"He should tell us what scares him."
Translation:Il devrait nous dire ce qui lui fait peur.
le is always direct object whereas lui is indirect object.
How to differentiate one from the other :
The direct object is the answer to a direct question : What? Who?...
The indirect object is the answer to an indirect question (implying the use of a preposition) : To what? To whom?...
In this Duo sentence, it's kind of tricky because him (Scares who? -> him) is direct object in the English sentence, and lui is indirect object in the French one. That is because we say : "faire peur à" (-> preposition needed) (faire peur à qui ? -> lui).