CHAPTER 1 CATEGORIZATION AND ALLOCATION OF RECEIPTS: TIMING OF RECEIPTS ...... 1-1 § 100 Estates ...... 1-1 § 101 Trusts ...... 1-4 § 102 Entitlement to Estate Income ...... 1-7 § 102.1 Specific Devises ...... 1-8 § 102.2 Pecuniary Devises ...... 1-8 § 102.3 Residuary Devises ...... 1-9 § 103 Trusts ...... 1-11 § 104 Determining Net Income...... 1-11

CHAPTER 2 ALLOCATION OF RECEIPTS DURING ADMINISTRATION OF TRUST: TYPES OF RECEIPTS ...... 2-1 § 200 Receipts from Entities ...... 2-1 § 200.1 Allocation of Receipts from an Entity to Principal or Income...... 2-1 § 200.1(a) General Rule ...... 2-1 § 200.1(b) Entity Defined ...... 2-1 § 200.2 Receipts of Money—§ 62-7-910(B) ...... 2-2 § 200.3 Receipts Allocated to Principal—§ 62-7-910(C) ...... 2-2 § 200.3(a) Property Other than Money ...... 2-3 § 200.3(b) Cash Receipts for Part or All of a Trust’s Interest in the Entity ...... 2-3 § 200.3(c) Partial and Total Liquidations ...... 2-3 § 200.3(d) Partial Liquidations—General Rule ...... 2-3 § 200.3(e) Valuing the Entity’s Assets for Purposes of the 20-Percent Threshold ...... 2-6 § 200.3(f) Does It Include Total Distributions or Only Distributions to the Trust? ...... 2-7 § 200.3(g) Tax Distributions ...... 2-9 § 200.3(h) Different Categories of Assets ...... 2-10 § 200.3(i) Other Large Receipts ...... 2-10

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§ 200.3(j) Money from a Mutual Fund or a Real Estate Investment ...... 2-11 § 200.4 Other Issues ...... 2-11 § 200.4(a) Dividend Reinvestment Plans ...... 2-11 § 200.4(b) Taxable Distributions Without Receipts (Phantom Income) ...... 2-12 § 201 Allocations of Income and Principal Received from a Trust or an Estate ...... 2-15 § 201.1 General Rule ...... 2-15 § 201.2 Conflicts ...... 2-15 § 201.3 Tax ...... 2-15 § 201.4 Purchased Interest in a Trust ...... 2-17 § 202 Separate Accounting for a Business Activity ...... 2-19 § 202.1 General Rule ...... 2-19 § 202.2 What Is Covered by This Section? ...... 2-20 § 202.3 How Does the Trustee Keep Separate Accounting? ...... 2-21 § 202.4 Liquidation of Sole Proprietorship...... 2-21 § 202.5 Losses ...... 2-22 § 202.6 Why Use Separate Accounting? ...... 2-22 § 203 Receipts Not Normally Apportioned: Allocations to Principal ...... 2-25 § 203.1 General Rule ...... 2-25 § 203.2 Assets Received During the Transferor’s Lifetime ...... 2-25 § 203.3 Money or Property Received from Sale of a Principal Asset ...... 2-25 § 203.4 Disbursements Related to Environmental Matters ...... 2-26 § 203.5 Eminent Domain (Condemnation) ...... 2-27 § 203.6 What If There Is No Beneficiary? ...... 2-28 § 203.7 Other Receipts ...... 2-28 § 204 Accounting for Receipts from Rental Property ...... 2-29 § 204.1 General Rule ...... 2-29 § 204.2 Security Deposits ...... 2-30 § 204.3 Prepaid Rent ...... 2-30 § 204.4 Reimbursements for Principal Expenditures ...... 2-30 § 204.5 Leases with Options to Purchase ...... 2-31 § 204.6 Rental Expenses Exceed Rental Income ...... 2-31 § 205 Allocation of Interest as Income; Allocation of Proceeds from Disposition of an Obligation as Principal; Exceptions ...... 2-32 § 205.1 General Rule ...... 2-32 § 205.2 Scope of Section 62-7-915 ...... 2-33 § 205.3 Sale of an Asset ...... 2-34 § 205.4 “No Interest” Bonds ...... 2-35

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§ 205.5 Inflation Adjusted Bonds ...... 2-36 § 205.6 Bonds Purchased at a Premium over Face ...... 2-36 § 205.7 Power to Adjust...... 2-36 § 206 Allocation of Proceeds of Insurance Contracts (Policies); Exception ...... 2-38 § 206.1 General Rule ...... 2-38 § 206.2 Property and Casualty Contracts ...... 2-39 § 206.3 Death Benefits from an Annuity ...... 2-40 § 206.4 Dividends on an Insurance Policy ...... 2-40 § 207 Receipts Normally Apportioned ...... 2-41 § 207.1 General Rule: Insubstantial Allocations ...... 2-41 § 207.2 Presumption of Insubstantial Amount ...... 2-42 § 207.3 When a Trustee Cannot Make Insubstantial Allocations ..... 2-42 § 207.4 How Does it Apply?...... 2-44 § 208 Allocation of Payments; Interest, Dividends, or Payments Made Instead of Interest or Dividends; Allocation of Payments Made from Separate Fund; Exception ...... 2-46 § 208.1 General Rule ...... 2-46 § 208.2 What Is Covered? ...... 2-46 § 208.3 What Is a Payment? ...... 2-47 § 208.4 What Is a Separate Fund? ...... 2-48 § 208.5 Dividends, Interest, or Payments in Lieu of ...... 2-48 § 208.6 Payments Not Characterized as Dividends, Interest, or Payments in Lieu of ...... 2-49 § 208.7 Marital Trusts ...... 2-50 § 208.8 Inability to Determine Internal Income...... 2-51 § 209 Liquidating Assets ...... 2-56 § 209.1 General Rule ...... 2-56 § 209.2 Previous Law ...... 2-57 § 209.3 Lottery Payments ...... 2-57 § 210 Allocation of Receipts from Interests in Minerals or Other Natural Resources ...... 2-59 § 210.1 General Rule ...... 2-59 § 210.2 What Is a Mineral or a Natural Resource? ...... 2-59 § 210.3 What Is a Nominal Amount? ...... 2-60 § 210.4 Production Payments ...... 2-60 § 210.5 Royalties, Shut-In-Well Payments, Take-Or-Pay Payments, Bonuses, and Delay Rentals ...... 2-60 § 210.6 Working Interest ...... 2-61 § 210.7 Water ...... 2-61 § 210.8 What Law Applies ...... 2-62

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§ 210.9 Open Mines Doctrine ...... 2-62 § 210.10 Grandfather Clause ...... 2-63 § 210.11 Other Consideration—Statutory Ambiguity ...... 2-63 § 211 Allocation of Receipts from Sale of Timber and Related Products...... 2-66 § 211.1 General Rule ...... 2-66 § 211.2 What Is Covered ...... 2-66 § 211.3 Mandatory Income Beneficiary ...... 2-67 § 211.4 Reasonable Amount for Depletion ...... 2-67 § 211.5 Rate of Growth ...... 2-69 § 211.6 Receipts from Timber Allocated to Income ...... 2-70 § 211.7 Receipts Allocated to Principal ...... 2-70 § 211.7(a) Receipts Are Allocated to Principal to the Extent They Exceed the Growth Rate of the Timber ...... 2-71 § 211.7(b) Standing Timber...... 2-72 § 211.8 Leases or Contracts to Cut Trees ...... 2-72 § 211.9 Advance Payments, Bonuses, and Other Payments: ...... 2-72 § 211.10 A Trustee Is Not Required to Use Section 62-7-921 ...... 2-73 § 211.11 “Open Mines” Doctrine ...... 2-74 § 211.12 Grandfather Clause ...... 2-74 § 212 Marital Deduction Adjustments ...... 2-76 § 212.1 General Rule ...... 2-76 § 212.2 Not Covered ...... 2-78 § 213 Allocation of Derivatives; Options ...... 2-81 § 213.1 General Rule ...... 2-81 § 213.2 What Is a Derivative?...... 2-81 § 213.3 When Does This Provision Apply?...... 2-82 § 213.4 Options ...... 2-83 § 214 Allocation of Payments Related to Asset-Backed Securities ...... 2-85 § 214.1 General Rule ...... 2-85 § 214.2 What Is an Asset-Backed Security? ...... 2-86 § 214.3 What Is Not an Asset-Backed Security ...... 2-87 § 214.4 Current Returns ...... 2-87 § 214.5 Liquidations of Interests in Asset-Backed Securities ...... 2-87 § 214.6 Separate Activity Accounting ...... 2-88

CHAPTER 3 ALLOCATION OF DISBURSEMENTS DURING THE ADMINISTRATION OF A TRUST ...... 3-1 § 300 Disbursement—Charges to Income or Principal ...... 3-1 § 300.1 General Rule ...... 3-1

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§ 300.2 Trustee Fees—Investment Advisor or Custodian Services ...... 3-1 § 300.3 Preparing Property for Sale ...... 3-2 § 300.4 Accountings, Judicial Proceedings, and Other Matters Involving Income and Remainder Interests ...... 3-2 § 300.5 Insurance Premiums ...... 3-3 § 300.6 Taxes ...... 3-3 § 300.7 Debts and Interest ...... 3-4 § 300.8 Repairs ...... 3-5 § 300.9 Environmental Matters...... 3-5 § 300.10 Depreciation and Other Reserves...... 3-6 § 301 Depreciation Reserves: Transfer to Principal of Cash Receipts from Asset Subject to Depreciation ...... 3-9 § 301.1 General Rule ...... 3-9 § 301.2 Exceptions ...... 3-10 § 301.3 Depreciable Property ...... 3-11 § 301.4 Net Cash Receipt Requirement ...... 3-11 § 301.5 Reasonable Amount ...... 3-12 § 302 Future Principal Disbursements Reserves ...... 3-13 § 302.1 General Rule ...... 3-13 § 302.2 Examples of Expenditures ...... 3-13 § 302.3 Unusually Large Charges ...... 3-14 § 302.4 Capital Improvement to a Principal Asset and Property Preparation ...... 3-15 § 302.5 Periodic Debt Payment ...... 3-15 § 302.6 Environmental Disbursements ...... 3-16 § 302.7 Change of Income Beneficiaries ...... 3-16 § 303 Payment of Taxes from Income and Principal ...... 3-17 § 303.1 General Rule ...... 3-17 § 303.2 Entities ...... 3-18 § 303.3 Amount Payable to Beneficiary ...... 3-20 § 303.4 Distribution of Less Than the Amount of Income ...... 3-23 § 303.5 Distributions Equal to or Exceeding Gross Income ...... 3-23 § 303.6 Capital Gains ...... 3-23 § 303.7 Adjustments, Mandatory Between Income and Principal .... 3-24 § 304 Certain Adjustments Between Principal and Income; Reduction of Marital Deduction or Charitable Contribution Deduction ...... 3-27 § 304.1 Equitable Adjustments—The Common Law ...... 3-27 § 304.2 Statutory Adjustments ...... 3-29 § 304.3 Discretionary Adjustments...... 3-29

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§ 304.4 Adjustments Between Income and Income or Principal and Principal ...... 3-30 § 304.5 Mandatory Adjustments ...... 3-30 § 304.6 The Hubert Regulations ...... 3-31 § 304.7 Interaction with Section 62-7-905 (Estate Expenses) ...... 3-32 § 304.8 Exercising Discretion within the Parameters of the Hubert Regulations ...... 3-33 § 304.9 Failure to Adjust ...... 3-33 § 304.10 Making the Adjustment...... 3-34

CHAPTER 4 CHANGING THE PARADIGM: THE POWER TO ADJUST, UNITRUSTS, AND DECANTING ...... 4-1 § 400 Introduction ...... 4-1 § 401 SCUPAIA Recognizes Modern Portfolio Theory and Total Return ...... 4-3 § 402 The Power to Adjust Allows Allocation Between Principal and Income...... 4-6 § 403 Is the Power to Adjust a Boon or Bane to the Trustee? ...... 4-6 § 404 When Does a Trustee Have the Power to Adjust? ...... 4-10 § 404.1 Analyzing Whether a Trustee Has a Power to Adjust ...... 4-10 § 404.2 Do the SCUPAIA Specific Provisions Apply to the Trust? ...... 4-11 § 404.3 The Power to Adjust Preconditions ...... 4-14 § 404.4 The Basic Power to Adjust Limitations ...... 4-20 § 404.5 Additional Possible Limitations on the Power to Adjust ..... 4-25 § 404.5(a) Factors in Exercising the Power to Adjust ...... 4-25 § 404.5(b) Release ...... 4-27 § 405 Trustee’s Comfort Level in Determining If Exercise of Power to Adjust Is Authorized ...... 4-28 § 405.1 Court’s Power to Review and Remedy ...... 4-28 § 405.2 Court’s Power to Issue a Declaratory Judgment ...... 4-32 § 406 Unitrust Conversions and Reconversions ...... 4-34 § 407 Express Total Return Unitrusts ...... 4-40 § 408 Decanting ...... 4-40 § 408.1 Statutory Decanting Powers ...... 4-43 § 408.2 Process for Decanting ...... 4-46

CHAPTER 5 FEDERAL INCOME TAXATION OF ESTATES AND TRUSTS: AN OVERVIEW ...... 5-1 § 500 Introduction ...... 5-1 § 501 Computation of Net Taxable Income and Credits ...... 5-4 § 501.1 Taxable Income of the Trust or Estate ...... 5-4 vi Table of Contents

§ 501.1(a) Depreciation and Depletion ...... 5-5 § 501.1(b) Amortization ...... 5-8 § 501.1(c) Net Operating Loss Deduction...... 5-10 § 501.1(d) Personal Exemption and Standard Deduction...... 5-10 § 501.1(e) Expenses and Losses; Nature of Gain ...... 5-11 § 501.1(f) Limitations on Certain Deductions ...... 5-14 § 501.1(f)(1) Interest Generally ...... 5-14 § 501.1(f)(2) Section 67—Two-Percent Limitation on Deductions ...... 5-15 § 501.1(g) Passive Losses ...... 5-20 § 501.1(h) Disallowance of Deductions Under Section 265 ..... 5-21 § 501.1(i) Charitable Contributions ...... 5-22 § 501.1(i)(1) Set-Aside Deduction ...... 5-22 § 501.1(i)(2) Pursuant to Requirement ...... 5-24 § 501.1(i)(3) Gross Income Requirement...... 5-25 § 501.1(i)(4) Charitable Deduction for Phantom Income...... 5-26 § 501.1(j) Section 1031 Like-Kind Exchanges...... 5-28 § 501.1(k) Disposition of Installment Obligations ...... 5-29 § 501.2 Beneficiaries-Excess Deductions ...... 5-29 § 502 “Income” and “Distributable Net Income” ...... 5-31 § 502.1 “Distributable Net Income” ...... 5-31 § 502.2 Character of Income Distributed ...... 5-33 § 502.3 “Simple” and “Complex” Trusts ...... 5-34 § 502.4 Deductions for Distributions; Inclusions by Beneficiaries ...... 5-35 § 502.4(a) Amounts That Are Treated As Distributed ...... 5-35 § 502.4(b) Meaning of “Required to Be Distributed Currently” ...... 5-37 § 502.4(c) Meaning of “Other Amounts Properly Paid, Credited, or Required to Be Distributed” ...... 5-38 § 502.4(d) Indirect Payments...... 5-39 § 502.5 Separate Shares ...... 5-40 § 502.6 Nontaxable Corpus Distributions ...... 5-44 § 502.7 Sixty-Five-Day Rule and Delayed Income Distributions .... 5-48 § 503 Returns and Other Filing Requirements ...... 5-49 § 503.1 Filing Requirements ...... 5-49 § 503.2 Estimated Payments of Income Tax ...... 5-52 § 504 Election for a Trust to Be Taxed As Part of an Estate ...... 5-52 § 505 Termination of Estates and Trusts ...... 5-56 § 506 Section 1411 (Affordable Care Act Tax) ...... 5-60

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CHAPTER 6 SOUTH CAROLINA INCOME TAXATION OF ESTATES AND TRUSTS ...... 6-1 § 600 Introduction ...... 6-1 § 601 Determining Resident Estates, Trusts, and Beneficiaries ...... 6-1 § 602 Adjustments for Differences in Federal Taxable Income and South Carolina Taxable Income...... 6-7 § 602.1 Capital Gains Adjustment ...... 6-7 § 602.2 Net Operating Loss Adjustment...... 6-8 § 602.3 Accumulation Distributions (Throwback Rules) and Section 691(c) Deduction ...... 6-8 § 602.4 State and Local Taxes ...... 6-9 § 602.5 Section 199 and Bonus Depreciation ...... 6-10 § 602.6 Basis Differences ...... 6-10 § 602.7 Lump Sum Distributions From a Qualified Retirement Plan that Qualify under I.R.C. Section 402(e) ...... 6-10 § 602.8 Active Trade or Business Income (Form SC I-335 Income) ...... 6-11 § 602.9 Out-of-State Real Estate Income ...... 6-11 § 602.10 State and Local Interest Income ...... 6-11 § 602.11 Federal Bond Interest Income ...... 6-12 § 602.12 Section 265 Disallowance ...... 6-12 § 602.13 Charitable Deduction ...... 6-13 § 602.14 Personal Exemption ...... 6-14 § 602.15 Impact of South Carolina Adjustments on Distributable Net Income (DNI) ...... 6-14 § 602.16 Apportioning Adjustments Between the Estate or Trust and Beneficiaries ...... 6-15 § 602.17 Adjustments for Estates and Trusts with Nonresident Beneficiaries and Nonresident Estates, Trusts, and Beneficiaries ...... 6-20 § 603 Tax Elections ...... 6-23 § 604 Tax Credits ...... 6-23 § 605 Tax Returns ...... 6-25 § 605.1 Filing Requirements ...... 6-25 § 605.2 Return Due Date ...... 6-26 § 605.3 Extensions to File ...... 6-26 § 605.4 Estimated Tax Payments ...... 6-27 § 606 Tax Reporting Period ...... 6-28 § 607 Changes to Federal Tax Returns ...... 6-28 § 608 Taxations of Beneficiaries ...... 6-28 § 609 Withholding on Nonresident Beneficiaries ...... 6-29

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§ 610 Charitable Remainder Trusts ...... 6-31 § 611 Withholding Requirements—Payments to Nonresident Estates and Trusts ...... 6-34

TABLE OF AUTHORITIES ...... TOA-1 Cases ...... TOA-1 Other Authorities ...... TOA-3 Treasury Regulations ...... TOA-6 Internal Revenue Code (26 U.S.C.) ...... TOA-9 I.R.S. Private Letter Rulings, Chief Counsel Advice, National Office Technical Advice Memorandum ...... TOA-13 Revenue Rulings (& Procedures)...... TOA-14 S.C. Uniform Principal and Income Act (S.C. Code Ann.) ...... TOA-14 S.C. Probate Code (S.C. Code Ann.) ...... TOA-19 S.C. Trust Code (S.C. Code Ann.) ...... TOA-19 S.C. Uniform Prudent Investor Act (S.C. Code Ann.) ...... TOA-20 S.C. Income Tax Act (S.C. Code Ann.) ...... TOA-21

INDEX ...... 1

CROSS REFERENCE CONVERSION CHART: S.C. UNIFORM PRINCIPAL AND INCOME ACT TO UNIFORM PRINCIPAL AND INCOME ACT ...... 1