FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsHard
A client, a 55-year-old successful business owner, approaches a registered representative seeking to establish a trust account for the benefit of their minor grandchildren. The client wants to maintain significant control over the assets and the distribution schedule, but also wishes to establish a clear succession plan for the trust's management. Which type of trust would be MOST appropriate to recommend?
- ARevocable Living Trust
- BIrrevocable Trust
- CUniform Transfers to Minors Act (UTMA) account
- DUniform Gifts to Minors Act (UGMA) account
Show answer & explanationAnswer & explanation
Correct answer: A. Revocable Living Trust
A revocable living trust allows the grantor (the client) to maintain control over the assets during their lifetime, amend or revoke the trust, and name successor trustees to manage the trust upon their incapacitation or death, fulfilling the desire for control and a clear succession plan. UGMA/UTMA accounts transfer control to the minor at majority, and irrevocable trusts surrender control permanently.
Why the other options are wrong
- B. An irrevocable trust involves permanently relinquishing control over the assets, which is contrary to the client's desire to maintain significant control.
- C. UTMA accounts are similar to UGMA but can hold a wider range of assets; they also transfer full control to the minor at the age of majority, which doesn't meet the client's needs.
- D. UGMA accounts are custodial accounts that transfer full control to the minor at the age of majority (18 or 21), which contradicts the client's desire for significant control and a distribution schedule.
Revocable Living Trust
A legal entity created during an individual's lifetime that allows the grantor to maintain control over assets, manage distributions, and designate successor trustees, with the ability to amend or revoke the trust.
- Grantor retains control over trust assets while alive and competent.
- Can be amended, modified, or revoked at any time by the grantor.
- Avoids probate upon the grantor's death.
- Allows for detailed distribution instructions and succession of management.
Memory trick: Revocable means you can change it, Irrevocable means it's set.