentrate holdings in the settlor's family business
  2. Hold only assets that produce current income
  3. Invest only in U.S. Treasury securities
  4. Diversify across asset classes and issuers Correct answer.

Explanation

The prudent investor rule requires diversification to reduce risk unless, under the circumstances, diversification is imprudent.

Question 32Trust Administration and Fiduciary Duties

Under the Uniform Trust Code, a trustee may resign:

  1. Only with court approval
  2. With 30 days' notice to beneficiaries and co-trustees Correct answer.
  3. Only if the trust instrument expressly permits resignation
  4. At any time without notice

Explanation

UTC Section 705 permits a trustee to resign by giving at least 30 days' notice to the qualified beneficiaries and any co-trustees, unless the trust instrument provides otherwise.

Question 33Trust Administration and Fiduciary Duties

The duty of prudence requires a trustee to administer the trust with:

  1. Complete avoidance of any investment risk
  2. Reasonable care, skill, and caution in managing another's property Correct answer.
  3. The same care as a paid professional in every case
  4. The highest possible return regardless of risk

Explanation

A trustee must act with the care, skill, and caution that a reasonable person would use in managing property for another, considering the trust's purposes and circumstances.

Question 34Trust Administration and Fiduciary Duties

Under the Uniform Prudent Investor Act, a trustee's investment decisions are evaluated:

  1. Only by the amount of income produced
  2. Security by security in isolation
  3. By comparison with the S&P 500
  4. As part of the portfolio as a whole Correct answer.

Explanation

The UPIA adopts a portfolio approach, judging individual investments in the context of the entire trust portfolio and the trust's purposes.

Question 35Trust Administration and Fiduciary Duties

While reviewing trust records, a trustee discovers a valid, unpaid promissory note owed to the trust by a third party. The trustee should:

  1. Divide the note among the beneficiaries
  2. Ignore it because the trustee did not create the note
  3. Take reasonable steps to collect the note for the trust Correct answer.
  4. Write off the note as uncollectible

Explanation

A trustee has a duty to take reasonable steps to enforce claims and collect trust property.

Question 36Trust Administration and Fiduciary Duties

A trustee may properly delegate to an agent:

  1. All investment decisions permanently
  2. Ministerial tasks such as tax return preparation Correct answer.
  3. The trustee's duty of loyalty
  4. The trustee's discretionary distribution decisions

Explanation

A trustee may delegate ministerial or administrative functions, but generally may not delegate core fiduciary duties such as discretionary distribution decisions or loyalty.

Question 37Trust Administration and Fiduciary Duties

In making investment and distribution decisions, a trustee is expected to:

  1. Maximize income tax savings for the current beneficiary above all
  2. Avoid all transactions that create capital gains
  3. Ignore tax consequences because they are the beneficiaries' concern
  4. Weigh tax consequences as part of prudent administration Correct answer.

Explanation

Prudent administration includes considering the tax consequences of investment and distribution decisions, though tax savings are not the only objective.

Question 38Trust Administration and Fiduciary Duties

Under the Uniform Principal and Income Act, a trustee may make an adjustment between income and principal if:

  1. A court orders the adjustment
  2. All beneficiaries consent in writing
  3. Necessary to fulfill the trustee's duty of impartiality Correct answer.
  4. The trust instrument expressly grants the power

Explanation

UPIA Section 104 gives the trustee a default power to adjust between income and principal when necessary to administer the trust impartially, unless the trust instrument negates it.

Question 39Trust Administration and Fiduciary Duties

A court may modify the administrative terms of a noncharitable trust under the doctrine of equitable deviation when:

  1. The trustee wants to increase its compensation
  2. Unanticipated circumstances defeat the trust's material purpose Correct answer.
  3. The beneficiaries simply prefer different terms
  4. The trust has existed for more than 10 years

Explanation

Equitable deviation allows a court to modify administrative terms when unanticipated circumstances would defeat the settlor's material purpose.

Question 40Trust Administration and Fiduciary Duties

Under UTC Section 414, a court may terminate a small trust if:

  1. The trustee requests termination for convenience
  2. Trust value is too small to justify administration costs Correct answer.
  3. The settlor's spouse has died
  4. The trust has no charitable beneficiaries

Explanation

UTC Section 414 permits a court to terminate or modify a trust whose value is insufficient to justify the cost of administration.

Question 41Trust Administration and Fiduciary Duties

A beneficiary asks the trustee for information about the trust. The trustee's duty to keep beneficiaries informed:

  1. Forbids sharing any information with beneficiaries
  2. Requires reasonable information about administration to qualified beneficiaries Correct answer.
  3. Requires the trustee to publish the trust instrument publicly
  4. Applies only to the settlor during life

Explanation

The duty to inform and report requires the trustee to keep qualified beneficiaries reasonably informed about the trust and its administration.

Question 42Trust Administration and Fiduciary Duties

A trustee delegates investment management to an agent under the Uniform Prudent Investor Act. The trustee must:

  1. Delegate only to a bank
  2. Take no further action once delegation occurs
  3. Monitor the agent's performance periodically Correct answer.
  4. Obtain court approval before delegating

Explanation

Although the UPIA permits delegation of investment functions, the trustee must select the agent prudently and monitor the agent's performance.

Question 43Trust Administration and Fiduciary Duties

A trustee is authorized to make distributions for a beneficiary who becomes incapacitated. The trustee may:

  1. Stop all distributions until the beneficiary recovers
  2. Pay the funds directly to the beneficiary's adult child without inquiry
  3. Apply the funds for the beneficiary's care and needs Correct answer.
  4. Distribute the entire trust to the beneficiary's creditors

Explanation

The trustee should apply trust funds for the incapacitated beneficiary's benefit, such as paying care providers or covering needs, rather than making outright payments to others.

Question 44Trust Administration and Fiduciary Duties

A third party sues the trust, challenging the validity of a trust provision. The trustee should:

  1. Defend the trust and pay reasonable litigation costs from trust assets Correct answer.
  2. Concede the challenge to avoid litigation costs
  3. Pay the plaintiff personally to settle
  4. Resign immediately

Explanation

A trustee has a duty to defend the trust against challenges and may use trust assets for reasonable litigation expenses.

Question 45Trust Administration and Fiduciary Duties

A trustee administering trust-owned real property should generally:

  1. Avoid insurance to save trust expenses
  2. Insure the property only if a beneficiary requests
  3. Obtain adequate property and liability insurance Correct answer.
  4. Insure the property in the beneficiaries' names

Explanation

Obtaining adequate insurance is a prudent administration expense that protects the trust from property and liability losses.

Question 46Trust Administration and Fiduciary Duties

A trustee has discretion to distribute to a beneficiary as the trustee 'deems advisable.' A court reviewing the trustee's decision to withhold distributions will generally apply which standard?

  1. No review at all
  2. Strict scrutiny
  3. Abuse of discretion Correct answer.
  4. De novo review

Explanation

Courts generally review discretionary trustee decisions for abuse of discretion, asking whether the trustee acted honestly and in good faith within the scope of reasonable judgment.

Question 47Trust Administration and Fiduciary Duties

Under the Uniform Principal and Income Act, a stock dividend is generally allocated:

  1. Fifty percent to income and fifty percent to principal
  2. Entirely to income
  3. To income if declared from current earnings
  4. To principal Correct answer.

Explanation

A stock dividend, consisting of additional shares issued to all shareholders, is treated as principal because it changes the form of ownership rather than producing distributable income.

Question 48Trust Administration and Fiduciary Duties

A trustee converts an income-only trust into a unitrust under state statute. Under a unitrust, the income beneficiary receives:

  1. A fixed percentage of trust value, revalued periodically Correct answer.
  2. A fixed dollar amount that never changes
  3. Only capital gains realized by the trust
  4. All actual dividends and interest earned by the trust

Explanation

A unitrust pays the income beneficiary a fixed percentage of the trust's value, recalculated periodically, rather than the actual income earned.

Question 49Trust Administration and Fiduciary Duties

A trustee holds trust-owned real property that may be contaminated. To satisfy fiduciary duties, the trustee should:

  1. Resign without notifying anyone
  2. Ignore the issue because liability falls on the settlor
  3. Immediately convey the property to a beneficiary
  4. Investigate and take reasonable steps to manage the liability Correct answer.

Explanation

A trustee must prudently manage trust property and liabilities, including investigating environmental risk and taking reasonable steps such as insurance or remediation.

Question 50Trust Administration and Fiduciary Duties

A trustee who is a partner in an accounting firm considers hiring that firm to prepare the trust's tax returns. Under the duty of loyalty, the trustee should:

  1. Disclose the conflict and ensure the fee is reasonable Correct answer.
  2. Never hire any firm, because trustees may not deal with the trust
  3. Hire the firm without disclosure because tax work is ministerial
  4. Hire the firm and charge its standard fee

Explanation

A trustee must avoid conflicts of interest and, when a conflict exists, disclose it and ensure the transaction is fair and in the trust's best interest.