NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesHard
A client has recently inherited a substantial sum and is considering opening a trust account to manage the assets for their minor children. They want to ensure that the assets are protected, professionally managed, and distributed according to specific instructions upon the children reaching a certain age. Additionally, they want the trust to be difficult to modify or terminate once established. Which type of trust would best meet these objectives?
- AA revocable living trust
- BAn irrevocable trust
- CA testamentary trust
- DA simple trust
Show answer & explanationAnswer & explanation
Correct answer: B. An irrevocable trust
An irrevocable trust, once established, cannot be easily modified or terminated by the grantor, ensuring the assets are protected and distributed according to the original instructions. This aligns with the client's desire for difficult modification and protection.
Why the other options are wrong
- A. A revocable living trust can be changed or terminated by the grantor at any time, which contradicts the client's desire for a trust that is 'difficult to modify or terminate'.
- C. A testamentary trust is created through a will and only becomes effective upon the grantor's death, whereas the client is looking to establish a trust now for inherited assets.
- D. A simple trust is a type of trust that is required to distribute all of its income each year and does not allow for accumulation of income or specific distribution ages, which does not fully meet the client's needs for distribution upon a certain age.
Irrevocable Trust
A type of trust that, once established, generally cannot be modified, amended, or terminated by the grantor without the permission of the beneficiary or a court, offering strong asset protection and estate tax benefits.
- Grantor gives up control over assets once transferred.
- Assets are typically removed from the grantor's taxable estate.
- Offers strong asset protection from creditors and lawsuits.
- Difficult to change or terminate without beneficiary consent.
Memory trick: Irrevocable, it can't be undone, your assets protected, for everyone.