1 Article 7.Part 5. Creditors' Claims; Spendthrift and Discretionary Trusts

Article 7.Part 5. Creditors’ Claims; Spendthrift Article 7.Part 5. and Discretionary Trusts

GENERAL COMMENT GENERAL COMMENT This article addresses the validity of a This article addresses the validity of a spendthrift provision and the rights of creditors, spendthrift provision and the rights of both of the settlor and beneficiaries, to reach a creditors, both of the settlor and beneficiaries, trust to collect a debt. Sections 501 and 502 to reach a trust to collect a debt. Sections state the general rules. To the extent that a trust 62-7-501 and 62-7-502 state the general rules. is protected by a spendthrift provision, a To the extent that a trust is protected by a beneficiary’s creditor may not reach the spendthrift provision, a beneficiary’s creditor beneficiary’s interest until distribution is made may not reach the beneficiary’s interest until by the trustee. To the extent not protected by a distribution is made by the trustee. To the spendthrift provision, however, the creditor can extent not protected by a spendthrift provision, reach the beneficiary’s interest subject to the however, the creditor can reach the court’s power to limit the relief. Section 503 beneficiary’s interest subject to the court’s lists the categories of creditors whose claims power to limit the relief. Section 62-7-503 lists are not subject to a spendthrift restriction. the categories of creditors whose claims are Sections 504 through 507 address special not subject to a spendthrift restriction. categories in which the rights of a beneficiary’s Sections 62-7-504 through 62-7-507 address creditors are the same whether or not the trust special categories in which the rights of a contains a spendthrift provision. Section 504 beneficiary’s creditors are the same whether or deals with discretionary trusts and trusts for not the trust contains a spendthrift provision. which distributions are subject to a standard. Section 62-7-504 deals with discretionary Section 505 covers creditor claims against a trusts and trusts for which distributions are settlor, whether the trust is revocable or subject to a standard. Section 62-7-505 covers irrevocable, and if revocable, whether the claim creditor claims against a settlor, whether the is made during the settlor’s lifetime or incident trust is revocable or irrevocable, and if to the settlor’s death. Section 506 provides a revocable, whether the claim is made during creditor with a remedy if a trustee fails to make the settlor’s lifetime or incident to the settlor’s a mandated distribution within a reasonable death. Section 62-7-506 provides a creditor time. Section 507 clarifies that although the with a remedy if a trustee fails to make a trustee holds legal title to trust property, that mandated distribution within a reasonable property is not subject to the trustee’s personal time. Section 62-7-507 clarifies that although debts. the trustee holds legal title to trust property, The provisions of this article relating to the that property is not subject to the trustee’s validity and effect of a spendthrift provision personal debts. and the rights of certain creditors and assignees The provisions of this article relating to the to reach the trust may not be modified by the validity and effect of a spendthrift provision

terms of the trust. See Section 105(b)(5). and the rights of certain creditors and This article does not supersede state exemption assignees to reach the trust may not be statutes nor an enacting jurisdiction’s Uniform modified by the terms of the trust. See Section Fraudulent Transfers Act which, when 62-7-105(b)(5). applicable, invalidates any type of gratuitous This article does not supersede state transfer, including transfers into trust. exemption statutes nor any fraudulent transfer statutes, which, when applicable, invalidates any type of gratuitous transfer, including transfers into trust.

SECTION 62-7-501. Rights of beneficiary’s SECTION 62-7-501. creditor or assignee.

(a) Except as provided in subsection (b), the (a) Except as provided in subsection (b), the court may authorize a creditor or assignee of court may authorize a creditor or assignee of the beneficiary to reach the beneficiary’s the beneficiary to reach the beneficiary’s interest by attachment of present or future interest by attachment of present or future distributions to or for the benefit of the distributions to or for the benefit of the beneficiary or other means. The court may beneficiary or other means. The court may limit the award to such relief as is appropriate limit the award to such relief as is appropriate under the circumstances. under the circumstances. (b) This section shall not apply and a trustee (b) This section shall not apply and a shall have no liability to any creditor of a trustee shall have no liability to any creditor of beneficiary for any distributions made to or for a beneficiary for any distributions made to or the benefit of the beneficiary to the extent a for the benefit of the beneficiary to the extent beneficiary’s interest: a beneficiary’s interest: (1) is protected by a spendthrift provision, or (1) is protected by a spendthrift (2) is a discretionary trust interest as referred to provision, or in S.C. Code Section 62-7-504. (2) is a discretionary trust interest as referred to in S.C. Code Section 62-7-504. COMMENT Absent a valid spendthrift provision, a creditor REPORTER’S COMMENT may reach the interest of a beneficiary the same as any other of the beneficiary’s assets. This Absent a valid spendthrift provision, a does not necessarily mean that the creditor can creditor may reach the interest of a beneficiary collect all distributions made to the beneficiary. the same as any other of the beneficiary’s Other creditor law of the State may limit the assets. This does not necessarily mean that the creditor to a specified percentage of a creditor can collect all distributions made to distribution. See, e.g., Cal. Prob. Code Section the beneficiary. Other creditor law of the State

15306.5. This section does not prescribe the may limit the creditor to a specified procedures for reaching a beneficiary’s interest percentage of a distribution. This section does or of priority among claimants, leaving those not prescribe the procedures for reaching a issues to the enacting State’s laws on creditor beneficiary’s interest or of priority among rights. The section does clarify, however, that claimants, leaving those issues to the State’s an order obtained against the trustee, whatever law on creditor rights. The section does state procedure may have been used, may clarify, however, that an order obtained extend to future distributions whether made against the trustee, whatever state procedure directly to the beneficiary or to others for the may have been used, may extend to future beneficiary’s benefit. By allowing an order to distributions whether made directly to the extend to future payments, the need for the beneficiary or to others for the beneficiary’s creditor periodically to return to court will be benefit. By allowing an order to extend to reduced. future payments, the need for the creditor A creditor typically will pursue a claim by periodically to return to court will be reduced. serving an order on the trustee attaching the A creditor typically will pursue a claim by beneficiary’s interest. Assuming that the serving an order on the trustee attaching the validity of the order cannot be contested, the beneficiary’s interest. Assuming that the trustee will then pay to the creditor instead of to validity of the order cannot be contested, the the beneficiary any payments the trustee would trustee will then pay to the creditor instead of otherwise be required to make to the to the beneficiary any payments the trustee beneficiary, as well as discretionary would otherwise be required to make to the distributions the trustee decides to make. The beneficiary, as well as discretionary creditor may also, in theory, force a judicial distributions the trustee decides to make. The sale of a beneficiary’s interest. Because creditor may also, in theory, force a judicial proceedings to satisfy a claim are equitable in sale of a beneficiary’s interest. nature, the second sentence of this section Because proceedings to satisfy a claim are ratifies the court’s discretion to limit the award equitable in nature, the second sentence of this as appropriate under the circumstances. In section ratifies the court’s discretion to limit exercising its discretion to limit relief, the court the award as appropriate under the may appropriately consider the support needs of circumstances. In exercising its discretion to a beneficiary and the beneficiary’s family. See limit relief, the court may appropriately Restatement (Third) of Trusts Section 56 cmt. e consider the support needs of a beneficiary (Tentative Draft No. 2, approved 1999). and the beneficiary’s family. See Restatement (Third) of Trusts Section 56 cmt. e (Tentative SOUTH CAROLINA COMMENT Draft No. 2, approved 1999). There was no South Carolina statutory The case law in South Carolina was provision that correlates with this Section. uncertain as to the effectiveness and Also, the case law in South Carolina is application of the spendthrift provision but uncertain as to the effectiveness and application appears to indicate that a spendthrift provision

of the spendthrift provision but appears to operated against only income interests but not indicate that a spendthrift provision operates principal interests. See S. Alan Medlin, The against only income interests but not principal Law of Wills and Trusts, Vol. I. Estate interests. See S. Alan Medlin, The Law of Planning in South Carolina, Section 508.2(a), Wills and Trusts, Vol. I, Estate Planning in p. 5-19 (2002). Older cases seem to allow a South Carolina, Section 508.2(a), p. 5-19 cessor clause to prevent the voluntary or (2002). Older cases seem to allow a cessor involuntary alienation of the beneficiary’s clause to prevent the voluntary or involuntary interest. See S. Alan Medlin, supra. This alienation of the beneficiary’s interest. See S. Section avoids the confusion regarding the Alan Medlin, supra. This Section avoids the effectiveness and application of the spendthrift confusion regarding the effectiveness and provision and also clarifies and broadens the application of the spendthrift provision and also laws in South Carolina so that a spendthrift clarifies and broadens the laws in South provision operates as a restraint against both Carolina so that a spendthrift provision operates income and principal interests, except as as a restraint against both income and principal otherwise provided in the following sections interests, except as otherwise provided in the of the SCTC. following sections of the SCTC. Section 62-7-501 provides additional Section 62-7-501 provides additional protection protection not only for spendthrift interests, not only for spendthrift interests, but also for but also for interests in discretionary trusts as interests in discretionary trusts as referred to in referred to in S. C. Code Section 62-7-504. S.C. Code Section 62-7-504. Discretionary Discretionary trusts do not have to rely on trusts do not have to rely on spendthrift spendthrift language for a beneficiary’s language for a beneficiary’s present or future present or future interest in the trust to be interest in the trust to be exempt from creditor exempt from creditor attachment. attachment. For a definition of discretionary trust, resort For a definition of discretionary trust, resort should be made to the South Carolina should be made to the South Carolina common common law. See generally Heath v. Bishop, law. See generally Heath v. Bishop, 25 S.C. 25 S. C. Eq. (4 Rich. Eq.) 446 (S.C. 1851); Eq. (4 Rich. Eq.) 446 (S.C. 1851); Collins v. Collins v. Collins, 219 S.C. 1. 63 S.E. 2d 811 Collins, 219 S.C. 1, 63 S.E.2d 811 (S.C. 1951); (S.C.1951); see also Sarlin v. Sarlin, 312 S. C. see also Sarlin v. Sarlin, 312 S.C. 27, 430 27, 430 S. E. 2d 530 (S.C. App. 1993); Page S.E.2d 530 (S.C. App. 1993); Page v. Page, v. Page, 243 S. C. 312, 133 S. E. 2d 829 (S.C. 243 S.C. 312, 133 S.E.2d 829 (S.C. 1963). 1963).

SECTION 62-7-502. Spendthrift provision. SECTION 62-7-502.

(a) A spendthrift provision is valid only if it (a) A spendthrift provision is valid only if it restrains both voluntary and involuntary restrains both voluntary and involuntary transfer of a beneficiary’s interest. transfer of a beneficiary’s interest.

(b) A term of a trust providing that the interest (b) A term of a trust providing that the of a beneficiary is held subject to a ‘spendthrift interest of a beneficiary is held subject to a trust’, or words of similar import, is sufficient ‘spendthrift trust’, or words of similar import, to restrain both voluntary and involuntary is sufficient to restrain both voluntary and transfer of the beneficiary’s interest. involuntary transfer of the beneficiary’s (c) A beneficiary may not transfer an interest in interest. a trust in violation of a valid spendthrift (c) A beneficiary may not transfer an provision and, except as otherwise provided in interest in a trust in violation of a valid this article, a creditor or assignee of the spendthrift provision and, except as otherwise beneficiary may not reach the interest or a provided in this article, a creditor or assignee distribution by the trustee before its receipt by of the beneficiary may not reach the interest or the beneficiary. a distribution by the trustee before its receipt by the beneficiary. COMMENT Under this section, a settlor has the power to REPORTER’S COMMENT restrain the transfer of a beneficiary’s interest, Under this section, a settlor has the power to regardless of whether the beneficiary has an restrain the transfer of a beneficiary’s interest, interest in income, in principal, or in both. regardless of whether the beneficiary has an Unless one of the exceptions under this article interest in income, in principal, or in both. applies, a creditor of the beneficiary is Unless one of the exceptions under this article prohibited from attaching a protected interest applies, a creditor of the beneficiary is and may only attempt to collect directly from prohibited from attaching a protected interest the beneficiary after payment is made. This and may only attempt to collect directly from section is similar to Restatement (Third) of the beneficiary after payment is made. This Trusts Section 58 (Tentative Draft No. 2, section is similar to Restatement (Third) of approved 1999), and Restatement (Second) of Trusts Section 58 (Tentative Draft No. 2, Trusts Sections 152-153 (1959). For the approved 1999), and Restatement (Second) of definition of spendthrift provision, see Section Trusts Sections 152-153 (1959). For the 103(15). definition of spendthrift provision, see Section For a spendthrift provision to be effective under 62-7-103(15). this Code, it must prohibit both the voluntary For a spendthrift provision to be effective and involuntary transfer of the beneficiary’s under this Code, it must prohibit both the interest, that is, a settlor may not allow a voluntary and involuntary transfer of the beneficiary to assign while prohibiting a beneficiary’s interest, that is, a settlor may not beneficiary’s creditor from collecting, and vice allow a beneficiary to assign while prohibiting versa. See Restatement (Third) of Trusts a beneficiary’s creditor from collecting, and Section 58 cmt. b (Tentative Draft No. 2, vice versa. See Restatement (Third) of Trusts approved 1999). See also Restatement Section 58 cmt. b (Tentative Draft No. 2, (Second) of Trusts Section 152(2) (1959). A approved 1999). See also Restatement

spendthrift provision valid under this Code will (Second) of Trusts Section 152(2) (1959). A also be recognized as valid in a federal spendthrift provision valid under this Code bankruptcy proceeding. See 11 U.S.C. Section will also be recognized as valid in a federal 541(c)(2). bankruptcy proceeding. See 11 U.S.C. Subsection (b), which is derived from Texas Section 541(c)(2). Property Code Section 112.035(b), allows a Subsection (b), which is derived from Texas settlor to provide maximum spendthrift Property Code Section 112.035(b), allows a protection simply by stating in the instrument settlor to provide maximum spendthrift that all interests are held subject to a protection simply by stating in the instrument “spendthrift trust” or words of similar effect. that all interests are held subject to a A disclaimer, because it is a refusal to accept “spendthrift trust” or words of similar effect. ownership of an interest and not a transfer of an A disclaimer, because it is a refusal to interest already owned, is not affected by the accept ownership of an interest and not a presence or absence of a spendthrift provision. transfer of an interest already owned, is not Most disclaimer statutes expressly provide that affected by the presence or absence of a the validity of a disclaimer is not affected by a spendthrift provision. Most disclaimer spendthrift protection. See, e.g., Unif. Probate statutes expressly provide that the validity of a Code Section 2-801(a). Releases and disclaimer is not affected by a spendthrift exercises of powers of appointment are also not protection. See, e.g., Unif. Probate Code affected because they are not transfers of Section 2-801(a) and SCPC Section property. See Restatement (Third) of Trusts 62-2-801(c)(6). Releases and exercises of Section 58 cmt. c (Tentative Draft No. 2, powers of appointment are also not affected approved 1999). because they are not transfers of property. See A spendthrift provision is ineffective against a Restatement (Third) of Trusts Section 58 cmt. beneficial interest retained by the settlor. See c (Tentative Draft No. 2, approved 1999). Restatement (Third) of Trusts Section 58(2) A spendthrift provision is ineffective against (Tentative Draft No. 2, approved 1999). This is a beneficial interest retained by the settlor. a necessary corollary to Section 505(a)(2), See Restatement (Third) of Trusts Section which allows a creditor or assignee of the 58(2) (Tentative Draft No. 2, approved 1999). settlor to reach the maximum amount that can This is a necessary corollary to Section be distributed to or for the settlor’s benefit. 62-7-505(a)(2), which allows a creditor or This right to reach the trust applies whether or assignee of the settlor to reach the maximum not the trust contains a spendthrift provision. amount that can be distributed to or for the A valid spendthrift provision makes it settlor’s benefit. This right to reach the trust impossible for a beneficiary to make a legally applies whether or not the trust contains a binding transfer, but the trustee may choose to spendthrift provision. honor the beneficiary’s purported assignment. A valid spendthrift provision makes it The trustee may recommence distributions to impossible for a beneficiary to make a legally the beneficiary at anytime. The beneficiary, not binding transfer, but the trustee may choose to

having made a binding transfer, can withdraw honor the beneficiary’s purported assignment. the beneficiary’s direction but only as to future The trustee may recommence distributions to payments. See Restatement (Third) of Trusts the beneficiary at anytime. The beneficiary, Section 58 cmt. d (Tentative Draft No. 2, not having made a binding transfer, can approved 1999); Restatement (Second) of withdraw the beneficiary’s direction but only Trusts Section 152 cmt. i (1959). as to future payments. See Restatement (Third) of Trusts Section 58 cmt. d (Tentative SOUTH CAROLINA COMMENT Draft No. 2, approved 1999); Restatement For discussion of the treatment of spendthrift (Second) of Trusts Section 152 cmt. i (1959). provisions in South Carolina, see the South For discussion of the treatment of Carolina Comment to SCTC Section 62-7-501. spendthrift provisions in South Carolina, see Comment to SCTC Section 62-7-501.

SECTION 62-7-503. Exceptions to spendthrift SECTION 62-7-503. provision. (a) In this section, ‘child’ includes any person (a) In this section, “child” includes any person for whom an order or judgment for child for whom an order or judgment for child support has been entered in this or another support has been entered in this or another State. State. (b) Even if a trust contains a spendthrift (b) Even if a trust contains a spendthrift provision, a beneficiary’s child who has a provision, a beneficiary’s child who has a judgment or court order against the judgment or court order against the beneficiary beneficiary for support or maintenance may for support or maintenance may obtain from a obtain from a court an order attaching present court an order attaching present or future or future distributions to or for the benefit of distributions to or for the benefit of the the beneficiary. beneficiary. (c) The exception in subsection (b) is (c) The exception in subsection (b) is unenforceable against a special needs trust, unenforceable against a special needs trust, supplemental needs trust, or similar trust supplemental needs trust, or similar trust established for a disabled person if the established for a disabled person if the applicability of such a provision could applicability of such a provision could invalidate such a trust’s exemption from invalidate such a trust’s exemption from consideration as a countable resource for consideration as a countable resource for Medicaid or Supplemental Security Income Medicaid or Supplemental Security Income (SSI) purposes or if the applicability of such a (SSI) purposes or if the applicability of such a provision has the effect or potential effect of provision has the effect or potential effect of rendering such disabled person ineligible for rendering such disabled person ineligible for any program of public benefit, including, but

any program of public benefit, including, but not limited to, Medicaid and SSI. not limited to, Medicaid and SSI. REPORTER’S COMMENT COMMENT This section exempts the claims of certain This section exempts the claims of certain categories of creditors from the effects of a categories of creditors from the effects of a spendthrift restriction. spendthrift restriction. The exception in subsection (b) for The exception in subsection (b) for judgments judgments or orders to support a beneficiary’s or orders to support a beneficiary’s child or child is in accord with Restatement (Third) of current or former spouse is in accord with Trusts Section 59(a) (Tentative Draft No. 2, Restatement (Third) of Trusts Section 59(a) approved 1999), Restatement (Second) of (Tentative Draft No. 2, approved 1999), Trusts Section 157(a) (1959), and numerous Restatement (Second) of Trusts Section 157(a) state statutes. It is also consistent with federal (1959), and numerous state statutes. It is also bankruptcy law, which exempts such support consistent with federal bankruptcy law, which orders from discharge. South Carolina Trust exempts such support orders from discharge. Code Section 62-7-503(b), however, The effect of this exception is to permit the eliminates the exceptions contained in claimant for unpaid support to attach present or Uniform Trust Code Section 503 for a future distributions that would otherwise be beneficiary’s spouse or former spouse who has made to the beneficiary. Distributions subject a judgment or court order against the to attachment include distributions required by beneficiary for support or maintenance as well the express terms of the trust, such as as a judgment creditor who has provided mandatory payments of income, and services for the protection of a beneficiary’s distributions the trustee has otherwise decided interest in a spendthrift trust. The effect of to make, such as through the exercise of this exception is to permit the claimant for discretion. Subsection (b), unlike Section 504, unpaid support to attach present or future does not authorize the spousal or child claimant distributions that would otherwise be made to to compel a distribution from the trust. Section the beneficiary. Distributions subject to 504 authorizes a spouse or child claimant to attachment include distributions required by compel a distribution to the extent the trustee the express terms of the trust, such as has abused a discretion or failed to comply with mandatory payments of income, and a standard for distribution. distributions the trustee has otherwise decided Subsection (b) refers both to “support” and to make, such as through the exercise of “maintenance” in order to accommodate discretion. Subsection (b), unlike Section differences among the States in terminology 62-7-504, does not authorize the child employed. No difference in meaning between claimant to compel a distribution from the the two terms is intended. trust. Section 62-7-504 authorizes a child The definition of “child” in subsection (a) claimant to compel a distribution to the extent accommodates the differing approaches States the trustee has abused a discretion or failed to

take to defining the class of individuals eligible comply with a standard for distribution. for child support, including such issues as Subsection (b) refers both to “support” and whether support can be awarded to “maintenance” in order to accommodate stepchildren. However the State making the differences among the states in terminology award chooses to define “child” will be employed. No difference in meaning between recognized under this Code, whether the order the two terms is intended. sought to be enforced was entered in the same The definition of “child” in subsection (a) or different State. accommodates the differing approaches states The exception in subsection (b) for a judgment take to defining the class of individuals creditor who has provided services for the eligible for child support, including such protection of a beneficiary’s interest in the trust issues as whether support can be awarded to is in accord with Restatement (Third) of Trusts stepchildren. However the state making the Section 59(b) (Tentative Draft No. 2, award chooses to define “child” will be approved 1999), and Restatement (Second) of recognized under this Code, whether the order Trusts Section 157(c) (1959). This exception sought to be enforced was entered in the same allows a beneficiary of modest means to or different state. overcome an obstacle preventing the South Carolina has eliminated the beneficiary’s obtaining services essential to the exceptions found in UTC Section 503 (b) and protection or enforcement of the beneficiary’s (c) certain judgment creditors and for a claim rights under the trust. See Restatement (Third) made by the State of South Carolina or the of Trusts Section 59 cmt. d (Tentative Draft No. United States to the extent a state or federal 2, approved 1999). law provides for any such claim. Thus, under Subsection (c), which is similar to Restatement the SCTC, the only exception to a spendthrift (Third) of Trusts Section 59 cmt. a (Tentative trust will be for a beneficiary’s child who has Draft No. 2, approved 1999), exempts certain a judgment or court order against the governmental claims from a spendthrift beneficiary for support or maintenance. South restriction. Federal preemption guarantees that Carolina also adds a new subsection (c), not certain federal claims, such as claims by the found in the UTC, which makes clear that the Internal Revenue Service, may bypass a exception in subsection (b) for child support spendthrift provision no matter what this Code shall be unenforceable against a special or might say. The case law and relevant Internal supplemental needs trusts under the Revenue Code provisions on the exception for circumstances described in subsection (c). federal tax claims are collected in George G. Unlike Restatement (Third) of Trusts Section Bogert & George T. Bogert, The Law of Trusts 59(2) (Tentative Draft No. 2, approved 1999), and Trustees Section 224 (Rev. 2d ed. 1992); and Restatement (Second) of Trusts Section and 2A Austin W. Scott & William F. Fratcher, 157(b) (1959), this Code does not create an The Law of Trusts Section 157.4 (4th ed. 1987). exception to the spendthrift restriction for Regarding claims by state governments, this creditors who have furnished necessary subsection recognizes that States take a variety services or supplies to the beneficiary. There

of approaches with respect to collection, is also no exception for tort claimants. For a depending on whether the claim is for unpaid discussion of the exception for tort claims, taxes, for care provided at an institution, or for which has not generally been recognized, see other charges. Acknowledging this diversity, Restatement (Third) of Trusts Section 59 subsection (c) does not prescribe a rule, but Reporter’s Notes to cmt. a (Tentative Draft refers to other statutes of the State on whether No. 2, approved 1999). For a discussion of particular claims are subject to or exempted other exceptions to a spendthrift restriction, from spendthrift provisions. recognized in some States, see George G. Unlike Restatement (Third) of Trusts Section Bogert & George T. Bogert, The Law of 59(2) (Tentative Draft No. 2, approved 1999), Trusts and Trustees Section 224 (Rev. 2d ed. and Restatement (Second) of Trusts Section 1992); and 2A Austin W. Scott & William F. 157(b) (1959), this Code does not create an Fratcher, The Law of Trusts Sections exception to the spendthrift restriction for 157-157.5 (4th ed. 1987). creditors who have furnished necessary services or supplies to the beneficiary. Most of these cases involve claims by governmental entities, which the drafters concluded are better handled by the enactment of special legislation as authorized by subsection (c). The drafters also declined to create an exception for tort claimants. For a discussion of the exception for tort claims, which has not generally been recognized, see Restatement (Third) of Trusts Section 59 Reporter’s Notes to cmt. a (Tentative Draft No. 2, approved 1999). For a discussion of other exceptions to a spendthrift restriction, recognized in some States, see George G. Bogert & George T. Bogert, The Law of Trusts and Trustees Section 224 (Rev. 2d ed. 1992); and 2A Austin W. Scott & William F. Fratcher, The Law of Trusts Sections 157-157.5 (4th ed. 1987).

SOUTH CAROLINA COMMENT South Carolina Trust Code Section 62-7-503(b) eliminates the exceptions contained in Uniform Trust Code Section 503 for a beneficiary’s spouse or former spouse who has a judgment or court order against the beneficiary for support

or maintenance as well as a judgment creditor who has provided services for the protection of a beneficiary’s interest in a spendthrift trust. South Carolina has also eliminated the exception found in UTC Section 503(c) for a claim made by the State of South Carolina or the United States to the extent a state or federal law provides for any such claim. Thus, under the SCTC, the only exception to a spendthrift trust will be for a beneficiary’ s child who has a judgment or court order against the beneficiary for support or maintenance. South Carolina also adds a new subsection (c), not found in the UTC, which makes clear that the exception in subsection (b) for child support shall be unenforceable against a special or supplemental needs trusts under the circumstances described in subsection (c).

SECTION 62-7-504. Discretionary trusts; SECTION 62-7-504. effect of standard. (a) In this section, ‘child’ includes any person (a) In this section, “child” includes any person for whom an order or judgment for child for whom an order or judgment for child support has been entered in this or another support has been entered in this or another state. state. (b) Except as otherwise provided in subsection (b) Except as otherwise provided in (c), a creditor of a beneficiary may not compel subsection (c), a creditor of a beneficiary may a distribution from a trust in which the not compel a distribution from a trust in which beneficiary has a discretionary trust interest, the beneficiary has a discretionary trust even if: interest, even if: (1) the discretion is expressed in the form of a (1) the discretion is expressed in the standard of distribution; or form of a standard of distribution; or (2) the trustee has abused the discretion. (2) the trustee has abused the discretion. (c) To the extent a trustee has not complied (c) To the extent a trustee has not complied with a standard of distribution or has abused a with a standard of distribution or has abused a discretion: discretion: (1) a distribution may be ordered by the court to (1) a distribution may be ordered by the satisfy a judgment or court order against the court to satisfy a judgment or court order beneficiary for support or maintenance of the against the beneficiary for support or

beneficiary’s child; and maintenance of the beneficiary’s child; and (2) the court shall direct the trustee to pay to the (2) the court shall direct the trustee to child such amount as is equitable under the pay to the child such amount as is equitable circumstances but not more than the amount the under the circumstances but not more than the trustee would have been required to distribute amount the trustee would have been required to or for the benefit of the beneficiary had the to distribute to or for the benefit of the trustee complied with the standard or not beneficiary had the trustee complied with the abused the discretion. standard or not abused the discretion. (d) This section does not limit the right of a (d) This section does not limit the right of a beneficiary to maintain a judicial proceeding beneficiary to maintain a judicial proceeding against a trustee for an abuse of discretion or against a trustee for an abuse of discretion or failure to comply with a standard for failure to comply with a standard for distribution; provided, however, this right may distribution; provided, however, this right not be exercised by a creditor of the may not be exercised by a creditor of the beneficiary. beneficiary. (e) Whether or not a trust contains a spendthrift (e) Whether or not a trust contains a provision, a creditor of a beneficiary may not spendthrift provision, a creditor of a compel a distribution from insurance proceeds beneficiary may not compel a distribution payable to the trustee as beneficiary to the from insurance proceeds payable to the trustee extent state law exempts such insurance as beneficiary to the extent state law exempts proceeds from creditors’ claims. such insurance proceeds from creditors’ (f) A creditor of a beneficiary who is also a claims. trustee or cotrustee may not reach the trustee’s (f) A creditor of a beneficiary who is also a beneficial interest or otherwise compel a trustee or cotrustee may not reach the trustee’s distribution if the trustee’s discretion to make beneficial interest or otherwise compel a distributions for the trustee’s own benefit is distribution if the trustee’s discretion to make limited by an ascertainable standard. distributions for the trustee’s own benefit is limited by an ascertainable standard. COMMENT This section addresses the ability of a REPORTER’S COMMENT beneficiary’s creditor to reach the beneficiary’s South Carolina Trust Code Section discretionary trust interest, whether or not the 62-7-504 eliminates the exceptions allowed exercise of the trustee’s discretion is subject to under Uniform Trust Code Section 504 for a standard. This section, similar to the judgments or court orders in favor of a Restatement, eliminates the distinction between beneficiary’s spouse or former spouse. As discretionary and support trusts, unifying the with SCTC Section 62-7-503, the only rules for all trusts fitting within either of the exception will be for a beneficiary’s child who former categories. See Restatement (Third) of has a judgment or court order against the Trusts Section 60 Reporter’s Notes to cmt. a beneficiary for support or maintenance.

(Tentative Draft No. 2, approved 1999). However, a child’s claim against a This section will have limited application. discretionary trust interest will be limited to Pursuant to Section 502, the effect of a valid those cases where a trustee has not complied spendthrift provision, where applicable, is to with a standard of distribution or has abused a prohibit a creditor from collecting on a discretion. distribution prior to its receipt by the This section addresses the ability of a beneficiary. Only if the trust is not protected by beneficiary’s creditor to reach the a spendthrift provision, or if the creditor falls beneficiary’s discretionary trust interest, within one of the exceptions to spendthrift whether or not the exercise of the trustee’s enforcement created by Section 503, does this discretion is subject to a standard. This section become relevant. section, similar to the Restatement, eliminates For a discussion of the definition of “child” in the distinction between discretionary and subsection (a), see Section 503 Comment. support trusts, unifying the rules for all trusts Subsection (b), which establishes the general fitting within either of the former categories. rule, forbids a creditor from compelling a See Restatement (Third) of Trusts Section 60 distribution from the trust, even if the trustee Reporter’s Notes to cmt. a (Tentative Draft has failed to comply with the standard of No. 2, approved 1999). distribution or has abused a discretion. Under This section could have limited application. subsection (d), the power to force a distribution Pursuant to Section 62-7-502, the effect of a due to an abuse of discretion or failure to valid spendthrift provision, where applicable, comply with a standard belongs solely to the is to prohibit a creditor from collecting on a beneficiary. Under Section 814(a), a trustee distribution prior to its receipt by the must always exercise a discretionary power in beneficiary. Only if the trust is not protected good faith and with regard to the purposes of by a spendthrift provision, or if the creditor the trust and the interests of the beneficiaries. falls within one of the exceptions to Subsection (c) creates an exception for support spendthrift enforcement created by Section claims of a child, spouse, or former spouse who 62-7-503, does this section become relevant. has a judgment or order against a beneficiary For a discussion of the definition of “child” for support or maintenance. While a creditor of in subsection (a), see Section 62-7-503 a beneficiary generally may not assert that a Comment. trustee has abused a discretion or failed to Subsection (b), which establishes the comply with a standard of distribution, such a general rule, forbids a creditor from claim may be asserted by the beneficiary’s compelling a distribution from the trust, even child, spouse, or former spouse enforcing a if the trustee has failed to comply with the judgment or court order against the beneficiary standard of distribution or has abused a for unpaid support or maintenance. The court discretion. Under subsection (d), the power to must direct the trustee to pay the child, spouse force a distribution due to an abuse of or former spouse such amount as is equitable discretion or failure to comply with a standard under the circumstances but not in excess of the belongs solely to the beneficiary. Under

amount the trustee was otherwise required to Section 62-7-814(a), a trustee must always distribute to or for the benefit of the exercise a discretionary power in good faith beneficiary. Before fixing this amount, the and with regard to the purposes of the trust court having jurisdiction over the trust should and the interests of the beneficiaries. consider that in setting the respective support Subsection (c) creates an exception for award, the family court has already considered support claims of a child who has a judgment the respective needs and assets of the family. or order against a beneficiary for support or The Uniform Trust Code does not prescribe a maintenance. While a creditor of a particular procedural method for enforcing a beneficiary generally may not assert that a judgment or order against the trust, leaving that trustee has abused a discretion or failed to matter to local collection law. comply with a standard of distribution, such a claim may be asserted by the beneficiary’s SOUTH CAROLINA COMMENT child enforcing a judgment or court order South Carolina Trust Code Section 62-7-504 against the beneficiary for unpaid support or eliminates the exceptions allowed under maintenance. The court must direct the trustee Uniform Trust Code Section 504 for judgments to pay the child such amount as is equitable or court orders in favor of a beneficiary’s under the circumstances but not in excess of spouse or former spouse. As with SCTC the amount the trustee was otherwise required Section 62-7-503, the only exception will be for to distribute to or for the benefit of the a beneficiary’s child who has a judgment or beneficiary. Before fixing this amount, the court order against the beneficiary for support court having jurisdiction over the trust should or maintenance. However, a child’s claim consider that in setting the respective support against a discretionary trust interest will be award, the family court has already considered limited to those cases where a trustee has not the respective needs and assets of the family. complied with a standard of distribution or has The SCTC does not prescribe a particular abused a discretion. South Carolina’s version procedural method for enforcing a judgment of subsection (e), not found in the UTC, ensures or order against the trust, leaving that matter that even if there is no spendthrift provision, to local collection law. insurance proceeds remain exempt from The South Carolina Trust Code adds to the creditors’ claims pursuant to S.C. Code Section UTC version the proviso at the end of 38-63-40 et seq. and other relevant state laws. subsection (d), which prevents a beneficiary’s The South Carolina Trust Code adds to the creditor from enforcing on behalf of the UTC version the proviso at the end of beneficiary the beneficiary’s right, to the subsection (d), which prevents a beneficiary’s extent it exists, to maintain a judicial creditor from enforcing on behalf of the proceeding against a trustee for an abuse of beneficiary the beneficiary’s right, to the extent discretion or failure to comply with a standard it exists, to maintain a judicial proceeding of distribution. against a trustee for an abuse of discretion or South Carolina’s version of subsection (e), failure to comply with a standard of not found in the UTC, ensures that even if

distribution. there is no spendthrift provision, insurance proceeds remain exempt from creditors’ claims pursuant to S. C. Code Section 38-63-40 et seq. and other relevant state laws.

SECTION 62-7-505. Creditors’ claims against SECTION 62-7-505. settlor.

(a) Whether or not the terms of a trust contain a (a) Whether or not the terms of a trust spendthrift provision, the following rules apply: contain a spendthrift provision, the following (1) During the lifetime of the settlor, the rules apply: property of a revocable trust is subject to claims (1) During the lifetime of the settlor, the of the settlor’s creditors. property of a revocable trust is subject to (2) With respect to an irrevocable trust, a claims of the settlor’s creditors. creditor or assignee of the settlor may reach the (2) With respect to an irrevocable trust, a maximum amount that can be distributed to or creditor or assignee of the settlor may reach for the settlor’s benefit. If a trust has more than the maximum amount that can be distributed one settlor, the amount the creditor or assignee to or for the settlor’s benefit. If a trust has of a particular settlor may reach may not exceed more than one settlor, the amount the creditor the settlor’s interest in the portion of the trust or assignee of a particular settlor may reach attributable to that settlor’s contribution. may not exceed the settlor’s interest in the (3) After the death of a settlor, and subject to portion of the trust attributable to that settlor’s the settlor’s right to direct the source from contribution. which liabilities will be paid, and except to the (3) After the death of a settlor, and extent state or federal law exempts any property subject to the settlor’s right to direct the of the trust from claims, costs, expenses, or source from which liabilities will be paid, and allowances, the property of a trust that was except to the extent state or federal law revocable at the settlor’s death is subject to exempts any property of the trust from claims, claims of the settlor’s creditors, costs of costs, expenses, or allowances, the property of administration of the settlor’s estate, the a held in a revocable trust that was revocable expenses of the settlor’s funeral and disposal of at the time of the settlor’s death is subject to remains, and statutory allowances to a surviving claims of the settlor’s creditors, costs of spouse and children to the extent the settlor’s administration of the settlor’s estate, the probate estate is inadequate to satisfy those expenses of the settlor’s funeral and disposal claims, costs, expenses, and allowances, unless of remains, and statutory allowances to a barred by Section 62-3-801 et seq. surviving spouse and children to the extent the (b) For purposes of this section, a beneficiary settlor’s probate estate is inadequate to satisfy who is a trustee of a trust, but who is not the those claims, costs, expenses, and allowances,

settlor of the trust, cannot be treated in the same unless barred by Section 62-3-801 et seq. manner as the settlor of a revocable trust if the (b) For purposes of this section,: beneficiary-trustee’s power to make (1) a beneficiary who is a trustee of a distributions to the beneficiary-trustee is limited trust, but who is not the settlor of the trust, by an ascertainable standard related to the cannot be treated in the same manner as the beneficiary-trustee’s health, education, settlor of a revocable trust if the maintenance, or support. beneficiary-trustee’s power to make distributions to the beneficiary-trustee is COMMENT limited by an ascertainable standard related to Subsection (a)(1) states what is now a well the beneficiary-trustee’s health, education, accepted conclusion, that a revocable trust is maintenance, or and support; subject to the claims of the settlor’s creditors (2) the assets in a trust that are while the settlor is living. See Restatement attributable to a contribution to an inter vivos (Third) of Trusts Section 25 cmt. a (Tentative marital deduction trust described in either Draft No. 1, approved 1996). Such claims were Section 2523(e) or (f) of the Internal Revenue not allowed at common law, however. See Code of 1986, after the death of the spouse of Restatement (Second) of Trusts Section 330 the settlor of the inter vivos marital deduction cmt. o (1959). Because a settlor usually also trust are deemed to have been contributed by retains a beneficial interest that a creditor may the settlor’s spouse and not by the settlor. reach under subsection (a)(2), the common law rule, were it retained in this Code, would be of REPORTER’S COMMENT little significance. See Restatement (Second) of Subsection (a)(1) states what is now a well Trusts Section 156(2) (1959). accepted conclusion, that a revocable trust is Subsection (a)(2), which is based on subject to the claims of the settlor’s creditors Restatement (Third) of Trusts Section 58(2) and while the settlor is living. See Restatement cmt. e (Tentative Draft No. 2, approved 1999), (Third) of Trusts Section 25 cmt. a (Tentative and Restatement (Second) of Trusts Section Draft No. 1, approved 1996). Such claims 156 (1959), follows traditional doctrine in were not allowed at common law, however. providing that a settlor who is also a beneficiary See Restatement (Second) of Trusts Section may not use the trust as a shield against the 330 cmt. o (1959). Because a settlor usually settlor’s creditors. The drafters of the Uniform also retains a beneficial interest that a creditor Trust Code concluded that traditional doctrine may reach under subsection (a)(2), the reflects sound policy. Consequently, the common law rule, were it retained in this drafters rejected the approach taken in States Code, would be of little significance. See like Alaska and Delaware, both of which allow Restatement (Second) of Trusts Section a settlor to retain a beneficial interest immune 156(2) (1959). from creditor claims. See Henry J. Lischer, Jr., Subsection (a)(2), which is based on Domestic Asset Protection Trusts: Pallbearers Restatement (Third) of Trusts Section 58(2) to Liability, 35 Real Prop. Prob. & Tr. J. 479 and cmt. e (Tentative Draft No. 2, approved

(2000) ; John E. Sullivan, III, Gutting the Rule 1999), and Restatement (Second) of Trusts Against Self-Settled Trusts: How the Delaware Section 156 (1959), follows traditional Trust Law Competes with Offshore Trusts, 23 doctrine in providing that a settlor who is also Del. J. Corp. L. 423 (1998). Under the Code, a beneficiary may not use the trust as a shield whether the trust contains a spendthrift against the settlor’s creditors. The drafters of provision or not, a creditor of the settlor may the Uniform Trust Code concluded that reach the maximum amount that the trustee traditional doctrine reflects sound policy. could have paid to the settler-beneficiary. If the Consequently, the drafters rejected the trustee has discretion to distribute the entire approach taken in States like Alaska and income and principal to the settlor, the effect of Delaware, both of which allow a settlor to this subsection is to place the settlor’s creditors retain a beneficial interest immune from in the same position as if the trust had not been creditor claims. See Henry J. Lischer, Jr., created. For the definition of “ settlor,” see Domestic Asset Protection Trusts: Pallbearers Section 103(14). to Liability, 35 Real Prop. Prob. & Tr. J. 479 This section does not address possible rights (2000); John E. Sullivan, III, Gutting the Rule against a settlor who was insolvent at the time Against Self-Settled Trusts: How the of the trust’s creation or was rendered insolvent Delaware Trust Law Competes with Offshore by the transfer of property to the trust. This Trusts, 23 Del. J. Corp. L. 423 (1998). The subject is instead left to the State’s law on SCTC confirms this policy. Under the Code, fraudulent transfers. A transfer to the trust by whether the trust contains a spendthrift an insolvent settlor might also constitute a provision or not, a creditor of the settlor may voidable preference under federal bankruptcy reach the maximum amount that the trustee law. could have paid to the settler-beneficiary. If Subsection (a)(3) recognizes that a revocable the trustee has discretion to distribute the trust is usually employed as a will substitute. entire income and principal to the settlor, the As such, the trust assets, following the death of effect of this subsection is to place the settlor’s the settlor, should be subject to the settlor’s creditors in the same position as if the trust debts and other charges. However, in had not been created. For the definition of accordance with traditional doctrine, the assets “settlor,” see Section 62-7-103(14). of the settlor’s probate estate must normally This section does not address possible rights first be exhausted before the assets of the against a settlor who was insolvent at the time revocable trust can be reached. This section of the trust’s creation or was rendered does not attempt to address the procedural insolvent by the transfer of property to the issues raised by the need first to exhaust the trust. This subject is instead left to the State’s decedent’s probate estate before reaching the law on fraudulent transfers. A transfer to the assets of the revocable trust. Nor does this trust by an insolvent settlor might also section address the priority of creditor claims or constitute a voidable preference under federal liability of the decedent’s other nonprobate bankruptcy law. assets for the decedent’s debts and other Subsection (a)(3) recognizes that a

charges. Subsection (a) (3), however, does revocable trust is usually employed as a will ratify the typical pourover will, revocable trust substitute. As such, the trust assets, following plan. As long as the rights of the creditor or the death of the settlor, should be subject to family member claiming a statutory allowance the settlor’s debts and other charges. are not impaired, the settlor is free to shift However, under SCTC 62-7-505(a)(3), only liability from the probate estate to the revocable assets held in a revocable trust at the time of trust. Regarding other issues associated with the settlor’s death will be subject to creditor’s potential liability of nonprobate assets for claims. Assets transferred to a revocable trust unpaid claims, see Section 6-102 of the following the settlor’s death will not become Uniform Probate Code, which was added to that subject to creditor’s claims as a result of the Code in 1998. transfer. For example, life insurance proceeds Subsection (b)(1) treats a power of withdrawal and cash surrender values that would be as the equivalent of a power of revocation exempt under the terms of the trust pursuant to because the two powers are functionally §38-63-40 or §38-65-90 would maintain the identical. This is also the approach taken in exempt status if payable to the trust. Also, in Restatement (Third) of Trusts Section 56 cmt. b accordance with traditional doctrine, the assets (Tentative Draft No. 2, approved 1999). If the of the settlor’s probate estate must normally power is unlimited, the property subject to the first be exhausted before the assets of the power will be fully subject to the claims of the revocable trust can be reached. This section power holder’s creditors, the same as the power does not attempt to address the procedural holder’s other assets. If the power holder issues raised by the need first to exhaust the retains the power until death, the property decedent’s probate estate before reaching the subject to the power may be liable for claims assets of the revocable trust. Nor does this and statutory allowances to the extent the power section address the priority of creditor claims holder’s probate estate is insufficient to satisfy or liability of the decedent’s other nonprobate those claims and allowances. For powers assets for the decedent’s debts and other limited either in time or amount, such as a right charges. Subsection (a)(3), however, does to withdraw a $10,000 annual exclusion ratify the typical pourover will, revocable trust contribution within 30 days, this subsection plan. As long as the rights of the creditor or would limit the creditor to the $10,000 family member claiming a statutory allowance contribution and require the creditor to take are not impaired, the settlor is free to shift action prior to the expiration of the 30-day liability from the probate estate to the period. revocable trust. Regarding other issues Upon the lapse, release, or waiver of a power of associated with potential liability of withdrawal, the property formerly subject to the nonprobate assets for unpaid claims, see power will normally be subject to the claims of Section 6-102 of the Uniform Probate Code, the power holder’s creditors and assignees the which was added to that Code in 1998. same as if the power holder were the settlor of a Upon the lapse, release, or waiver of a now irrevocable trust. Pursuant to subsection power of withdrawal, the property formerly

(a)(2), a creditor or assignee of the power subject to the power will normally be subject holder generally may reach the power holder’s to the claims of the power holder’s creditors entire beneficial interest in the trust, whether or and assignees the same as if the power holder not distribution is subject to the trustee’s were the settlor of a now irrevocable trust. discretion. However, following the lead of Pursuant to subsection (a)(2), a creditor or Arizona Revised Statutes Section 14-7705(g) assignee of the power holder generally may and Texas Property Code Section 112.035(e), reach the power holder’s entire beneficial subsection (b)(2) creates an exception for trust interest in the trust, whether or not distribution property which was subject to a Crummey or is subject to the trustee’s discretion. The five and five power. Upon the lapse, release, or Uniform Trust Code does not address creditor waiver of a power of withdrawal, the holder is issues with respect to property subject to a treated as the settlor of the trust only to the special power of appointment or a extent the value of the property subject to the testamentary general power of appointment. power at the time of the lapse, release, or For creditor rights against such interests, see waiver exceeded the greater of the amounts Restatement (Property) Second: Donative specified in IRC Sections 2041(b)(2) or 2514(e) Transfers Sections 13.1 -- 3.7 (1986). [greater of 5% or $5,000], or IRC Section 2503(b) [$10,000 in 2001]. The Uniform Trust Code does not address creditor issues with respect to property subject to a special power of appointment or a testamentary general power of appointment. For creditor rights against such interests, see Restatement (Property) Second: Donative Transfers Sections 13.1 --3.7 (1986).

SOUTH CAROLINA COMMENT The South Carolina Trust Code does not include the UTC version of subsections (b)(1) and (b)(2), and the UTC Comment should be adjusted accordingly. South Carolina adds subsection (b)(1), which is not the UTC version of subsection 505(b)(1). The UTC version of Subsection (b)(1) is not included in the SCTC. The UTC and the Restatement (Third) of Trusts Section 60 cmt. g (Tentative Draft No. 2, approved 1999) appear to take the position that a creditor may attach a beneficiary’s interest merely because the

beneficiary is the sole trustee or cotrustee, even if the trustee/beneficiary (or cotrustee/beneficiary) is limited by an ascertainable standard. SCTC Section 62-5-505(b)(1) provides that neither a sole trustee/beneficiary nor a cotrustee/beneficiary will be treated in the same manner as the settlor of a revocable trust so long as the trustee/beneficiary or cotrustee/beneficiary’s interest is subject to the ascertainable standard described in that subsection.

SECTION 62-7-506. Overdue distribution. SECTION 62-7-506.

Whether or not a trust contains a spendthrift Whether or not a trust contains a spendthrift provision, a creditor or assignee of a provision, a creditor or assignee of a beneficiary may reach a mandatory distribution beneficiary may reach a mandatory of income or principal, including a distribution distribution of income or principal, including a upon termination of the trust, if the trustee has distribution upon termination of the trust, if not made the distribution to the beneficiary the trustee has not made the distribution to the within a reasonable time after the designated beneficiary within a reasonable time after the distribution date. For purposes of this section, a designated distribution date. For purposes of mandatory distribution is a distribution where this section, a mandatory distribution is a the trustee has no discretion in determining distribution where the trustee has no discretion whether the distribution shall be made or the in determining whether the distribution shall amount or timing of such distribution. be made or the amount or timing of such distribution. COMMENT The effect of a spendthrift provision is REPORTER’S COMMENT generally to insulate totally a beneficiary’s The effect of a spendthrift provision is interest until a distribution is made and received generally to insulate totally a beneficiary’s by the beneficiary. See Section 502. But this interest until a distribution is made and section, along with several other sections in this received by the beneficiary. See Section article, recognizes exceptions to this general 62-7-502. But this section, along with several rule. Whether a trust contains a spendthrift other sections in this article, recognizes provision or not, a trustee should not be able to exceptions to this general rule. Whether a trust avoid creditor claims against a beneficiary by contains a spendthrift provision or not, a refusing to make a distribution required to be trustee should not be able to avoid creditor made by the express terms of the trust. On the claims against a beneficiary by refusing to

other hand, a spendthrift provision would make a distribution required to be made by the become largely a nullity were a beneficiary’s express terms of the trust. On the other hand, a creditors able to attach all required payments as spendthrift provision would become largely a soon as they became due. This section reflects nullity were a beneficiary’s creditors able to a compromise between these two competing attach all required payments as soon as they principles. A creditor can reach a mandatory became due. This section reflects a distribution, including a distribution upon compromise between these two competing termination, if the trustee has failed to make the principles. A creditor can reach a mandatory payment within a reasonable time after the distribution, including a distribution upon designated distribution date. Following this termination, if the trustee has failed to make reasonable period, payments mandated by the the payment within a reasonable time after the express terms of the trust are in effect being designated distribution date. Following this held by the trustee as agent for the beneficiary reasonable period, payments mandated by the and should be treated as part of the express terms of the trust are in effect being beneficiary’s personal assets. held by the trustee as agent for the beneficiary This section is similar to Restatement (Third) of and should be treated as part of the Trusts Section 58 cmt. d (Tentative Draft No. 2, beneficiary’s personal assets. approved 1999). South Carolina Trust Code Section 2001 Amendment. By amendment in 2001, 62-7-506 adds to the Uniform Trust Code “designated distribution date” was substituted version of Section 506 a definition of for “required distribution date”. The “mandatory distribution” to prevent the South amendment conforms the language of this Carolina section from being interpreted to section to terminology used elsewhere in the require distributions from discretionary trusts Code. as referred to in SCTC Section 62-7-504. Common examples of mandatory distributions SOUTH CAROLINA COMMENT are found in qualified terminable interest South Carolina Trust Code Section 62-7-506 property trusts, charitable remainder trusts, adds to the Uniform Trust Code version of and grantor retained trusts, when the trustee is Section 506 a definition of “mandatory required to make a distribution annually of a distribution” to prevent the South Carolina sum certain. section from being interpreted to require This section is similar to Restatement distributions from discretionary trusts as (Third) of Trusts Section 58 cmt. d (Tentative referred to in SCTC Section 62-7-504. Draft No. 2, approved 1999). Common examples of mandatory distributions are found in qualified terminable interest property trusts, charitable remainder trusts, and grantor retained trusts, when the trustee is required to make a distribution annually of a sum certain.

SECTION 62-7-507. Personal obligations of SECTION 62-7-507. trustee.

Trust property is not subject to personal Trust property is not subject to personal obligations of the trustee, even if the trustee obligations of the trustee, even if the trustee becomes insolvent or bankrupt. becomes insolvent or bankrupt.

COMMENT REPORTER’S COMMENTS Because the beneficiaries of the trust hold the Because the beneficiaries of the trust hold beneficial interest in the trust property and the the beneficial interest in the trust property and trustee holds only legal title without the benefits the trustee holds only legal title without the of ownership, the creditors of the trustee have benefits of ownership, the creditors of the only a personal claim against the trustee. See trustee have only a personal claim against the Restatement (Third) Section 5 cmt. k (Tentative trustee. See Restatement (Third) Section 5 Draft No. 1, approved 1996); Restatement cmt. k (Tentative Draft No. 1, approved 1996); (Second) of Trusts Section 12 cmt. a (1959). Restatement (Second) of Trusts Section 12 Similarly, a personal creditor of the trustee who cmt. a (1959). Similarly, a personal creditor of attaches trust property to satisfy the debt does the trustee who attaches trust property to not acquire title as a bona fide purchaser even if satisfy the debt does not acquire title as a bona the creditor is unaware of the trust. See fide purchaser even if the creditor is unaware Restatement (Second) of Trusts Section 308 of the trust. See Restatement (Second) of (1959). The protection afforded by this section Trusts Section 308 (1959). The protection is consistent with that provided by the afforded by this section is consistent with that Bankruptcy Code. Property in which the provided by the Bankruptcy Code. Property in trustee holds legal title as trustee is not part of which the trustee holds legal title as trustee is the trustee’s bankruptcy estate. 11 U.S.C. not part of the trustee’s bankruptcy estate. 11 Section 541(d). U.S.C. Section 541(d). The exemption of the trust property from the The exemption of the trust property from personal obligations of the trustee is the most the personal obligations of the trustee is the significant feature of Anglo-American trust law most significant feature of Anglo-American by comparison with the devices available in trust law by comparison with the devices civil law countries. A principal objective of the available in civil law countries. A principal Hague Convention on the Law Applicable to objective of the Hague Convention on the Law Trusts and on their Recognition is to protect the Applicable to Trusts and on their Recognition Anglo-American trust with respect to is to protect the Anglo-American trust with transactions in civil law countries. See Hague respect to transactions in civil law countries. Convention art. 11. See also Henry Hansmann See Hague Convention art. 11. See also Henry & Ugo Mattei, The Functions of Trust Law: A Hansmann & Ugo Mattei, The Functions of

Comparative Legal and Economic Analysis, 73 Trust Law: A Comparative Legal and N.Y.U. L. Rev. 434 (1998); John H. Langbein, Economic Analysis, 73 N.Y.U. L. Rev. 434 The Secret Life of the Trust: The Trust as an (1998); John H. Langbein, The Secret Life of Instrument of Commerce, 107 Yale L.J. 165, the Trust: The Trust as an Instrument of 179-80 (1997). Commerce, 107 Yale L.J. 165, 179-80 (1997).

SOUTH CAROLINA COMMENT Prior South Carolina law had no counterpart to this Section.

L:\S-JUD\STUDY COMMITTEES\Probate Study Committee\ARTICLE 7- Trust Code\Divided into parts\Article 7.Side by Side.Part 5.letter size.ekw.doc