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1 Indicates Matter Stricken 2 Indicates New Matter 3 4 COMMITTEE REPORT 5 May 11, 2005 6 7 S. 422 8 9 Introduced by Senators McConnell, Hayes and Campsen 10 11 S. Printed 5/11/05--H. 12 Read the first time March 29, 2005. 13 14 15 THE COMMITTEE ON JUDICIARY 16 To whom was referred a Bill (S. 422) to amend Article 7, Title 17 62 of the Code of Laws of South Carolina, 1976, relating to trust 18 administration, so as to enact the Uniform Trust Code by 19 providing, etc., respectfully 20 REPORT: 21 That they have duly and carefully considered the same and 22 recommend that the same do pass: 23 24 JAMES H. HARRISON for Committee. 25 1 [422-1] 1 2 3 4 5 6 7 8 9 A BILL 10 11 TO AMEND ARTICLE 7, TITLE 62 OF THE CODE OF LAWS 12 OF SOUTH CAROLINA, 1976, RELATING TO TRUST 13 ADMINISTRATION, SO AS TO ENACT THE UNIFORM 14 TRUST CODE BY PROVIDING A COMPREHENSIVE 15 CODIFICATION OR RECODIFICATION OF MUCH OF 16 EXISTING TRUST LAW AND SUPPLEMENTING EXISTING 17 COMMON LAW UNLESS THE CODE SPECIFICALLY 18 CONTRADICTS IT, AND PROVIDING, AMONG OTHER 19 THINGS, FOR GENERAL PROVISIONS AND DEFINITIONS 20 INCLUDING A DEFINITION FOR “QUALIFIED 21 BENEFICIARY” AND AN APPLICATION OF THE STATE’S 22 WILL CONSTRUCTION RULES TO THE CONSTRUCTION 23 OF TRUSTS WHEN APPROPRIATE; FOR JUDICIAL 24 PROCEEDINGS AND REPRESENTATION BY OTHERS, 25 ESSENTIALLY RECODIFYING EXISTING VENUE, 26 JURISDICTION, AND REPRESENTATION PROVISIONS; 27 FOR THE RULES FOR CREATION OF TRUSTS INCLUDING 28 THAT A SELF-SETTLED TRUST MUST BE IN WRITING, 29 THAT A TRUST PURPOSE BE LAWFUL AND ACHIEVABLE, 30 THAT A VALID NONCHARITABLE TRUST MAY BE 31 CREATED WITHOUT DEFINITE BENEFICIARIES IN ONLY 32 CERTAIN INSTANCES, THAT AN EARLY TERMINATION 33 OR MODIFICATION OF A NONAMENDABLE 34 IRREVOCABLE TRUST REQUIRES COURT APPROVAL, 35 THAT A COURT MAY MODIFY THE ADMINISTRATIVE OR 36 DISPOSITIVE PROVISIONS OF A TRUST, AND THAT A 37 TRUST MAY BE TERMINATED IF IT CANNOT JUSTIFY ITS 38 ADMINISTRATIVE COSTS, MODIFIED TO ACCOMPLISH 39 THE SETTLOR’S TAX OBJECTIVES, OR DIVIDED OR 40 COMBINED WITH OTHERS TO FACILITATE 41 ADMINISTRATION; FOR RETENTION OF THE ABILITY OF 42 THE SETTLOR’S CREDITORS TO REACH THE TRUST1 [422] 1 1 PROPERTY IN A TRUST; FOR THE VALIDITY 2 SPENDTHRIFT PROVISION EXCEPT AS TO CHILD 3 SUPPORT AND PROTECTION OF THE SPECIAL NEEDS 4 TRUST; FOR THE PRESUMED REVOCABILITY INSTEAD 5 OF IRREVOCABILITY OF A TRUST, CLARIFICATION OF 6 THE MENTAL CAPACITY FOR CREATING A REVOCABLE 7 TRUST, AND A STATUTE OF LIMITATIONS FOR 8 CONTESTING A REVOCABLE TRUST; AND FOR RULES 9 FOR THE OFFICE OF TRUSTEE, INCLUDING 10 RESIGNATION AND REMOVAL, DUTIES AND POWERS OF 11 TRUSTEES, INCLUDING THE ESSENCE OF SOUTH 12 CAROLINA’S UNIFORM TRUSTEES POWERS ACT AND 13 THE UNIFORM PRUDENT INVESTORS ACT, ADDING A 14 BROADER TRUSTEE POWER AND A STANDARD OF CARE 15 FOR TRUSTEE MATTERS IN ADDITION TO INVESTMENT 16 AND MANAGEMENT, AND THE UNIFORM PRINCIPAL 17 AND INCOME ACT GOVERNING FIDUCIARY 18 ACCOUNTING PRINCIPALS, SUBSTANTIAL RETENTION 19 OF EXISTING LAW CONCERNING LIABILITY OF 20 TRUSTEES AND RIGHTS OF PERSONS DEALING WITH 21 THEM, AND APPLICATION OF THESE PROVISIONS TO 22 EXISTING RELATIONSHIPS; TO AMEND SECTION 27-6-50, 23 RELATING TO EXCEPTIONS TO THE RULE AGAINST 24 PERPETUITIES, SECTION 33-31-152, RELATING TO RIGHTS 25 OF STATES AS TO CORPORATIONS, SECTION 34-15-10, AS 26 AMENDED, RELATING TO A BANK ACTING AS 27 FIDUCIARY, SECTION 62-3-703, RELATING TO GENERAL 28 DUTIES OF A PERSONAL REPRESENTATIVE, SECTION 29 62-3-913, RELATING TO DISTRIBUTION BY A PERSONAL 30 REPRESENTATIVE TO A TRUSTEE, AND SECTION 31 62-5-417, RELATING TO THE GENERAL DUTY OF A 32 CONSERVATOR, ALL SO AS TO AMEND CROSS 33 REFERENCES TO CONFORM TO THIS ACT; AND TO 34 REPEAL SECTION 27-5-70. 35 36 Be it enacted by the General Assembly of the State of South 37 Carolina: 38 39 SECTION 1. Article 7, Title 62 of the 1976 Code is amended to 40 read: 41 42 “Article 7 431 [422] 2 1 Uniform Trust Administration Code 2 3 Part 1 4 5 Trust Estates General Provisions and Definitions 6 7 Section 62-7-101. Declarations or creations of trusts in land 8 shall be in writing. 9 10 All declarations or creations of trusts or confidences of any 11 lands, tenements, or hereditaments shall be manifested and proved 12 by some writing, signed by the party who is by law enabled to 13 declare such uses or trust or by his last will in writing, or else they 14 shall be utterly void and of no effect. 15 16 Section 62-7-102. Grants and assignments of trusts shall be 17 in writing. 18 19 All grants and assignments of any trust or confidence shall be in 20 writing, signed by the party granting or assigning them or shall be 21 made by last will or else shall be utterly void and of no effect. 22 23 Section 62-7-103. Trusts of land arising, transferred, or 24 extinguished by implication of law. 25 26 When any conveyance shall be made of any lands or tenements 27 by which a trust or confidence shall or may arise or result by the 28 implication or construction of law or be transferred or extinguished 29 by act or operation of law, such trust or confidence shall be of like 30 force and effect as it would have been without the two previous 31 sections of this Code. 32 33 Section 62-7-104. Word “writing” shall include typewriting. 34 35 The word “writing” used in this part shall be construed to 36 include typewriting. 37 38 Section 62-7-105. Religious, educational, charitable, or 39 benevolent trusts shall not be void because of discretion vested 40 in trustee or establishment of perpetuities. 41 42 No gift, grant, bequest, or devise, whether in trust or otherwise, 43 to religious, educational, charitable, or benevolent uses or for the1 [422] 3 1 purpose of providing for the care or maintenance of any part of any 2 public cemetery shall be invalid because the instrument confers 3 upon the trustee discretionary power in the selection and 4 designation of the objects or beneficiaries of such trust or in 5 carrying out the purposes thereof or by reason of contravening any 6 statute or rule against perpetuities. 7 8 Section 62-7-106. Religious, educational, or charitable trusts 9 created by nonresidents shall be valid. 10 11 Every such religious, educational, or charitable trust created by 12 any person domiciled in another state, which shall be valid under 13 the laws of the state of the domicile of such creator or donor, shall 14 be held in all respects valid under the laws of this State, even 15 though one or more of the trustees named in the instrument 16 creating the trust shall be domiciled in another state or one or more 17 of the beneficiaries named in the trust shall reside or be located in 18 a foreign state. This section shall apply to all trusts heretofore or 19 hereafter created in which one or more of the beneficiaries or 20 objects of such trust shall reside or be located in this State. 21 22 Section 62-7-107. Estate and possession of trust estates shall 23 be in beneficiaries thereof. 24 25 When any person shall be seized of any lands, tenements, rents, 26 reversions, remainders, or other hereditaments to the use, 27 confidence, or trust of any other person or of any body politic by 28 reason of any bargain, sale, feoffment, covenant, contract, 29 agreement, will, or otherwise, the person or body politic that shall 30 have such use, confidence, or trust, in fee simple, fee tail, for term 31 of life or for years or otherwise or any use, confidence, or trust in 32 remainder or reversion, shall be deemed and adjudged in lawful 33 seizin, estate and possession of and in such lands, tenements, rents, 34 reversions, remainders, and hereditaments, with their 35 appurtenances, to all intents, constructions, and purposes in law of 36 and in such like estates as they shall have in use, trust, or 37 confidence of or in them. 38 39 Section 62-7-108. Several seized jointly to use of one or 40 more of them. 41 42 When several persons shall be jointly seized of any lands, 43 tenements, rents, reversions, remainders, or other hereditaments to1 [422] 4 1 the use, confidence, or trust of any of them that be so jointly 2 seized, such person or persons who shall have any such use, 3 confidence, or trust in any such lands, tenements, rents, reversions, 4 remainders, or hereditaments shall have such estate, possession, 5 and seizing of and in such lands, tenements, rents, reversions, 6 remainders, and other hereditaments only to him or them that shall 7 have any such use, confidence, or trust, in like nature, manner, 8 form, condition, and course as he or they had before in the use, 9 confidence, or trust of such lands, tenements, or hereditaments, 10 saving and reserving to all and singular persons and bodies politic, 11 their heirs and successors, other than such person or persons who 12 are seized of such lands, tenements, or hereditaments to any use, 13 confidence, or trust, all such right, title, entry, interest, possession, 14 rents, and action as they or any of them had or might have had 15 without this section and also saving to all and singular those 16 persons and their heirs who are seized to any use all such former 17 right, title, entry, interest, possession, rents, customs, services, and 18 action as they or any of them might have had to his or their own 19 proper use in or to any lands, tenements, rents, or hereditaments 20 whereof they are seized to any other use, anything contained in this 21 chapter to the contrary notwithstanding. 22 23 Section 62-7-109. Beneficiaries’ title to rent out of trust 24 shall be same as conveyed by grant. 25 26 When several persons are seized of and in any lands, tenements, 27 or hereditaments, in fee simple or otherwise, to the use and intent 28 that some other person shall have and receive yearly to him and to 29 his heirs one annual rent out of such lands and tenements and some 30 other person one other annual rent, to him and his assigns for a 31 term of life or years or for some other special time, according to 32 such intent and use as has been before declared, limited, and made 33 thereof, the persons, their heirs and assigns, that have such use and 34 interest to have and receive any such annual rents out of any lands, 35 tenements, or hereditaments, and every one of them, their heirs and 36 assigns, shall be deemed to be in the possession and seizin of such 37 rent, of and in such like estate as they had in the title, interest, or 38 use of such rent or profit, and as if a sufficient grant, or other 39 lawful conveyance had been made and executed to them by such as 40 were seized to the use or intent of any such rent to be had, made, 41 or paid, according to the trust and intent thereof. All such persons 42 as have or shall have any title, use, and interest in or to any such 43 rent or profit shall have all suits, entries, and remedies for such1 [422] 5 1 rents, according to such conditions, pains or other things, limited 2 and appointed, upon the trust and intent or payment or surety of 3 such rent. 4 5 Section 62-7-110. Trusts shall be assets in the hands of 6 heirs. 7 8 If any cestui que trust shall die leaving a trust in fee simple to 9 descend to his heir such trust shall be deemed and taken, and is 10 hereby declared to be, assets by descent and the heir shall be liable 11 to and chargeable with the obligation of his ancestors for and by 12 reason of such assets as fully and amply as he might or ought to 13 have been if the estate in law had descended to him in possession 14 in like manner as the trust descended, any law, custom, or usage to 15 the contrary in any wise notwithstanding. 16 17 Section 62-7-111. Heir shall not be chargeable out of his 18 own estate for debts of his ancestor. 19 20 No heir that shall become chargeable by reason of any estate or 21 trust made assets in his hand by Section 62-7-110 shall, by reason 22 of any kind of plea or confession of the action, suffering judgment 23 by default or any other matter, be chargeable to pay the 24 condemnation out of his own estate but execution shall be sued of 25 the whole estate so made assets in his hands by descent in 26 whosesoever hands it shall come after the commencement of the 27 action. 28 29 Section 62-7-112. Revocable inter vivos trust; creation; 30 effect. 31 32 A revocable inter vivos trust may be created either by 33 declaration of trust or by a transfer of property and is not rendered 34 invalid because the trust creator retains substantial control over the 35 trust including, but not limited to, (1) a right of revocation, (2) 36 substantial beneficial interests in the trust, or (3) the power to 37 control investments or reinvestments. Nothing herein, however, 38 shall prevent a finding that a revocable inter vivos trust, 39 enforceable for other purposes, is illusory for purposes of 40 determining a spouse’s elective share rights under Section 41 62-2-201 et seq. A finding that a revocable inter vivos trust is 42 illusory and thus invalid for purposes of determining a spouse’s 43 elective share rights under Section 62-2-201 et seq. shall not1 [422] 6 1 render that revocable inter vivos trust invalid, but would allow 2 inclusion of the trust assets as part of the probate estate of the trust 3 creator only for the purpose of calculating the elective share and 4 would make available the trust assets for satisfaction of the 5 elective share only to the extent necessary under Section 62-2-207. 6 7 Section 62-7-113. Anti-lapse provision in trust. 8 9 (A) If the beneficiary under a revocable inter vivos trust, who is 10 a great-grandparent or a lineal descendant of a great-grandparent of 11 the trust creator, is dead at the time of execution of the trust, fails 12 to survive the trust creator, or is treated as if he predeceased the 13 trust creator, the issue of the deceased beneficiary who survived 14 the trust creator take in place of the deceased beneficiary and if 15 they are all of the same degree of kinship to the beneficiary they 16 take equally, but if of unequal degree then those of more remote 17 degree take by representation. One who would have been a 18 beneficiary under a class gift if he had survived the trust creator is 19 treated as a beneficiary for purposes of this section whether his 20 death occurred before or after the execution of the trust. 21 (B) Except as provided in subsection (A), if the disposition of 22 any real or personal property under a revocable inter vivos trust 23 fails for any reason, this property becomes a part of the residue of 24 the trust. 25 (C) Except as provided in subsection (A), if the residue under a 26 revocable inter vivos trust is distributed to two or more persons 27 and the share of one of the residuary beneficiaries fails for any 28 reason, his share passes to the other residuary beneficiary or to 29 other residuary beneficiaries in proportion to their interests in the 30 residue. 31 32 Section 62-7-114. Divorce or annulment as revoking 33 revocable inter vivos trust. 34 35 If after executing a revocable inter vivos trust the trust creator is 36 divorced or his marriage annulled or his spouse is a party to a valid 37 proceeding concluded by an order purporting to terminate all 38 marital property rights or confirming equitable distribution 39 between the spouses, the divorce or annulment or order revokes 40 any disposition or appointment of property including beneficial 41 interests made by such trust to the spouse, any provision 42 conferring a general or special power of appointment on the 43 spouse, and any nomination of the spouse as trustee, unless the1 [422] 7 1 trust expressly provides otherwise. Property prevented from 2 passing to a spouse because of revocation by divorce or annulment 3 or order passes as if the spouse failed to survive the trust creator, 4 and other provisions conferring some power or office on this 5 spouse are interpreted as if the spouse failed to survive the trust 6 creator. If provisions are revoked solely by this section, they are 7 revived by the trust creator’s remarriage to the former spouse. For 8 purposes of this section, divorce or annulment or order means any 9 divorce or annulment or order which would exclude the spouse as 10 a surviving spouse within the meaning of subsections (b) and (c) of 11 Section 62-2-802. A decree of separate maintenance which does 12 not terminate the status of husband and wife is not a divorce for 13 purposes of this section. No change of marital or parental 14 circumstances other than as described in this section revokes a 15 revocable inter vivos trust. 16 17 Section 62-7-201. Court; exclusive jurisdiction of trusts. 18 19 (a) Subject to the provisions of Section 62-1-302(c), the probate 20 court has exclusive jurisdiction of proceedings initiated by 21 interested parties concerning the internal affairs of trusts. 22 Proceedings which may be maintained under this section are those 23 concerning the administration and distribution of trusts, the 24 declaration of rights, and the determination of other matters 25 involving trustees and beneficiaries of trusts. These include, but 26 are not limited to, proceedings to: 27 (1) appoint or remove a trustee; 28 (2) review trustees’ fees and to review and settle interim or 29 final accounts; 30 (3) ascertain beneficiaries, determine any question arising in 31 the administration or distribution of any trust including questions 32 of construction of trust instruments, to instruct trustees, and 33 determine the existence or nonexistence of any immunity, power, 34 privilege, duty, or right. 35 (b) A proceeding under this section does not result in continuing 36 supervisory proceedings. The management and distribution of a 37 trust estate, submission of accounts and reports to beneficiaries, 38 payment of trustee’s fees and other obligations of a trust, 39 acceptance and change of trusteeship, and other aspects of the 40 administration of a trust shall proceed expeditiously consistent 41 with the terms of the trust, free of judicial intervention and without 42 order, approval, or other action of any court, subject to the1 [422] 8 1 jurisdiction of the court as invoked by interested parties or as 2 otherwise exercised as provided by law. 3 4 Section 62-7-202. Trust proceedings; venue. 5 6 Venue for proceedings under Section 62-7-201 involving trusts 7 is in the place in which the trust has its principal place of 8 administration. Unless otherwise designated in the trust 9 instrument, the principal place of administration of a trust is the 10 trustee’s usual place of business where the records pertaining to 11 the trust are kept, or at the trustee’s residence if he has no such 12 place of business. In the case of cotrustees, the principal place of 13 administration, if not otherwise designated in the trust instrument, 14 is (1) the usual place of business of the corporate trustee if there is 15 but one corporate cotrustee, or (2) the usual place of business or 16 residence of the individual trustee who is a professional fiduciary 17 if there is but one such person and no corporate cotrustee, and 18 otherwise (3) the usual place of business or residence of any of the 19 cotrustees as agreed upon by them. 20 21 Section 62-7-203. Trust proceedings; dismissal of matters 22 relating to foreign trusts. 23 24 The court will not, over the objection of a party, entertain 25 proceedings under Section 62-7-201 involving a trust registered or 26 having its principal place of administration in another state, unless 27 (1) when all appropriate parties could not be bound by litigation in 28 the courts of the state where the trust is registered or has its 29 principal place of administration or (2) when the interests of justice 30 otherwise would seriously be impaired. The court may condition a 31 stay or dismissal of a proceeding under this section on the consent 32 of any party to jurisdiction of the state in which the trust is 33 registered or has its principal place of business, or the court may 34 grant a continuance or enter any other appropriate order. 35 36 Section 62-7-204. Court; concurrent jurisdiction of 37 litigation involving trusts and third parties. 38 39 (A) The probate court has concurrent jurisdiction with the circuit 40 courts of this State of actions and proceedings to determine the 41 existence or nonexistence of trusts created other than by will, of 42 actions by or against creditors or debtors of trusts, and of other1 [422] 9 1 actions and proceedings involving trustees and third parties. Venue 2 is determined by the rules generally applicable to civil actions. 3 (B) The probate court has concurrent jurisdiction with the circuit 4 courts of this State over attorney’s fees. Attorney’s fees may be set 5 at a fixed or hourly rate or by contingency fee. 6 7 Section 62-7-205. Proceedings for review of employment of 8 agents and review of compensation of trustee and employees of 9 trust. 10 11 On petition of an interested person, after notice to all interested 12 persons, the court may review the propriety of employment of any 13 person by a trustee including any attorney, auditor, investment 14 advisor or other specialized agent or assistant, and the 15 reasonableness of the compensation of any person so employed, 16 and the reasonableness of the compensation determined by the 17 trustee for his own services. Any person who has received 18 excessive compensation from a trust may be ordered to make 19 appropriate refunds. The provisions of this section do not apply to 20 the extent there is a contract providing for the compensation to be 21 paid for the trustee’s services or if the trust directs otherwise. 22 23 Section 62-7-206. Trust proceedings; initiation by notice; 24 necessary parties. 25 26 Proceedings under Section 62-7-201 are initiated by filing a 27 petition in the court and giving notice pursuant to Section 62-1-401 28 to interested parties. The court may order notification of 29 additional persons. A decree is valid as to all who are given notice 30 of the proceeding though fewer than all interested parties are 31 notified. 32 33 Section 62-7-207. Trustees; eligibility of nonresident 34 corporations and individuals. 35 36 (a) No corporation created by another state of the United States 37 or by any foreign state, kingdom, or government, and no 38 corporation created under the laws of the United States and not 39 having a place of business in the State of South Carolina shall be 40 eligible or entitled to qualify, serve, or hold title to property in this 41 State as testamentary trustee of an estate of any person domiciled 42 in this State at the time of his death, whether the decedent shall die1 [422] 10 1 testate or intestate, except, however, such foreign corporations 2 may act as testamentary trustee in this State if: 3 (1) it has a bona fide capital of at least two hundred fifty 4 thousand dollars actually paid in; 5 (2) it is authorized to act as testamentary trustee in the state in 6 which it is incorporated or if such foreign corporation be a national 7 banking association in the state in which it has its principal place 8 of business; and 9 (3) any bank or other corporation organized under the laws of 10 this State or a national banking association having its principal 11 place of business in this State is permitted by law to act as 12 testamentary trustee in the state in which such foreign corporation 13 seeking to act in this State is organized or in which it has its 14 principal place of business if it is a national banking association 15 without further showing or qualification other than that it is 16 authorized to act in such fiduciary capacity in this State and upon 17 compliance with the laws of such other state, if any, concerning 18 service of process on nonresident fiduciaries. No officer, 19 employee, or agent of any such foreign corporation shall be 20 eligible or entitled to serve as testamentary trustee in this State 21 whether such officer, employee, or agent is a resident or a 22 nonresident of this State if such officer, employee, or agent is 23 acting as testamentary trustee on behalf of any such foreign 24 corporation except when such foreign corporation itself shall be 25 eligible to so serve. 26 (b) No letters of appointment of a trustee shall be granted or 27 issued to any nonresident individual by the court unless such 28 applicant for such appointment as trustee shall first file with the 29 court where such application for appointment is made, his consent 30 in writing that service of all claims, demands, debts, dues, 31 summons, and any other process of pleadings, in suits or actions, 32 relating to the administration of the estate in his charge in this 33 State, may be made by service upon such resident of such county 34 as may be appointed in such written instrument and, in the event of 35 the death, removal, resignation, absence from the State, or any 36 other inability to obtain service upon such agent named in such 37 written instrument or any successor named by similar instrument 38 filed with the court upon the probate judge of such county. 39 Nothing herein contained shall require a nonresident trustee named 40 as such trustee under a will executed at the time when such trustee 41 is a nonresident to make reports to the court in this State or shall 42 prevent an executor in administering an estate from paying any 43 legacy so directed under the will to such foreign trustee. 1 [422] 11 1 2 Section 62-7-208. When conveyance from infant trustee or 3 mortgagee is permissible. 4 5 Any person under the age of eighteen years, having estates in 6 lands, tenements, or hereditaments only in trust for others or by 7 way of mortgage, may by the direction of the court, signified by an 8 order made upon hearing all parties concerned, on the petition of 9 the person for whom such infant shall be seized or possessed in 10 trust or of the mortgagor or guardian of such infant or person 11 entitled to the monies secured by or upon any such lands, 12 tenements, or hereditaments whereof such infant is or shall be 13 seized or possessed by way of mortgage, or of the person entitled 14 to the redemption thereof, convey and assure to any other person 15 any such lands, tenements, or hereditaments in such manner as the 16 court shall by such order so to be obtained direct. 17 18 Section 62-7-209. Effect of such conveyance. 19 20 Such conveyance or assurance, to be had and made as stated in 21 Section 62-7-208, is as effectual in law, to all intents and purposes, 22 as if the infant was, at the time making such conveyance or 23 assurance, of the full age of eighteen years. 24 25 Section 62-7-210. Infant trustee or mortgagee may be 26 compelled to make conveyance. 27 28 Every such infant, being only trustee or mortgagee as stated in 29 Section 62-7-208, may be compelled by any such order, so as 30 herein stated to be obtained, to make such conveyance or 31 assurance, as stated herein, in like manner as trustees or 32 mortgagees of full age are compellable to convey or assign trust 33 estates or mortgages. 34 35 Section 62-7-211. Division or consolidation of trusts; 36 application of section. 37 38 Upon petition by a trustee, beneficiary, or any interested party 39 for good cause shown, the court, after a hearing on notice to all 40 interested parties, in that manner as the court may direct, may 41 divide a trust into two or more single trusts or consolidate two or 42 more trusts into a single trust, upon those terms and conditions as1 [422] 12 1 it considers appropriate, provided the consolidation or division 2 satisfies the court that: 3 (1) consolidation or division is not inconsistent with the intent of 4 the trustor with regard to any trust to be consolidated or divided; 5 (2) consolidation or division would facilitate administration of 6 the trusts; and 7 (3) consolidation or division would be in the best interests of all 8 beneficiaries and not materially impair their respective interests. 9 This section applies to all trusts whenever created, whether inter 10 vivos or testamentary, created by the same or different 11 instruments, by the same or different persons and regardless of 12 where created or administered. 13 This section does not limit the right of a trustee acting in 14 accordance with the applicable provisions of the governing 15 instrument to divide or consolidate trusts. 16 17 Section 62-7-301. General Duties Not Limited. 18 19 Except as specifically provided, the general duty of the trustee to 20 administer a trust expeditiously for the benefit of the beneficiaries 21 is not altered by this Code. 22 23 Section 62-7-302. Uniform Prudent Investor Act. 24 25 (A) This section may be cited as the South Carolina Uniform 26 Prudent Investor Act. 27 (B)(1) Except as otherwise provided in item (2), a trustee who 28 invests and manages trust assets owes a duty to the beneficiaries of 29 the trust to comply with the prudent investor rule in this section. 30 (2) The prudent investor rule is a default rule that may be 31 expanded, restricted, eliminated, or otherwise altered by the 32 provisions of a trust. A trustee is not liable to a beneficiary to the 33 extent that the trustee acted in reasonable reliance on the 34 provisions of the trust. 35 (C)(1) A trustee shall invest and manage trust assets as a prudent 36 investor would by considering the purposes, terms, distribution 37 requirements, and other circumstances of the trust. In satisfying 38 this standard, the trustee shall exercise reasonable care, skill, and 39 caution. 40 (2) A trustee’s investment and management decisions 41 respecting individual assets must be evaluated not in isolation but 42 in the context of the trust portfolio as a whole and as a part of an1 [422] 13 1 overall investment strategy having risk and return objectives 2 reasonably suited to the trust. 3 (3) A trustee shall consider in investing and managing trust 4 assets those circumstances of the following as are relevant to the 5 trust or its beneficiaries: 6 (a) general economic conditions; 7 (b) the possible effect of inflation or deflation; 8 (c) the expected tax consequences of investment decisions 9 or strategies; 10 (d) the role that each investment or course of action plays 11 within the overall trust portfolio, including financial assets, 12 interests in closely held enterprises, tangible and intangible 13 personal property, and real property; 14 (e) the expected total return from income and the 15 appreciation of capital; 16 (f) other resources of the beneficiaries; 17 (g) needs for liquidity, regularity of income, and 18 preservation or appreciation of capital; and 19 (h) an asset’s special relationship or special value to the 20 purposes of the trust or to one or more of the beneficiaries. 21 (4) A trustee shall make a reasonable effort to verify facts 22 relevant to the investment and management of trust assets. 23 (5)(a) A trustee may invest in any kind of property or type of 24 investment consistent with the standards of this section. 25 (b) Nothing in this section prohibits affiliate investments if 26 they otherwise comply with the standards of this section. For these 27 purposes, “affiliate” means an entity that owns or is owned by the 28 trustee, in whole or in part, or is owned by the same entity that 29 owns the trustee. Affiliate investments include: 30 (i) investment and reinvestment in the securities of an 31 open-end or closed-end management investment company or of an 32 investment trust registered under the Investment Company Act of 33 1940, as amended. A bank or trustee, or both of them, may invest 34 in these securities even if the bank or trustee, or an affiliate of the 35 bank or trustee, provides services to the investment company or 36 investment trust such as that of an investment advisor, custodian, 37 transfer agent, registrar, sponsor, distributor, manager, or 38 otherwise, and receives reasonable remuneration for those 39 services; 40 (ii) retention of the securities into which corporate 41 securities owned by the trustee may be converted or which may be 42 derived as a result of merger, consolidation, stock dividends, splits, 43 liquidations, and similar procedures, and the exercise by purchase1 [422] 14 1 or otherwise any rights, warrants, or conversion features attaching 2 to the securities; 3 (iii) purchase or other acquisition and retention of a 4 security underwritten by a syndicate, even if the trustee or its 5 affiliate participates or has participated as a member of the 6 syndicate, provided the trustee does not purchase the security from 7 itself, its affiliate, or from another member of the underwriting 8 syndicate, or its affiliate, pursuant to an implied or express 9 reciprocal agreement between the trustee, or its affiliate, and the 10 other member, or its affiliate, to purchase all or part of each other’s 11 underwriting participation commitment within the syndicate. 12 (6) A trustee who has special skills or expertise, or is named 13 trustee in reliance upon the trustee’s representation that the trustee 14 has special skills or expertise, has a duty to use those special skills 15 or expertise. 16 (D) A trustee shall diversify the investments of the trust unless 17 the trustee reasonably determines that, because of special 18 circumstances, the purposes of the trust are better served without 19 diversifying. 20 (E) Within a reasonable time after accepting a trusteeship or 21 receiving trust assets, a trustee shall review the trust assets and 22 make and implement decisions concerning the retention and 23 disposition of assets in order to bring the trust portfolio into 24 compliance with the purposes, terms, distribution requirements, 25 and other circumstances of the trust and with the requirements of 26 this section. 27 (F) A trustee shall: 28 (1) invest and manage the trust assets solely in the interest of 29 the beneficiaries; 30 (2) act impartially in investing and managing the trust assets, 31 taking into account any differing interests of the beneficiaries if a 32 trust has two or more beneficiaries; 33 (3) incur only costs that are appropriate and reasonable in 34 relation to the assets, the purposes of the trust, and the skills of the 35 trustee in investing and managing trust assets. 36 (G) Compliance with the prudent investor rule is determined in 37 light of the facts and circumstances existing at the time of a 38 trustee’s decision or action and not by hindsight. 39 (H)(1) A trustee may delegate investment and management 40 functions if it is prudent to do so under the circumstances. The 41 trustee shall exercise reasonable care, skill, and caution in: 42 (a) selecting an agent; 1 [422] 15 1 (b) establishing the scope and terms of the delegation, 2 consistent with the purposes and terms of the trust; and 3 (c) periodically reviewing the actions of the agent to 4 monitor his performance and compliance with the terms of the 5 delegation. 6 (2) In performing a delegated function, an agent owes a duty 7 to the trust to exercise reasonable care to comply with the terms of 8 the delegation. 9 (3) A trustee who complies with the requirements of item (1) 10 is not liable to the beneficiaries or to the trust for the decisions or 11 actions of the agent to whom the function was delegated. 12 (4) By accepting the delegation of a trust function from the 13 trustee of a trust that is subject to the law of this State, an agent 14 submits to the jurisdiction of the courts of this State. 15 (I) The following terms or comparable language in the 16 provisions of a trust, unless otherwise limited or modified, 17 authorize any investment or strategy permitted pursuant to this 18 section: “investments permissible by law for investment of trust 19 funds”, “legal investments”, “authorized investments”, “using the 20 judgment and care under the circumstances then prevailing that 21 persons of prudence, discretion, and intelligence exercise in the 22 management of their own affairs, not in regard to speculation but 23 in regard to the permanent disposition of their funds, considering 24 the probable income as well as the probable safety of their capital”, 25 “prudent man rule”, “prudent trustee rule”, “prudent person rule”, 26 and “prudent investor rule”. 27 (J)(1) Notwithstanding provisions of this section to the contrary, 28 the duties of a trustee with respect to acquiring a contract of 29 insurance upon the life of the trustor or upon the lives of the trustor 30 and the trustor’s spouse, children, or parents do not include a duty 31 to: 32 (a) determine whether the contract is or remains a proper 33 investment; 34 (b) exercise policy options available under the contract; or 35 (c) diversify the contract. 36 (2) The trustee is not liable to the beneficiaries of the contract 37 of insurance or to another party for loss arising from this 38 subsection. 39 (3) Except as specifically provided in the trust instrument, the 40 provisions of this subsection apply to trust established before or 41 after the effective date of this subsection and to a life insurance 42 policy acquired by the trustee before or after the effective date of 43 this section. 1 [422] 16 1 (K) This section applies to “charitable remainder trusts”. “ 2 Charitable remainder trust” means a trust that provides for a 3 specified distribution at least annually for either life or a term of 4 years to one or more beneficiaries, at least one of which is not a 5 charity with an irrevocable remainder interest to be held for the 6 benefit of, or paid over to, charity. 7 (L) This section must be applied and construed to effectuate its 8 general purpose to make uniform the law with respect to the 9 subject of this section among the States enacting it. 10 11 Section 62-7-303. Duty to inform and account to 12 beneficiaries. 13 14 From the time at which a trust becomes irrevocable, the trustee 15 shall keep the beneficiaries of the trust reasonably informed of the 16 trust and its administration and, in addition: 17 (a) within thirty days after his acceptance of the trust, the trustee 18 shall inform in writing the current beneficiaries and if possible one 19 or more persons who under Section 62-1-403 may represent 20 beneficiaries with future interest of his name and address; 21 (b) upon reasonable request, the trustee shall provide the 22 beneficiary with a copy of the terms of the trust which describe or 23 affect his interest and with relevant information about the assets of 24 the trust and the particulars relating to the administration; 25 (c) upon reasonable request, a beneficiary is entitled to a 26 statement of the accounts of the trust annually and on termination 27 of the trust or change of the trustee. 28 29 Section 62-7-304. Duty to provide bond. 30 31 A trustee need not provide bond to secure performance of his 32 duties unless required by the terms of the trust, or requested by a 33 beneficiary and found by the court to be necessary to protect the 34 interests of the beneficiaries who are not able to protect themselves 35 and whose interests otherwise are not adequately represented. On 36 petition of the trustee or other interested person the court may 37 excuse a resubstitution of another bond with the same or different 38 sureties. If bond is required, it shall be filed in the court in the 39 place in which the trust has its principal place of administration in 40 amounts and with sureties and liabilities as provided in Sections 41 62-3-604 and 62-3-606 relating to bonds of personal 42 representatives. 431 [422] 17 1 Section 62-7-305. Trustee’s duties; appropriate place of 2 administration, deviation. 3 A trustee is under a continuing duty to administer the trust 4 according to the objectives of the trustor at a place appropriate to 5 the purposes of the trust and to its sound, efficient management. If 6 the principal place of administration becomes inappropriate for any 7 reason, the court may enter any order furthering efficient 8 administration and the interests of beneficiaries, including, if 9 appropriate, removal of the trustee and appointment of a trustee in 10 another state. Trust provisions relating to the place of 11 administration and to changes in the place of administration or of 12 trustee control unless compliance would be contrary to efficient 13 administration or the purposes of the trust. Views of adult 14 beneficiaries shall be given weight in determining the suitability of 15 the trustee and the place of administration. 16 17 Section 62-7-306. Personal liability of trustee to third parties. 18 19 (a) Unless otherwise provided in the contract, a trustee is not 20 personally liable on contracts properly entered into in his fiduciary 21 capacity in the course of administration of the trust estate unless he 22 fails to reveal his representative capacity or identify the trust estate 23 in the contract. 24 (b) A trustee is personally liable for obligations arising from 25 ownership or control of property of the trust estate or for torts 26 committed in the course of administration of the trust estate only if 27 he is personally at fault. 28 (c) Claims based on contracts entered into by a trustee in his 29 fiduciary capacity, on obligations arising from ownership or 30 control of the trust estate, or on torts committed in the course of 31 trust administration may be asserted against the trust estate by 32 proceeding against the trustee in his fiduciary capacity, whether or 33 not the trustee is personally liable therefor. 34 (d) The question of liability as between the trust estate and the 35 trustee individually may be determined in a proceeding for 36 accounting, surcharge, or indemnification or other appropriate 37 proceeding. 38 39 Section 62-7-307. Limitations on proceedings against trustees 40 after final account. 41 42 Unless previously barred by adjudication, consent, or limitation, 43 any claim against a trustee for breach of trust is barred as to any1 [422] 18 1 beneficiary who has received a final account or other statement 2 fully disclosing the matter and showing termination of the trust 3 relationship between the trustee and the beneficiary unless a 4 proceeding to assert the claim is commenced within one year after 5 receipt of the final account or statement. In any event and 6 notwithstanding lack of full disclosure a trustee who has issued a 7 final account or statement received by the beneficiary and has 8 informed the beneficiary of the location and availability of records 9 for his examination is protected after three years. A beneficiary is 10 deemed to have received a final account or statement if, being an 11 adult, it is received by him personally or if, being a minor or 12 disabled person, it is received by his representative as described in 13 Section 62-1-403(1) and (2). 14 15 Section 62-7-401. Short title. 16 17 This part may be cited as the South Carolina Uniform Principal 18 and Income Act. 19 20 Section 62-7-402. Definitions. 21 22 As used in this part: 23 (1) “Accounting period” means a calendar year unless another 24 twelve-month period is selected by a fiduciary. The term includes 25 a portion of a calendar year or other twelve-month period that 26 begins when an income interest begins or ends when an income 27 interest ends. 28 (2) “Beneficiary” includes, in the case of a decedent’s estate, an 29 heir, legatee, and devisee and, in the case of a trust, an income 30 beneficiary and a remainder beneficiary. 31 (3) “Fiduciary” means a personal representative or a trustee. The 32 term includes an executor, administrator, successor personal 33 representative, special administrator, and a person performing 34 substantially the same function. 35 (4) “Income” means money or property that a fiduciary receives 36 as current return from a principal asset. The term includes a 37 portion of receipts from a sale, exchange, or liquidation of a 38 principal asset, to the extent provided in Section 62-7-410 through 39 Section 62-7-424. 40 (5) “Income beneficiary” means a person to whom net income 41 of a trust is or may be payable. 42 (6) “Income interest” means the right of an income beneficiary 43 to receive all or part of net income, whether the terms of the trust1 [422] 19 1 require it to be distributed or authorize it to be distributed in the 2 trustee’s discretion. 3 (7) “Mandatory income interest” means the right of an income 4 beneficiary to receive net income that the terms of the trust require 5 the fiduciary to distribute. 6 (8) “Net income” means the total receipts allocated to income 7 during an accounting period minus the disbursements made from 8 income during the period, plus or minus transfers under this part to 9 or from income during the period. 10 (9) “Person” means an individual, a corporation, a business 11 trust, an estate, a trust, a partnership, a limited liability company, 12 an association, a joint venture, a government or a governmental 13 subdivision, an agency, or an instrumentality; a public corporation, 14 or other legal or commercial entity. 15 (10) “Principal” means property held in trust for distribution to a 16 remainder beneficiary when the trust terminates. 17 (11) “Remainder beneficiary” means a person entitled to receive 18 principal when an income interest ends. 19 (12) “Terms of a trust” means the manifestation of the intent of 20 a settlor or decedent with respect to the trust, expressed in a 21 manner that admits of its proof in a judicial proceeding, whether 22 by written or spoken words or by conduct. 23 (13) “Trustee” includes an original, additional, or successor 24 trustee, whether or not appointed or confirmed by a court. 25 26 Section 62-7-403. Allocation of receipts and disbursements. 27 28 (A) In allocating receipts and disbursements to or between 29 principal and income, and with respect to any matter within the 30 scope of Sections 62-7-405 through 62-7-409, a fiduciary: 31 (1) shall administer a trust or estate in accordance with the 32 terms of the trust or the will, even if there is a different provision 33 in this part; 34 (2) may administer a trust or estate by the exercise of a 35 discretionary power of administration given to the fiduciary by the 36 terms of the trust or the will, even if the exercise of the power 37 produces a result different from a result required or permitted by 38 this part; 39 (3) shall administer a trust or estate in accordance with this 40 part if the terms of the trust or the will do not contain a different 41 provision or do not give the fiduciary a discretionary power of 42 administration; and 1 [422] 20 1 (4) shall add a receipt or charge a disbursement to principal to 2 the extent that the terms of the trust and this part do not provide a 3 rule for allocating the receipt or disbursement to or between 4 principal and income. 5 (B) In exercising the power to adjust pursuant to Section 6 62-7-404(A) or a discretionary power of administration regarding a 7 matter within the scope of this part, whether granted by the terms 8 of a trust, a will, or this part, a fiduciary shall administer a trust or 9 estate impartially, based on what is fair and reasonable to all of the 10 beneficiaries, except to the extent that the terms of the trust or the 11 will clearly manifest an intention that the fiduciary shall or may 12 favor one or more of the beneficiaries. A determination in 13 accordance with this part is presumed to be fair and reasonable to 14 all of the beneficiaries. 15 16 Section 62-7-404. Adjustments between principal and 17 income. 18 19 (A) A trustee may adjust between principal and income to the 20 extent the trustee considers necessary if the trustee invests and 21 manages trust assets as a prudent investor, the terms of the trust 22 describe the amount that may or must be distributed to a 23 beneficiary by referring to the trust’s income, and the trustee 24 determines, after applying the provisions in Section 62-7-403(A), 25 that the trustee is unable to comply with Section 62-7-403(B). 26 (B) In deciding whether and to what extent to exercise the power 27 of adjustment in subsection (A), a trustee shall consider all factors 28 relevant to the trust and its beneficiaries, including: 29 (1) nature, purpose, and expected duration of the trust; 30 (2) intent of the settlor; 31 (3) identity and circumstances of the beneficiaries; 32 (4) needs for liquidity, regularity of income, and preservation 33 and appreciation of capital; 34 (5) assets held in the trust and the extent to which they consist 35 of financial assets, interests in closely held enterprises, tangible 36 and intangible personal property, or real property and the extent to 37 which an asset is used by a beneficiary, and whether an asset was 38 purchased by the trustee or received from the settlor; 39 (6) net amount otherwise allocated to income and the increase 40 or decrease in the value of the principal assets, which the trustee 41 may estimate as to assets for which market values are not readily 42 available; 1 [422] 21 1 (7) terms of the trust and whether and to what extent they give 2 the trustee the power to, or prohibit him from, invade principal or 3 accumulate income or prohibit the trustee from invading principal 4 or accumulating income, and the extent to which the trustee has 5 exercised a power from time to time to invade principal or 6 accumulate income; 7 (8) actual and anticipated effect of economic conditions on 8 principal and income and effects of inflation and deflation; and 9 (9) anticipated tax consequences of an adjustment. 10 (C) A trustee may not make an adjustment: 11 (1) that diminishes the income interest in a trust that requires 12 all of the income to be paid at least annually to a surviving spouse 13 and for which an estate tax or gift tax marital deduction is allowed, 14 in whole or in part, if the trustee did not have the power to make 15 the adjustment; 16 (2) that reduces the actuarial value of the income interest in a 17 trust to which a person transfers property with the intent to qualify 18 for a gift tax exclusion; 19 (3) that changes the amount payable to a beneficiary as a 20 fixed annuity or a fixed fraction of the value of the trust assets; 21 (4) from any amount that is permanently set aside for 22 charitable purposes under a will or the terms of a trust unless both 23 income and principal are so set aside; 24 (5) if possessing or exercising the power to make an 25 adjustment is determinative in causing an individual to be treated 26 as the owner of all or part of the trust for income tax purposes; 27 (6) if possessing or exercising the power to make an 28 adjustment is determinative in causing all or part of the trust assets 29 to be included for estate tax purposes in the estate of an individual 30 who has the power to remove a trustee or appoint a trustee, or 31 both; 32 (7) if the trustee is a beneficiary of the trust; or 33 (8) if the trustee is not a beneficiary, but the adjustment 34 benefits the trustee directly or indirectly. 35 (D) If subsection (C)(5), (6), (7), or (8) applies to a trustee and 36 there is more than one trustee, a cotrustee to whom the provision 37 does not apply may make the adjustment unless the exercise of the 38 power by the remaining trustee or trustees is not permitted by the 39 terms of the trust. 40 (E) A trustee may release the entire power of adjustment in 41 subsection (A) or may release only the power to adjust from 42 income to principal or the power to adjust from principal to 43 income if the trustee is uncertain about whether possessing or1 [422] 22 1 exercising the power causes a result described in subsections (C) 2 (1) through (6) or (C)(8) or if the trustee determines that 3 possessing or exercising the power may deprive the trust of a tax 4 benefit or impose a tax burden not contemplated in subsection (C). 5 The release may be permanent or for a specified period, including 6 a period measured by the life of an individual. 7 (F) Terms of a trust that limit the power of a trustee to make an 8 adjustment between principal and income do not affect the 9 application of this section unless it is clear from the terms of the 10 trust that the terms are intended to deny the trustee the power of 11 adjustment in subsection (A). 12 13 Section 62-7-405. Determinations of income and principal; 14 distributions upon death of decedent or end of an income 15 interest in a trust. 16 17 After a decedent dies, in the case of an estate, or after an income 18 interest in a trust ends, a fiduciary: 19 (1) of an estate or of a terminating income interest shall 20 determine the amount of net income and net principal receipts 21 received from property specifically given to a beneficiary pursuant 22 to Sections 62-7-407 through 62-7-430 which apply to trustees and 23 the provisions of item (5). The fiduciary shall distribute the net 24 income and net principal receipts to the beneficiary who is to 25 receive the specific property; 26 (2) shall determine the remaining net income of a decedent’s 27 estate or a terminating income interest pursuant to Sections 28 62-7-407 through 62-7-430 which apply to trustees and by: 29 (a) including in net income all income from property used to 30 discharge liabilities; 31 (b) paying from income or principal, in the fiduciary’s 32 discretion, fees of attorneys, accountants, and fiduciaries, court 33 costs and other expenses of administration, and interest on death 34 taxes; except that the fiduciary may pay those expenses from 35 income of property passing to a trust for which the fiduciary 36 claims an estate tax marital or charitable deduction only to the 37 extent that the payment of those expenses from income does not 38 cause the reduction or loss of the deduction; and 39 (c) paying from principal all other disbursements made or 40 incurred in connection with the settlement of a decedent’s estate or 41 the winding up of a terminating income interest, including debts, 42 funeral expenses, disposition of remains, family allowances, and 43 death taxes and related penalties that are apportioned to the estate1 [422] 23 1 or terminating income interest by the will, the terms of the trust, or 2 applicable law; 3 (3) shall distribute to a beneficiary who receives a pecuniary 4 amount outright the rate of interest or other amount provided by 5 the will or the terms of the trust. If the will or the terms of the trust 6 provide no interest amount, the beneficiary of a pecuniary amount 7 outright shall receive no interest or other income on the bequest for 8 one year after the first appointment of a personal representative. 9 Beginning one year after the first appointment of a personal 10 representative, and notwithstanding any other provision of law to 11 the contrary, the beneficiary of a pecuniary amount outright must 12 be treated as any other beneficiary under item (4). If a beneficiary 13 is to receive a pecuniary amount outright from a trust after an 14 income interest ends and no interest or other amount is provided 15 for by the terms of the trust, the fiduciary shall treat the pecuniary 16 amount as if it were required to be paid under a will and as if the 17 payment were being made beginning one year after the first 18 appointment of a personal representative; 19 (4) shall distribute the net income remaining after distributions 20 required by item (3) in the manner pursuant to Section 62-7-406 to 21 all other beneficiaries, including a beneficiary who receives a 22 pecuniary amount in trust, even if the beneficiary holds an 23 unqualified power to withdraw assets from the trust or other 24 presently exercisable general power of appointment over the trust; 25 and 26 (5) may not reduce principal or income receipts from property 27 described in item (1) because of a payment pursuant to Sections 28 62-7-424 and 62-7-425 to the extent that the will, the terms of the 29 trust, or applicable law requires the fiduciary to make the payment 30 from assets other than the property or to the extent that the 31 fiduciary recovers or expects to recover the payment from a third 32 party. The net income and principal receipts from the property are 33 determined by including all of the amounts the fiduciary receives 34 or pays with respect to the property, whether those amounts 35 accrued or became due before, on, or after the date of a decedent’s 36 death or an income interest’s terminating event, and by making a 37 reasonable provision for amounts that the fiduciary believes the 38 estate or terminating income interest may become obligated to pay 39 after the property is distributed. 40 41 Section 62-7-406. Determination and distribution of net 42 income. 431 [422] 24 1 (A) Each beneficiary described in Section 62-7-405(4) is 2 entitled to receive a portion of the net income equal to his 3 fractional interest in undistributed principal assets, using values as 4 of the distribution date. If a fiduciary makes more than one 5 distribution of assets to beneficiaries to whom this section applies, 6 each beneficiary, including one who does not receive part of the 7 distribution, is entitled, as of each distribution date, to the net 8 income the fiduciary has received after the date of death or 9 terminating event or earlier distribution date but has not distributed 10 as of the current distribution date. 11 (B) In determining a beneficiary’s share of net income, the: 12 (1) beneficiary is entitled to receive a portion of the net 13 income equal to his fractional interest in the undistributed principal 14 assets immediately before the distribution date, including assets 15 that later may be sold to meet principal obligations. 16 (2) fractional interest of the beneficiary in the undistributed 17 principal assets must be calculated without regard to property 18 specifically given to a beneficiary and property required to pay 19 pecuniary amounts not in trust. 20 (3) fractional interest of the beneficiary in the undistributed 21 principal assets must be calculated on the basis of the aggregate 22 value of those assets as of the distribution date without reducing 23 the value by any unpaid principal obligation; and 24 (4) distribution date for purposes of this section may be the 25 date as of which the fiduciary calculates the value of the assets if 26 that date is reasonably near the date on which assets are actually 27 distributed. 28 (C) If a fiduciary does not distribute all of the collected but 29 undistributed net income to each person as of a distribution date, 30 the fiduciary shall maintain appropriate records showing the 31 interest of each beneficiary in that net income. 32 (D) A trustee may apply the provisions of this section, to the 33 extent that the trustee considers it appropriate, to net gain or loss 34 realized after the date of death or terminating event or earlier 35 distribution date from the disposition of a principal asset if this 36 section applies to the income from the asset. 37 38 Section 62-7-407. Beginning and end of income interests. 39 40 (A) An income beneficiary is entitled to net income from the 41 date on which the income interest begins. An income interest 42 begins on the date specified in the terms of the trust or, if no date is1 [422] 25 1 specified, on the date an asset becomes subject to a trust or 2 successive income interest. 3 (B) An asset becomes subject to a trust on the date: 4 (1) it is transferred to the trust, in the case of an asset that is 5 transferred to a trust during the transferor’s life; 6 (2) the testator dies, in the case of an asset that becomes 7 subject to a trust by reason of a will, even if there is an intervening 8 period of administration of the estate; or 9 (3) the individual dies, in the case of an asset that is 10 transferred to a fiduciary by a third party because of the death of 11 the individual. 12 (C) An asset becomes subject to a successive income interest on 13 the day after the preceding income interest ends, as determined 14 pursuant to subsection (D), even if there is an intervening period of 15 administration to wind up the preceding income interest. 16 (D) An income interest ends on the day before an income 17 beneficiary dies or another terminating event occurs or on the last 18 day of a period during which there is no beneficiary to whom a 19 trustee may distribute income. 20 21 Section 62-7-408. Allocation of income receipts and 22 disbursements. 23 24 (A) A trustee shall allocate an income receipt or disbursement, 25 other than one subject to Section 62-7-405(1), to principal if its 26 due date occurs before a decedent dies in the case of an estate or 27 before an income interest begins in the case of a trust or successive 28 income interest. 29 (B) A trustee shall allocate an income receipt or disbursement to 30 income if its due date occurs on or after the date on which a 31 decedent dies or an income interest begins and it is a periodic due 32 date. An income receipt or disbursement must be treated as 33 accruing from day to day if its due date is not periodic or it has no 34 due date. The portion of the receipt or disbursement accruing 35 before the date on which a decedent dies or an income interest 36 begins must be allocated to principal and the balance must be 37 allocated to income. 38 (C) An item of income or an obligation is due on the date the 39 payer is required to make a payment. If a payment date is not 40 stated, there is no due date for the purposes of this part. 41 Distributions to shareholders or other owners from an entity 42 subject to Section 62-7-410 are considered due on the date fixed 43 by the entity for determining who is entitled to receive the1 [422] 26 1 distribution or, if no date is fixed, on the declaration date for the 2 distribution. A due date is periodic for receipts or disbursements 3 that must be paid at regular intervals under a lease or an obligation 4 to pay interest or if an entity customarily makes distributions at 5 regular intervals. 6 7 Section 62-7-409. Undistributed income. 8 9 (A) In this section, “undistributed income” means net income 10 received before the date on which an income interest ends. The 11 term does not include an item of income or expense that is due or 12 accrued or net income that has been added or must be added to 13 principal under the terms of the trust. 14 (B) When a mandatory income interest ends, the trustee shall 15 pay to a mandatory income beneficiary who survives that date, or 16 the estate of a deceased mandatory income beneficiary whose 17 death causes the interest to end, the beneficiary’s share of the 18 undistributed income that is not disposed of under the terms of the 19 trust, unless the beneficiary has an unqualified power to revoke 20 more than five percent of the trust immediately before the income 21 interest ends. In that case, the undistributed income from the 22 portion of the trust that may be revoked must be added to 23 principal. 24 (C) When the obligation of a trustee to pay a fixed annuity or a 25 fixed fraction of the value of the trust assets ends, the trustee shall 26 prorate the final payment if, and to the extent, required by 27 applicable law to accomplish a purpose of the trust or its settlor 28 relating to income, gift, estate, or other tax requirements. 29 30 Section 62-7-410. Allocation of receipts from an entity to 31 principal or income. 32 33 (A) In this section, “entity” means a corporation, partnership, 34 limited liability company, regulated investment company, real 35 estate investment trust, common trust fund, or other organization 36 in which a trustee has an interest other than a trust or estate subject 37 to Section 62-7-411, a business or activity to which Section 38 62-7-412 applies, or an asset-backed security to which Section 39 62-7-424 applies. 40 (B) Except as otherwise provided in this section, a trustee shall 41 allocate to income money received from an entity. 42 (C) A trustee shall allocate the following receipts from an entity 43 to principal: 1 [422] 27 1 (1) property other than money; 2 (2) money received in one distribution or a series of related 3 distributions in exchange for part or all of a trust’s interest in the 4 entity; 5 (3) money received in total or partial liquidation of the entity; 6 and 7 (4) money received from an entity that is a regulated 8 investment company or a real estate investment trust if the money 9 distributed is a capital gain dividend for federal income tax 10 purposes. 11 (D) Money is received in partial liquidation: 12 (1) to the extent that the entity, at or near the time of a 13 distribution, indicates that it is a distribution in partial liquidation; 14 or 15 (2) if the total amount of money and property received in a 16 distribution or series of related distributions is greater than twenty 17 percent of the entity’s gross assets of the entity, as shown by the 18 year-end financial statements immediately preceding the initial 19 receipt. 20 (E) Money is not received in partial liquidation, nor may it be 21 taken into account pursuant to subsection (D)(2), to the extent that 22 it does not exceed the amount of income tax that a trustee or 23 beneficiary must pay on taxable income of the entity that 24 distributes the money. 25 (F) A trustee may rely upon a statement made by an entity about 26 the source or character of a distribution if the statement is made at 27 or near the time of distribution by the board of directors or other 28 person or group of persons authorized to exercise powers to pay 29 money or transfer property comparable to those of a corporation’s 30 board of directors. 31 32 Section 62-7-411. Allocations of income and principal 33 received from a trust or an estate. 34 35 A trustee shall allocate to income an amount received as a 36 distribution of income from a trust or an estate in which the trust 37 has an interest other than a purchased interest, and shall allocate to 38 principal an amount received as a distribution of principal from 39 such a trust or estate. If a trustee purchases an interest in a trust 40 that is an investment entity, or a decedent or donor transfers an 41 interest in such a trust to a trustee, Section 62-7-410 or 62-7-424 42 applies to a receipt from the trust. 431 [422] 28 1 Section 62-7-412. Separate accounting for a business activity. 2 3 (A) If a trustee who conducts a business or other activity 4 determines that it is in the best interest of all the beneficiaries to 5 account separately for the business or activity instead of 6 accounting for it as part of the general accounting records of the 7 trust, the trustee may maintain separate accounting records for its 8 transactions, whether or not its assets are segregated from other 9 trust assets. 10 (B) A trustee who accounts separately for a business or other 11 activity may determine the extent to which its net cash receipts 12 must be retained for working capital, the acquisition or 13 replacement of fixed assets, and other reasonably foreseeable 14 needs of the business or activity, and the extent to which the 15 remaining net cash receipts are accounted for as principal or 16 income in the trust’s general accounting records. If a trustee sells 17 assets of the business or other activity, other than in the ordinary 18 course of the business or activity, the trustee shall account for the 19 net amount received as principal in the general accounting records 20 of the trust to the extent the trustee determines that the amount 21 received is no longer required in the conduct of the business. 22 (C) Activities for which a trustee may maintain separate 23 accounting records include: 24 (1) retail, manufacturing, service, and other traditional 25 business activities; 26 (2) farming; 27 (3) raising and selling livestock and other animals; 28 (4) management of rental properties; 29 (5) extraction of minerals and other natural resources; 30 (6) timber operations; and 31 (7) activities subject to Section 62-7-423. 32 33 Section 62-7-413. Allocations to principal. 34 35 A trustee shall allocate to principal: 36 (1) to the extent not allocated to income pursuant to this part, 37 assets received from a transferor during his lifetime, a decedent’s 38 estate, a trust with a terminating income interest, or a payer under a 39 contract naming the trust or its trustee as beneficiary; 40 (2) money or other property received from the sale, exchange, 41 liquidation, or change in form of a principal asset, including 42 realized profit; 1 [422] 29 1 (3) amounts recovered from third parties to reimburse the trust 2 because of disbursements described in Section 62-7-426(A)(7) or 3 for other reasons to the extent not based on the loss of income; 4 (4) proceeds of property taken by eminent domain, but a 5 separate award made for the loss of income with respect to an 6 accounting period during which a current income beneficiary had a 7 mandatory income interest is income; 8 (5) net income received in an accounting period during which 9 there is No beneficiary to whom a trustee may or must distribute 10 income; and 11 (6) other receipts as provided in Sections 62-7-417 through 12 62-7-424. 13 14 Section 62-7-414. Accounting for receipts from rental 15 property. 16 17 To the extent that a trustee accounts for receipts from rental 18 property pursuant to this section, the trustee shall allocate to 19 income an amount received as rent of real or personal property, 20 including an amount received for cancellation or renewal of a 21 lease. An amount received as a refundable deposit, including a 22 security deposit or a deposit applied as rent for future periods, 23 must be added to principal and held subject to the terms of the 24 lease and is not available for distribution to a beneficiary until the 25 trustee’s contractual obligations have been satisfied with respect to 26 that amount. 27 28 Section 62-7-415. Allocation of interest as income; allocation 29 of proceeds from disposition of an obligation as principal; 30 exceptions. 31 32 (A) An amount received as interest, whether determined at a 33 fixed, variable, or floating rate, on an obligation to pay money to 34 the trustee, including an amount received as consideration for 35 prepaying principal, must be allocated to income without provision 36 for amortization of premium. 37 (B) A trustee shall allocate to principal an amount received from 38 the sale, redemption, or other disposition of an obligation to pay 39 money to the trustee more than one year after it is purchased or 40 acquired by the trustee, including an obligation whose purchase 41 price or value when it is acquired is less than its value at maturity. 42 If the obligation matures within one year after it is purchased or 43 acquired by the trustee, an amount received in excess of its1 [422] 30 1 purchase price or its value when acquired by the trust must be 2 allocated to income. 3 (C) This section does not apply to an obligation subject to 4 Section 62-7-418, 62-7-419, 62-7-420, 62-7-421, or 62-7-424. 5 6 Section 62-7-416. Allocation of proceeds of insurance 7 contracts; exception. 8 9 (A) Except as otherwise provided in subsection (B), a trustee 10 shall allocate to principal the proceeds of a life insurance policy or 11 other contract in which the trust or its trustee is named as 12 beneficiary, including a contract that insures the trust or its trustee 13 against loss for damage to, destruction of, or loss of title to a trust 14 asset. The trustee shall allocate dividends on an insurance policy to 15 income if the premiums on the policy are paid from income, and to 16 principal if the premiums are paid from principal. 17 (B) A trustee shall allocate to income proceeds of a contract that 18 insures the trustee against loss of occupancy or other use by an 19 income beneficiary, loss of income, or, subject to Section 20 62-7-412, loss of profits from a business. 21 (C) This section does not apply to a contract subject to Section 22 62-7-418. 23 24 Section 62-7-417. Insubstantial allocations. 25 26 If a trustee determines that an allocation between principal and 27 income required by Section 62-7-418, 62-7-419, 62-7-420, 28 62-7-421, or 62-7-424 is insubstantial, the trustee may allocate the 29 entire amount to principal unless one of the circumstances 30 provided in Section 62-7-404(C) applies to the allocation. This 31 power may be exercised by a cotrustee in the circumstances 32 provided in Section 62-7-404(D) and may be released for the 33 reasons and in the manner provided in Section 62-7-404(E). An 34 allocation is presumed to be insubstantial if: 35 (1) the amount of the allocation increases or decreases net 36 income in an accounting period, as determined before the 37 allocation, by less than ten percent; or 38 (2) the value of the asset producing the receipt for which the 39 allocation is made is less than ten percent of the total value of the 40 assets of the trust at the beginning of the accounting period. 411 [422] 31 1 Section 62-7-418. Allocation of payments; interest, 2 dividends, or payments made instead of interest or dividends; 3 marital deductions; exception. 4 5 (A) In this section, “payment” means a payment that a trustee 6 may receive over a fixed number of years or during the life of one 7 or more individuals because of services rendered or property 8 transferred to the payer in exchange for future payments. The term 9 includes a payment made in money or property from the payer’s 10 general assets or from a separate fund created by the payer, 11 including a private or commercial annuity, an individual retirement 12 account, and a pension, profit-sharing, stock-bonus, or 13 stock-ownership plan. 14 (B) To the extent that a payment is characterized as interest or a 15 dividend or a payment made instead of interest or a dividend, a 16 trustee shall allocate it to income. The trustee shall allocate to 17 principal the balance of the payment and any other payment 18 received in the same accounting period that is not characterized as 19 interest, a dividend, or an equivalent payment. 20 (C) If part of a payment is not characterized as interest, a 21 dividend, or an equivalent payment, and all or part of the payment 22 is required to be made, a trustee shall allocate to income ten 23 percent of the part that is required to be made during the 24 accounting period and the balance to principal. If a part of a 25 payment is not required to be made or the payment received is the 26 entire amount to which the trustee is entitled, the trustee shall 27 allocate the entire payment to principal. For purposes of this 28 subsection, a payment is not “required to be made” to the extent 29 that it is made because the trustee exercises a right of withdrawal. 30 (D) If, to obtain an estate tax marital deduction for a trust, a 31 trustee must allocate more of a payment to income than provided 32 for by this section, the trustee shall allocate to income the 33 additional amount necessary to obtain the marital deduction. 34 (E) This section does not apply to payments subject to Section 35 62-7-419. 36 37 Section 62-7-419. Liquidating assets. 38 39 (A) In this section, “liquidating asset” means an asset whose 40 value diminishes or terminates because the asset is expected to 41 produce receipts for a period of limited duration. The term 42 includes a leasehold, patent, copyright, royalty right, and right to 43 receive payments during a period of more than one year under an1 [422] 32 1 arrangement that does not provide for the payment of interest on 2 the unpaid balance. The term does not include a payment subject to 3 Section 62-7-418, resources subject to Section 62-7-420, timber 4 subject to Section 62-7-421, an activity subject to Section 5 62-7-423, an asset subject to Section 62-7-424, or any asset for 6 which the trustee establishes a reserve for depreciation pursuant to 7 Section 62-7-427. 8 (B) A trustee shall allocate to income ten percent of the receipts 9 from a liquidating asset and the balance to principal. 10 11 Section 62-7-420. Allocation of receipts from interests in 12 minerals or other natural resources. 13 14 (A) To the extent that a trustee accounts for receipts from an 15 interest in minerals or other natural resources pursuant to this 16 section, the trustee shall allocate them if: 17 (1) received as nominal delay rental or nominal annual rent on 18 a lease, a receipt must be allocated to income; 19 (2) received from a production payment, a receipt must be 20 allocated to income if and to the extent that the agreement creating 21 the production payment provides a factor for interest or its 22 equivalent. The balance must be allocated to principal; 23 (3) an amount received as a royalty, shut-in-well payment, 24 take-or-pay payment, bonus, or delay rental is more than nominal, 25 ninety percent must be allocated to principal and the balance to 26 income; 27 (4) an amount is received from a working interest or any other 28 interest not otherwise provided for in this subsection, ninety 29 percent of the net amount received must be allocated to principal 30 and the balance to income. 31 (B) An amount received on account of an interest in water that is 32 renewable must be allocated to income. If the water is not 33 renewable, ninety percent of the amount must be allocated to 34 principal and the balance to income. 35 (C) This part applies whether or not a decedent or donor was 36 extracting minerals, water, or other natural resources before the 37 interest became subject to the trust. 38 (D) If a trust owns an interest in minerals, water, or other natural 39 resources on the effective date of this part, the trustee may allocate 40 receipts from the interest as provided in this part or in the manner 41 used by the trustee before the effective date of this part. If the trust 42 acquires an interest in minerals, water, or other natural resources1 [422] 33 1 after the effective date of this part, the trustee shall allocate 2 receipts from the interest as provided in this part. 3 4 Section 62-7-421. Allocation of receipts from sale of timber 5 and related products. 6 7 (A) To the extent that a trustee accounts for receipts from the 8 sale of timber and related products pursuant to this section, the 9 trustee shall allocate the net receipts to: 10 (1) income, to the extent that the amount of timber removed 11 from the land does not exceed the rate of growth of the timber 12 during the accounting periods in which a beneficiary has a 13 mandatory income interest; 14 (2) principal, to the extent that the amount of timber removed 15 from the land exceeds the rate of growth of the timber or the net 16 receipts are from the sale of standing timber; 17 (3) or between income and principal, if the net receipts are 18 from the lease of timberland or from a contract to cut timber from 19 land owned by a trust, by determining the amount of timber 20 removed from the land under the lease or contract and applying 21 items (1) and (2); or 22 (4) principal, to the extent that advance payments, bonuses, 23 and other payments are not otherwise allocated pursuant to this 24 subsection. 25 (B) In determining net receipts to be allocated pursuant to 26 subsection ( A), a trustee shall deduct and transfer to principal a 27 reasonable amount for depletion. 28 (C) This part applies whether or not a decedent or transferor was 29 harvesting timber from the property before it became subject to the 30 trust. 31 (D) If a trust owns an interest in timberland on the effective date 32 of this part, the trustee may allocate net receipts from the sale of 33 timber and related products as provided in this part or in the 34 manner used by the trustee before the effective date of this part. If 35 the trust acquires an interest in timberland after the effective date 36 of this part, the trustee shall allocate net receipts from the sale of 37 timber and related products as provided in this part. 38 39 Section 62-7-422. Marital deduction adjustments. 40 41 (A) If a marital deduction is allowed for all or part of a trust 42 whose assets consist substantially of property that does not provide 43 the surviving spouse with sufficient income from or use of the trust1 [422] 34 1 assets, and if the amounts that the trustee transfers from principal 2 to income pursuant to Section 62-7-404 and distributes to the 3 spouse from principal pursuant to the terms of the trust are 4 insufficient to provide the spouse with the beneficial enjoyment 5 required to obtain the marital deduction, the spouse may require 6 the trustee to make property productive of income, convert 7 property within a reasonable time, or exercise the power in Section 8 62-7-404(A). The trustee may decide which action or combination 9 of actions to take. 10 (B) If subsection (A) is inapplicable, proceeds from the sale or 11 other disposition of an asset are principal without regard to the 12 amount of income the asset produces during any accounting 13 period. 14 15 Section 62-7-423. Allocation of derivatives; options. 16 17 (A) In this section, “derivative” means a contract or financial 18 instrument or a combination of contracts and financial instruments 19 which gives a trust the right or obligation to participate in some or 20 all changes in the price of a tangible or intangible asset or group of 21 assets, or changes in a rate, an index of prices or rates, or other 22 market indicator for an asset or a group of assets. 23 (B) To the extent that a trustee does not account pursuant to 24 Section 62-7-412 for transactions in derivatives, the trustee shall 25 allocate to principal receipts from and disbursements made in 26 connection with those transactions. 27 (C) If a trustee grants an option to buy property from the trust, 28 whether or not the trust owns the property when the option is 29 granted, grants an option that permits another person to sell 30 property to the trust, or acquires an option to buy property for the 31 trust or an option to sell an asset owned by the trust, and the trustee 32 or other owner of the asset is required to deliver the asset if the 33 option is exercised, an amount received for granting the option 34 must be allocated to principal. An amount paid to acquire the 35 option must be paid from principal. A gain or loss realized upon 36 the exercise of an option, including an option granted to a settlor of 37 the trust for services rendered, must be allocated to principal. 38 39 Section 62-7-424. Allocation of payments related to 40 asset-backed securities. 41 42 (A) In this section, “asset-backed security” means an asset 43 whose value is based upon the right it gives the owner to receive1 [422] 35 1 distributions from the proceeds of financial assets that provide 2 collateral for the security. The term includes an asset that gives the 3 owner the right to receive from the collateral financial assets only 4 the interest or other current return or only the proceeds other than 5 interest or current return. The term does not include an asset 6 subject to Section 62-7-409 or 62-7-418. 7 (B) If a trust receives a payment from interest or other current 8 return and from other proceeds of the collateral financial assets, 9 the trustee shall allocate to income the portion of the payment 10 which the payer identifies as being from interest or other current 11 return and shall allocate the balance of the payment to principal. 12 (C) If a trust receives one or more payments in exchange for the 13 entire interest in an asset-backed security in one accounting period, 14 the trustee shall allocate the payments to principal. If a payment is 15 one of a series of payments that results in the liquidation of the 16 interest of the trust in the security over more than one accounting 17 period, the trustee shall allocate ten percent of the payment to 18 income and the balance to principal. 19 20 Section 62-7-425. Disbursements from income. 21 22 A trustee shall make the following disbursements from income 23 to the extent that they are not disbursements subject to Section 24 62-7-405(2)(b) or (c): 25 (1) one-half of the regular compensation of the trustee and of 26 any person providing investment advisory or custodial services to 27 the trustee; 28 (2) one-half of all expenses for accountings, judicial 29 proceedings, or other matters that involve both the income and 30 remainder interests; 31 (3) all of the other ordinary expenses incurred in connection 32 with the administration, management, or preservation of trust 33 property and the distribution of income, including interest, 34 ordinary repairs, regularly recurring taxes assessed against 35 principal, and expenses of a proceeding or other matter that 36 concerns primarily the income interest; and 37 (4) recurring premiums on insurance covering the loss of a 38 principal asset or the loss of income from or use of the asset. 39 40 Section 62-7-426. Disbursements from principal. 41 42 (A) A trustee shall make the following disbursements from 43 principal: 1 [422] 36 1 (1) the remaining one-half of the disbursements provided in 2 Section 62-7-425(1) and (2); 3 (2) all of the trustee’s compensation calculated on principal as 4 a fee for acceptance, distribution, or termination, and 5 disbursements made to prepare property for sale; 6 (3) payments on the principal of a trust debt; 7 (4) expenses of a proceeding that concerns primarily 8 principal, including a proceeding to construe the trust or to protect 9 the trust or its property; 10 (5) premiums paid on a policy of insurance not provided in 11 Section 62-7-425(4) of which the trust is the owner and 12 beneficiary; 13 (6) estate, inheritance, and other transfer taxes, including 14 penalties, apportioned to the trust; and 15 (7) disbursements related to environmental matters, including 16 reclamation, assessing environmental conditions, remedying and 17 removing environmental contamination, monitoring remedial 18 activities and the release of substances, preventing future releases 19 of substances, collecting amounts from persons liable or 20 potentially liable for the costs of those activities, penalties imposed 21 under environmental laws or regulations and other payments made 22 to comply with those laws or regulations, statutory or common law 23 claims by third parties, and defending claims based on 24 environmental matters. 25 (B) If a principal asset is encumbered with an obligation that 26 requires income from that asset to be paid directly to the creditor, 27 the trustee shall transfer from principal to income an amount equal 28 to the income paid to the creditor in reduction of the principal 29 balance of the obligation. 30 31 Section 62-7-427. Transfer to principal of cash receipts from 32 asset subject to depreciation. 33 34 (A) In this section, “depreciation” means a reduction in value 35 due to wear, tear, decay, corrosion, or gradual obsolescence of a 36 fixed asset having a useful life of more than one year. 37 (B) A trustee may transfer to principal a reasonable amount of 38 the net cash receipts from a principal asset that is subject to 39 depreciation, but may not transfer any amount for depreciation: 40 (1) of that portion of real property used or available for use by 41 a beneficiary as a residence or of tangible personal property held or 42 made available for the personal use or enjoyment of a beneficiary; 43 (2) during the administration of a decedent’s estate; or 1 [422] 37 1 (3) under this section if the trustee is accounting pursuant to 2 Section 62-7-412 for the business or activity in which the asset is 3 used. 4 (C) An amount transferred to principal need not be held as a 5 separate fund. 6 7 Section 62-7-428. Future principal disbursements reserves. 8 9 (A) If a trustee makes or expects to make a principal 10 disbursement described in this section, the trustee may transfer an 11 appropriate amount from income to principal in one or more 12 accounting periods to reimburse principal or to provide a reserve 13 for future principal disbursements. 14 (B) A principal disbursement for purposes of this section 15 includes the following, but only to the extent that the trustee has 16 not been, and does not expect to be, reimbursed by a third party: 17 (1) an amount chargeable to income but paid from principal 18 because it is unusually large, including extraordinary repairs; 19 (2) a capital improvement to a principal asset, whether in the 20 form of changes to an existing asset or the construction of a new 21 asset, including special assessments; 22 (3) a disbursement made to prepare property for rental, 23 including tenant allowances, leasehold improvements, and broker’s 24 commissions; 25 (4) a periodic payment on an obligation secured by a principal 26 asset to the extent that the amount transferred from income to 27 principal for depreciation is less than the periodic payments; and 28 (5) a disbursement described in Section 62-7-426(A)(7). 29 (C) If the asset whose ownership gives rise to the disbursements 30 becomes subject to a successive income interest after an income 31 interest ends, a trustee may continue to transfer amounts from 32 income to principal as provided in subsection (A). 33 34 Section 62-7-429. Payment of taxes from income and 35 principal. 36 37 (A) A tax required to be paid by a trustee based on receipts 38 allocated to income must be paid from income. 39 (B) A tax required to be paid by a trustee based on receipts 40 allocated to principal must be paid from principal, even if the tax is 41 called an income tax by the taxing authority. 42 (C) A tax required to be paid by a trustee on the trust’s share of 43 the taxable income of the entity must be paid proportionately from:1 [422] 38 1 (1) income, to the extent that receipts from the entity are 2 allocated to income; and 3 (2) principal, to the extent that: 4 (a) receipts from the entity are allocated to principal; and 5 (b) the trust’s share of the taxable income of the entity 6 exceeds the total receipts described in items (1) and (2)(a). 7 (D) For purposes of this section, receipts allocated to principal 8 or income must be reduced by the amount distributed to a 9 beneficiary from principal or income for which the trust receives a 10 deduction in calculating the tax. 11 12 Section 62-7-430. Certain adjustments between principal and 13 income; reduction of marital deduction or charitable 14 contribution deduction. 15 16 (A) A fiduciary may make adjustments between principal and 17 income to offset the shifting of economic interests or tax benefits 18 between income beneficiaries and remainder beneficiaries which 19 arise from: 20 (1) elections and decisions, other than those provided in 21 subsection (B), that the fiduciary makes from time to time 22 regarding tax matters; 23 (2) an income tax or any other tax that is imposed upon the 24 fiduciary or a beneficiary as a result of a transaction involving or a 25 distribution from the estate or trust; or 26 (3) the ownership by an estate or trust of an interest in an 27 entity whose taxable income, whether or not distributed, is 28 includable in the taxable income of the estate, trust, or a 29 beneficiary. 30 (B) If the amount of an estate tax marital deduction or charitable 31 contribution deduction is reduced because a fiduciary deducts an 32 amount paid from principal for income tax purposes instead of 33 deducting it for estate tax purposes, and as a result estate taxes 34 paid from principal are increased and income taxes paid by an 35 estate, trust, or beneficiary are decreased, each estate, trust, or 36 beneficiary that benefits from the decrease in income tax shall 37 reimburse the principal from which the increase in estate tax is 38 paid. The total reimbursement must equal the increase in the estate 39 tax to the extent that the principal used to pay the increase would 40 have qualified for a marital deduction or charitable contribution 41 deduction but for the payment. The proportionate share of the 42 reimbursement for each estate, trust, or beneficiary whose income 43 taxes are reduced must be the same as its proportionate share of the1 [422] 39 1 total decrease in income tax. An estate or trust shall reimburse 2 principal from income. 3 4 Section 62-7-431. Application and construction of Uniform 5 Principal and Income Act. 6 7 In applying and construing this Uniform Act, consideration must 8 be given to the need to promote uniformity of the law with respect 9 to its subject matter among states that enact it. 10 11 Section 62-7-432. Discretionary power of a fiduciary. 12 13 (A) A court must not change a fiduciary’s decision to exercise or 14 not to exercise a discretionary power conferred by this part unless 15 it determines that the decision was an abuse of the fiduciary’s 16 discretion. A court shall not determine that a fiduciary abused its 17 discretion merely because the court would have exercised the 18 discretion in a different manner or would not have exercised the 19 discretion. 20 (B) The decisions subject to subsection (A) include a 21 determination: 22 (1) pursuant to Section 62-7-404(A) of whether and to what 23 extent an amount should be transferred from principal to income or 24 from income to principal; and 25 (2) of the factors that are relevant to the trust and its 26 beneficiaries, the extent to which they are relevant, and the weight, 27 if any, to be given to the relevant factors, in deciding whether and 28 to what extent to exercise the power in Section 62-7-404(A). 29 (C) If a court determines that a fiduciary has abused its 30 discretion, the remedy is to restore the income and remainder 31 beneficiaries to the positions they would have occupied if the 32 fiduciary had not abused its discretion, according to the following 33 rules: 34 (1) to the extent that the abuse of discretion has resulted in no 35 distribution to a beneficiary or a distribution that is too small, the 36 court must require the fiduciary to distribute from the trust to the 37 beneficiary an amount that the court determines will restore the 38 beneficiary, in whole or in part, to his or her appropriate position; 39 (2) to the extent that the abuse of discretion has resulted in a 40 distribution to a beneficiary that is too large, the court must restore 41 the beneficiaries, the trust, or both, in whole or in part, to their 42 appropriate positions by requiring the fiduciary to withhold an 43 amount from one or more future distributions to the beneficiary1 [422] 40 1 who received the distribution that was too large or requiring that 2 beneficiary to return some or all of the distribution to the trust; 3 (3) to the extent that the court is unable, after applying items 4 (1) and (2), to restore the beneficiaries, the trust, or both, to the 5 positions they would have occupied if the fiduciary had not abused 6 its discretion, the court may require the fiduciary to pay an 7 appropriate amount from its own funds to one or more of the 8 beneficiaries or the trust, or both. 9 (D) Upon a petition by the fiduciary, the court having 10 jurisdiction over the trust or estate must determine whether a 11 proposed exercise or nonexercise by the fiduciary of a 12 discretionary power in this part results in an abuse of the 13 fiduciary’s discretion. If the petition describes the proposed 14 exercise or nonexercise of the power and contains sufficient 15 information to inform the beneficiaries of the reasons for the 16 proposal, the facts upon which the fiduciary relies, and an 17 explanation of how the income and remainder beneficiaries are 18 affected by the proposed exercise or nonexercise of the power, a 19 beneficiary who challenges the proposed exercise or nonexercise 20 has the burden of establishing that it will result in an abuse of 21 discretion. 22 23 Section 62-7-501. Trustees shall file copy of trust instrument 24 with Attorney General. 25 26 The trustees of charitable trusts in existence on July 1, 1953, or 27 thereafter created, under the laws of this State, shall file a certified 28 copy of the trust instrument with the Attorney General within 29 ninety days after such date or within sixty days after the creation of 30 the trust, whichever is later. 31 32 Section 62-7-502. Trustees shall file annual reports with 33 Attorney General. 34 35 Trustees of Charitable trusts shall submit an annual report to the 36 Attorney General, which shall include a complete financial 37 statement relating to the trust property during the preceding year, a 38 summary of the acts of the trustees in their capacity as such, the 39 name and address of each trustee, and, if a trustee is a corporation, 40 the name and address of each director and officer thereof. The first 41 report submitted shall include an itemized statement of the 42 property which passed into the hands of the trustees upon the 43 creation of the trust, and every report shall include a statement of1 [422] 41 1 the trust property in the hands of the trustee both at the beginning 2 and the end of the year for which the report is made. 3 4 Section 62-7-503. Action by Attorney General to compel 5 compliance. 6 7 Upon the failure of the trustees to discharge their duties under 8 this part, or when it appears that the trustees are not properly 9 discharging the duties imposed upon them by the trust, the 10 Attorney General shall bring an action to compel their compliance 11 with this part or to compel them to discharge the duties imposed 12 upon them by trust, as the case may be. 13 14 Section 62-7-504. Rules and regulations of Attorney General. 15 16 The Attorney General may make such rules and regulations, 17 relating to the time for submission of, and the information to be 18 contained in, the reports required by this part [Sections 62-7-501 et 19 seq.]. 20 21 Section 62-7-505. Exemptions. 22 23 This part [Sections 62-7-501 et seq.] shall not apply to trusts or 24 trustees of the following: Churches, cemeteries, orphanages 25 operated in conjunction with churches, hospitals, colleges, or 26 universities, or school districts, nor shall it apply to banking 27 institutions which act as trustees under the supervision of the State 28 Board of Financial Institutions or under the supervision of federal 29 banking agencies. 30 31 Section 62-7-506. Trustees shall not subject trust to certain 32 federal taxes on private foundations. 33 34 All trustees of any trust governed by the laws of this State 35 whose governing instrument does not expressly provide that this 36 section shall not apply to such trust are required to act or to refrain 37 from acting so as not to subject the trust to the taxes imposed by 38 Sections Sections 4941, 4942, 4943, 4944, or 4945 of the Internal 39 Revenue Code of 1954, or corresponding provisions of any 40 subsequent United States internal revenue law. 41 42 Sections 4941 through 4945 of the Internal Revenue Code of 43 1954, see 26 USCA Sections 4941 through 4945. 1 [422] 42 1 2 Section 62-7-507. Provisions not to cause forfeiture or 3 reversion of trust property. 4 5 Nothing contained in Sections 33-31-150, 33-31-151, and 6 62-7-506 may be construed to cause a forfeiture or reversion of 7 any of the property of a trust which is subject to such sections, or 8 to make the purposes of the trust impossible of accomplishment. 9 10 Section 62-7-601. Sale of notes and other evidences of 11 indebtedness. 12 13 All fiduciaries may sell to the highest bidder, as other personalty 14 is sold, all notes, accounts, and other evidences of indebtedness 15 coming into their hands as such when such evidences of 16 indebtedness are appraised as or have become doubtful or 17 worthless. 18 19 Section 62-7-602. Deposit of securities in clearing 20 corporation by fiduciary or custodian. 21 22 (a) Notwithstanding any other provision of law, any fiduciary 23 holding securities in its fiduciary capacity, any bank, trust 24 company, or private banker holding securities as a custodian or 25 managing agent, and any bank, trust company, or private banker 26 holding securities as custodian for a fiduciary, is authorized to 27 deposit or arrange for the deposit of such securities in a clearing 28 corporation (as defined in Article 8 of the Uniform Commercial 29 Code). When such securities are so deposited, certificates 30 representing securities of the same class of the same issuer may be 31 merged and held in bulk in the name of the nominee of such 32 clearing corporation with any other such securities deposited in 33 such clearing corporation by any person regardless of the 34 ownership of such securities, and certificates of small 35 denomination may be merged into one or more certificates of 36 larger denomination. The records of such fiduciary and the 37 records of such bank, trust company, or private banker acting as 38 custodian, as managing agent or as custodian for a fiduciary shall 39 at all times show the name of the party for whose account the 40 securities are so deposited. Ownership of, and other interests in, 41 such securities may be transferred by bookkeeping entry on the 42 books of such clearing corporation without physical delivery of 43 certificates representing such securities. A bank, trust company, or1 [422] 43 1 private banker so depositing securities pursuant to this section 2 shall be subject to such regulations as in the case of state-chartered 3 institutions, the Board of Financial Institutions, and, in the case of 4 national banking associations, The Comptroller of the Currency 5 may from time to time issue. A bank, trust company, or private 6 banker acting as custodian for a fiduciary shall, on demand by the 7 fiduciary, certify in writing to the fiduciary the securities so 8 deposited by such bank, trust company, or private banker in such 9 clearing corporation for the account of such fiduciary. A fiduciary 10 shall, on demand by any party to a judicial proceeding for the 11 settlement of such fiduciary’s account or on demand by the 12 attorney for such party, certify in writing to such party the 13 securities deposited by such fiduciary in such clearing corporation 14 for its account as such fiduciary. 15 (b) This section shall apply to any fiduciary holding securities in 16 its fiduciary capacity, and to any bank, trust company, or private 17 banker holding securities as a custodian, managing agent, or 18 custodian for a fiduciary, acting on April 17, 1973, or who 19 thereafter may act regardless of the date of the agreement, 20 instrument, or court order by which it is appointed and regardless 21 of whether or not such fiduciary, custodian, managing agent, or 22 custodian for a fiduciary owns capital stock of such clearing 23 corporation. 24 25 Section 62-7-603. Limits on powers of fiduciary; merger of 26 legal and equitable title to property; application of section. 27 28 (A) Unless application of this section is clearly and convincingly 29 negated in the will, the trust document or a written instrument 30 appointing a fiduciary, the following provisions apply to any 31 fiduciary, whether acting as a sole fiduciary or as a co-fiduciary: 32 (1) Any power conferred upon the fiduciary, in his capacity as 33 a fiduciary (and not including any power conferred upon him in his 34 capacity as a beneficiary), which would, except for this section, 35 constitute, in whole or in part, a general power of appointment 36 cannot be exercised by him in favor of himself, his estate, his 37 creditors, or the creditors of his estate. 38 (a) The fiduciary can, however, exercise the power in favor 39 of someone other than himself, his estate, his creditors and the 40 creditors of his estate. 41 (b) If a power comes within item (1) and the power is 42 conferred upon two or more fiduciaries, it can be exercised by the 43 fiduciary or the fiduciaries who are not disqualified from1 [422] 44 1 exercising the power as if they were the only fiduciary or 2 fiduciaries. 3 (c) If all of the serving fiduciaries are disqualified from 4 exercising a power, the court that would have jurisdiction to 5 appoint a fiduciary under the instrument, if there were no fiduciary 6 currently serving, shall exercise, or shall appoint a special 7 fiduciary whose only power is to exercise, the power that cannot 8 be exercised by the other fiduciaries by reason of item (1). 9 (d) For purposes of this section, “Internal Revenue Code” 10 has the same meaning as in Section 12-7-20(11). 11 (2) Any power conferred upon the fiduciary in his capacity as 12 a fiduciary to allocate receipts and expenses as between income 13 and principal in his own favor, must be exercised in accordance 14 with the provisions of the Revised Uniform Principal and Income 15 Act, as contained in this South Carolina Probate Code. 16 (3) If a person holds legal title to property in a fiduciary 17 capacity and also has an equitable or beneficial title in the same 18 property, either by transfer, by declaration, or by operation of law, 19 no merger of the legal and the equitable titles shall occur unless: 20 (a) the fiduciary is the sole fiduciary and is also the sole 21 current and future beneficiary; and 22 (b) the legal title and the equitable title are of the same 23 quality and duration. If either one of these conditions is not met, 24 no merger may occur and the fiduciary relationship does not 25 terminate. 26 (B) Items (1) and (2) of subsection (A) of this section do not 27 apply to revocable trusts in which the fiduciary of the trust is also 28 the creator of the trust and is living. 29 (C) This section applies to all fiduciary relationships in 30 existence on the effective date of this section and to all other 31 fiduciary relationships that come into existence after the effective 32 date of this section. The provisions of subsection (A) of this 33 section are declaratory of existing common law and neither modify 34 nor amend existing fiduciary relationships. 35 36 Section 62-7-604. Reduction of proportionate value or share 37 of investment. 38 39 No fiduciary is required to reduce the proportionate value or 40 share of any single investment as it relates to the entire value, 41 share, or kind of the estate solely for the purpose of reducing the 42 investment risk that may be associated with the estate, if the value1 [422] 45 1 or share of the single investment, considered alone, is of prudent 2 investment quality as provided in Section 62-7-302. 3 4 Section 62-7-701. Short title; citation. 5 6 This Part may be cited as the Uniform Trustees’ Powers Act. 7 8 Section 62-7-702. Definitions. 9 10 As used in this Part: 11 (1) “trust” means an express trust created by a trust instrument, 12 including a will, whereby a trustee has the duty to administer a 13 trust asset for the benefit of a named or otherwise described 14 income or principal beneficiary, or both; “trust” does not include a 15 resulting or constructive trust, a business trust which provides for 16 certificates to be issued to the beneficiary, an investment trust, a 17 voting trust, a security instrument, a trust created by the judgment 18 or decree of a court, a liquidation trust, or a trust for the primary 19 purpose of paying dividends, interests, interest coupons, salaries, 20 wages, pensions or profits, or employee benefits of any kind, an 21 instrument wherein a person is nominee or escrowee for another, a 22 trust created in deposits in any financial institutions, or other trust 23 the nature of which does not admit of general trust administration; 24 (2) “prudent man” means a trustee whose exercise of judgment 25 and care complies with the requirements of Section 62-7-302. 26 27 Section 62-7-703. Powers of trustees, generally; 28 incorporation of provisions by non-trust instruments. 29 30 (a) The trustee has all powers conferred upon him by the 31 provisions of this Part unless limited in the trust instrument. 32 (b) An instrument which is not a trust under Section 62-7-702(1) 33 may incorporate any provision of this Part by reference. 34 35 Section 62-7-704. Powers of trustees conferred by this Part. 36 37 (a) From time of creation of the trust until final distribution of 38 the assets of the trust, a trustee has the power to perform, without 39 court authorization, every act which a prudent man would perform 40 for the purposes of the trust including, but not limited to, the 41 powers specified in subsection (c). 42 (b) In the exercise of his powers including the powers granted 43 by this Part, a trustee has a duty to act with due regard to his1 [422] 46 1 obligation as a fiduciary and is subject to the standards provided in 2 Section 62-7-302, including a duty to give consideration to 3 available tax exemptions, deductions, or credits for tax purposes. 4 “Tax” includes, but is not limited to, any federal, state, or local 5 income, gift, estate, inheritance, generation-skipping transfer, or 6 other wealth transfer tax. 7 (c) A trustee has the power, subject to subsections (a) and (b): 8 (1) to collect, hold, and retain trust assets received from a 9 trustor until, in the judgment of the trustee, disposition of the 10 assets should be made; and the assets may be retained even though 11 they include an asset in which the trustee is personally interested; 12 (2) to receive additions to the assets of the trust; 13 (3) to continue or participate in the operation of any business 14 or other enterprise, and to effect incorporation, dissolution, or 15 other change in the form of the organization of the business or 16 enterprise; 17 (4) to acquire an undivided interest in a trust asset in which 18 the trustee, in any trust capacity, or anyone else, holds an 19 undivided interest; 20 (5) to invest and reinvest trust assets in accordance with the 21 provisions of the trust or as provided by law; 22 (6) to deposit trust funds in a bank, including a bank operated 23 by the trustee; 24 (7) to acquire or dispose of an asset, for cash or on credit, at 25 public or private sale; and to manage, develop, improve, 26 exchange, partition, change the character of, or abandon a trust 27 asset or any interest therein; and to encumber, mortgage, or pledge 28 a trust asset for a term within or extending beyond the term of the 29 trust, in connection with the exercise of any power vested in the 30 trustee; 31 (8) to make ordinary or extraordinary repairs or alterations in 32 buildings or other structures, to demolish any improvements, to 33 raze existing or erect new party walls or buildings; 34 (9) to subdivide, develop, or dedicate land to public use; or to 35 make or obtain the vacation of plats and adjust boundaries; or to 36 adjust differences in valuation on exchange or partition by giving 37 or receiving consideration; or to dedicate easements to public use 38 without consideration; 39 (10) to enter for any purpose into a lease as lessor or lessee 40 with or without option to purchase or renew for a term within or 41 extending beyond the term of the trust; 1 [422] 47 1 (11) to enter into a lease or arrangement for exploration and 2 removal of minerals or other natural resources or enter into a 3 pooling or unitization agreement; 4 (12) to grant an option involving disposition of a trust asset, 5 or to take an option for the acquisition of any asset; 6 (13) to vote a security, in person or by general or limited 7 proxy; 8 (14) to pay calls, assessments, and any other sums chargeable 9 or accruing against or on account of securities; 10 (15) to sell or exercise stock subscription or conversion rights; 11 to consent, directly or through a committee or other agent, to the 12 reorganization, consolidation, merger, dissolution, or liquidation of 13 a corporation or other business enterprise; 14 (16) to hold a security in the name of a nominee or in other 15 form without disclosure of the trust, so that title to the security 16 may pass by delivery, but the trustee is liable for any act of the 17 nominee in connection with the stock so held; 18 (17) to insure the assets of the trust against damage or loss, 19 and the trustee against liability with respect to third persons; 20 (18) to borrow money to be repaid from trust assets or 21 otherwise; to advance money for the protection of the trust, and 22 for all expenses, losses, and liability sustained in the 23 administration of the trust or because of the holding or ownership 24 of any trust assets, for which advances with any interest the trustee 25 has a lien on the trust assets as against the beneficiary; 26 (19) to pay or contest any claim; to settle a claim by or 27 against the trust by compromise, arbitration, or otherwise; and to 28 release, in whole or in part, any claim belonging to the trust to the 29 extent that the claim is uncollectible; 30 (20) to pay taxes, assessments, compensation of the trustee, 31 and other expenses incurred in the collection, care, administration, 32 and protection of the trust; 33 (21) to allocate items of income or expense to either trust 34 income or principal, as provided in Part 4 of this article [62-7-401 35 et seq.,] but without regard to how such items are treated for tax 36 purposes; 37 (22) to pay any sum distributable to a beneficiary under legal 38 disability, without liability to the trustee, by paying the sum to the 39 beneficiary or by paying the sum for the use of the beneficiary 40 either to a legal representative appointed by the court, or if none, to 41 a relative; 42 (23) to effect distribution of property and money in divided or 43 undivided interests and to adjust resulting differences in valuation; 1 [422] 48 1 (24) to employ persons, including attorneys, auditors, 2 investment advisors, or agents, even if they are associated with the 3 trustee, to advise or assist the trustee in the performance of his 4 administrative duties; to act without independent investigation 5 upon their recommendations; and instead of acting personally, to 6 employ one or more agents to perform any act of administration, 7 whether or not discretionary; 8 (25) to prosecute or defend actions, claims, or proceedings for 9 the protection of trust assets and of the trustee in the performance 10 of his duties; 11 (26) to execute and deliver all instruments which will 12 accomplish or facilitate the exercise of the powers vested in the 13 trustee. 14 15 Section 62-7-705. Trustee’s office not transferable unless 16 provided for in instrument; resignation. 17 18 Unless otherwise provided in the trust instrument, while 19 continuing to act as a trustee, the trustee may not transfer his office 20 to another or delegate the entire administration of the trust to a 21 cotrustee or another. The trustee may resign if: 22 (1) the document so provides; 23 (2) all beneficiaries consent; or 24 (3) the court approves the resignation. 25 A beneficiary may consent if the beneficiary is not a minor or 26 incapacitated person or the resignation is consented to by the 27 representative of the minor or incapacitated person as described in 28 Section 61-1-403(1) and (2). 29 30 Section 62-7-706. Power of court to authorize deviation or 31 transactions involving conflict of interest. 32 33 (a) This Part does not affect the power of the court for cause 34 shown and upon petition of the trustee or affected beneficiary and 35 upon appropriate notice to the affected parties to relieve a trustee 36 from any restrictions on his power that would otherwise be placed 37 upon him by the trust or by this Part. 38 (b) Subject to the provisions of Section 62-7-603, if the duty of 39 the trustee and his individual interest or his interest as trustee of 40 another trust, conflict in the exercise of a trust power, the power 41 may be exercised only by court authorization (except as provided 42 in items (1), (4), (6), (18), and (24) of subsection (c) of Section 43 62-7-704) upon petition of the trustee or any other interested1 [422] 49 1 person, unless directed otherwise by the trust. Under this section, 2 personal profit or advantage to an affiliated or subsidiary company 3 or association is personal profit to any corporate trustee. 4 5 Section 62-7-707. Exercise of powers by joint trustees; 6 successor trustees; liability. 7 8 (a) Any power vested in three or more trustees may be exercised 9 by a majority, but a trustee who has not joined in exercising a 10 power is not liable to the beneficiaries or to others for the 11 consequences of the exercise; and a dissenting trustee is not liable 12 for the consequences of an act in which he joins at the direction of 13 the majority of the trustees, if he expressed his dissent in writing to 14 any of his cotrustees at or before the time of the joinder. 15 (b) If two or more trustees are appointed to perform a trust, and if 16 any of them is unable or refuses to accept the appointment, or, 17 having accepted, ceases to be a trustee, the surviving or remaining 18 trustees shall perform the trust and succeed to all the powers, 19 duties, and discretionary authority given to the trustees jointly. 20 (c) Unless directed otherwise by the court or by the trust 21 instrument, a successor trustee appointed by the court or by the 22 trust instrument succeeds to all the powers, duties, and 23 discretionary authority given to the predecessor trustee. Upon 24 reasonable request, a successor trustee is entitled to a statement of 25 the accounts of the trust from a predecessor trustee. A successor 26 trustee may accept the account rendered and shall be under no duty 27 to examine the acts or omissions of the predecessor trustee and 28 shall not be liable for failure to seek redress for any act or 29 omission of the predecessor trustee. The trustee of a testamentary 30 trust may accept the account rendered by a personal representative 31 and shall be under no duty to examine the acts or omissions of the 32 predecessor personal representative and shall not be liable for 33 failure to seek redress for any act or omission of the predecessor 34 personal representative. 35 (d) This section does not excuse a cotrustee from liability for 36 failure either to participate in the administration of the trust or to 37 attempt to prevent a breach of trust. 38 39 Section 62-7-708. Third persons protected in dealing with 40 trustee. 41 42 With respect to a third person dealing with a trustee or assisting 43 a trustee in the conduct of a transaction, the existence of trust1 [422] 50 1 powers and their proper exercise by the trustee may be assumed 2 without inquiry. The third person is not bound to inquire whether 3 the trustee has power to act or is properly exercising the power; 4 and a third person, without actual knowledge that the trustee is 5 exceeding his powers or improperly exercising them, is fully 6 protected in dealing with the trustee as if the trustee possessed and 7 properly exercised the powers he purports to exercise. A third 8 person is not bound to assure the proper application of trust assets 9 paid or delivered to the trustee. 10 11 Section 62-7-709. Application. 12 13 Except as specifically provided in the trust, the provisions of this 14 Part apply to any trust established before or after the effective date 15 of this Part and to any trust asset acquired by the trustee before or 16 after the effective date of this Part. 17 18 General Comment 19 20 The Uniform Trust Code is primarily a default statute. Most of 21 the Code’s provisions can be overridden in the terms of the trust. 22 The provisions not subject to override are scheduled in Section 23 105(b). These include the duty of a trustee to act in good faith and 24 with regard to the purposes of the trust, public policy exceptions to 25 enforcement of spendthrift provisions, the requirements for 26 creating a trust, and the authority of the court to modify or 27 terminate a trust on specified grounds. 28 The remainder of the article specifies the scope of the Code 29 (Section 102), provides definitions (Section 103), and collects 30 provisions of importance not amenable to codification elsewhere in 31 the Uniform Trust Code. Sections 106 and 107 focus on the 32 sources of law that will govern a trust. Section 106 clarifies that 33 despite the Code’s comprehensive scope, not all aspects of the law 34 of trusts have been codified. The Uniform Trust Code is 35 supplemented by the common law of trusts and principles of 36 equity. Section 107 addresses selection of the jurisdiction or 37 jurisdictions whose laws will govern the trust. A settlor, absent 38 overriding public policy concerns, is free to select the law that will 39 determine the meaning and effect of a trust’s terms. 40 Changing a trust’s principal place of administration is 41 sometimes desirable, particularly to lower a trust’s state income 42 tax. Such transfers are authorized in Section 108. The trustee, 43 following notice to the “qualified beneficiaries,” defined in Section1 [422] 51 1 103(12), may without approval of court transfer the principal place 2 of administration to another State or country if a qualified 3 beneficiary does not object and if the transfer is consistent with the 4 trustee’s duty to administer the trust at a place appropriate to its 5 purposes, its administration, and the interests of the beneficiaries. 6 The settlor, if minimum contacts are present, may also designate 7 the trust’s principal place of administration. 8 Sections 104 and 109 through 111 address procedural issues. 9 Section 104 specifies when persons, particularly persons who work 10 in organizations, are deemed to have acquired knowledge of a fact. 11 Section 109 specifies the methods for giving notice and excludes 12 from the Code’s notice requirements persons whose identity or 13 location is unknown and not reasonably ascertainable. Section 110 14 allows beneficiaries with remote interests to request notice of 15 actions, such as notice of a trustee resignation, which are normally 16 given only to the qualified beneficiaries. 17 Section 111 ratifies the use of nonjudicial settlement 18 agreements. While the judicial settlement procedures may be used 19 in all court proceedings relating to the trust, the nonjudicial 20 settlement procedures will not always be available. The terms of 21 the trust may direct that the procedures not be used, or settlors may 22 negate or modify them by specifying their own methods for 23 obtaining consents. Also, a nonjudicial settlement may include 24 only terms and conditions a court could properly approve. 25 The Uniform Trust Code does not prescribe the rules of 26 construction to be applied to trusts created under the Code. The 27 Code instead recognizes that enacting jurisdictions are likely to 28 take a diversity of approaches, just as they have with respect to the 29 rules of construction applicable to wills. Section 112 30 accommodates this variation by providing that the State’s specific 31 rules on construction of wills, whatever they may be, also apply to 32 the construction of trusts. 33 34 South Carolina Comment 35 36 The South Carolina version of the Uniform Trust Code is 37 referred to as the South Carolina Trust Code or sometimes the 38 SCTC throughout this article. The Uniform Trust Code is 39 sometimes referred to as the UTC. The South Carolina Probate 40 Code, South Carolina Code Ann. Section 62-1-100 et seq., is 41 sometimes referred to as the SCPC. The sections of the South 42 Carolina Trust Code are codified at Title 62, Article 7 and1 [422] 52 1 consequently become a part of the comprehensive South Carolina 2 Probate Code. 3 By rule, the Comments to the Uniform Trust Code cannot be 4 changed. However, because the South Carolina Trust Code differs 5 in some respects from the Uniform Trust Code, the Uniform Trust 6 Code Comments, although included, are not always appropriate for 7 South Carolina. Consequently, when appropriate, the South 8 Carolina Comments include guidance to those portions of the 9 Uniform Trust Code Comments not appropriate for South 10 Carolina. However, portions of the UTC Comments not 11 distinguished by the SCTC Comments may nevertheless be 12 inappropriate for the SCTC, especially with respect to 13 cross-references. Depending on context, general references to 14 “article” in the UTC Comments may correlate to “Part” in the 15 SCTC. 16 17 Section 62-7-101. Short Title. 19 This article may be cited as the South Carolina Trust Code. In 20 this article, unless the context clearly indicates otherwise, ‘Code’ 21 shall mean the South Carolina Trust Code. 22 23 Section 62-7-102. Scope. 25 This article applies to express trusts, charitable or noncharitable, 26 and trusts created pursuant to a statute, judgment, or decree that 27 requires the trust to be administered in the manner of an express 28 trust. The term ‘express trust’ includes both testamentary and inter 29 vivos trusts, regardless of whether the trustee is required to 30 account to the probate court, and includes, but is not limited to, all 31 trusts defined in Section 62-1-201(44). This article does not apply 32 to constructive trusts, resulting trusts, conservatorships 33 administered by conservators as defined in Section 62-1-201(6), 34 administration of decedent’s estates, all multiple party accounts 35 referred to in Section 62-6-101 et seq., custodial arrangements, 36 business trusts providing for certificates to be issued to 37 beneficiaries, common trust funds, voting trusts, security 38 arrangements, liquidation trusts, and trusts for the primary purpose 39 of paying debts, dividends, interest, salaries, wages, profits, 40 pensions, or employee benefits of any kind, or any arrangement 41 under which a person is nominee or escrowee for another. 42 43 Comment 441 [422] 53 1 The Uniform Trust Code, while comprehensive, applies only to 2 express trusts. Excluded from the Code’s coverage are resulting 3 and constructive trusts, which are not express trusts but remedial 4 devices imposed by law. For the requirements for creating an 5 express trust and the methods by which express trusts are created, 6 see Sections 401-402. The Code does not attempt to distinguish 7 express trusts from other legal relationships with respect to 8 property, such as agencies and contracts for the benefit of third 9 parties. For the distinctions, see Restatement (Third) of Trusts 10 Sections 2, 5 (Tentative Draft No. 1, approved 1996); Restatement 11 (Second) of Trusts Sections 2, 5-16C (1959). 12 The Uniform Trust Code is directed primarily at trusts that arise 13 in an estate planning or other donative context, but express trusts 14 can arise in other contexts. For example, a trust created pursuant 15 to a divorce action would be included, even though such a trust is 16 not donative but is created pursuant to a bargained-for exchange. 17 Commercial trusts come in numerous forms, including trusts 18 created pursuant to a state business trust act and trusts created to 19 administer specified funds, such as to pay a pension or to manage 20 pooled investments. Commercial trusts are often subject to 21 special-purpose legislation and case law, which in some respects 22 displace the usual rules stated in this Code. See John H. 23 Langbein, The Secret Life of the Trust: The Trust as an Instrument 24 of Commerce, 107 Yale L.J. 165 (1997). 25 Express trusts also may be created by means of court judgment 26 or decree. Examples include trusts created to hold the proceeds of 27 personal injury recoveries and trusts created to hold the assets of a 28 protected person in a conservatorship proceeding. See, e.g., 29 Uniform Probate Code Section 5-411(a)(4). 30 31 South Carolina Comment 32 33 This section provides a concise statement of the positive 34 inclusion of express trusts within the scope of the SCTC. 35 South Carolina has another comprehensive statement of the 36 scope of applicable South Carolina trust law, contained in the 37 definition paragraph of the South Carolina Probate Code Section 38 62-1-201(44), which contains an expanded statement of the 39 inclusion of express trusts and further contains detailed statements 40 of the trusts and trust type arrangements that are excluded from the 41 scope. This statement is now included in Section 62-7-102 with 42 reference to Section 62-1-201(44). Former Section 62-7-702(1), in 43 the South Carolina Uniform Trustee’s Powers Act, which is1 [422] 54 1 repealed by the SCTC, also contained a comprehensive statement 2 of applicable South Carolina trust law. 3 4 Section 62-7-103. Definitions. 5 6 In this article: 7 (1) ‘Action,’ with respect to an act of a trustee, includes a 8 failure to act. 9 (2) ‘Beneficiary’ means a person that: 10 (A) has a present or future beneficial interest in a trust, 11 vested or contingent; or 12 (B) in a capacity other than that of trustee, holds a power of 13 appointment over trust property; or 14 (C) In the case of a charitable trust, has the authority to 15 enforce the terms of the Trust. 16 (3) ‘Charitable trust’ means a trust, or portion of a trust, 17 created for a charitable purpose described in Section 62-7-405(a). 18 (4) ‘Conservator’ means a person appointed by the court to 19 administer the estate of a protected person. 20 (5) ‘Environmental law’ means a federal, state, or local law, 21 rule, regulation, or ordinance relating to protection of the 22 environment. 23 (6) ‘Guardian’ means a person appointed by the court to make 24 decisions regarding the support, care, education, health, and 25 welfare of a minor or adult individual. The term does not include a 26 guardian ad litem or a statutory guardian. 27 (7) ‘Interests of the beneficiaries’ means the beneficial 28 interests provided in the terms of the trust. 29 (8) ‘Jurisdiction’, with respect to a geographic area, includes a 30 State or country. 31 (9) ‘Person’ means an individual, corporation, business trust, 32 estate, trust, partnership, limited liability company, association, 33 joint venture, government, governmental subdivision, agency, or 34 instrumentality, public corporation, or any other legal or 35 commercial entity. 36 (10) ‘Power of withdrawal’ means a presently exercisable 37 general power of appointment other than a power exercisable by a 38 trustee which is limited by an ascertainable standard, or which is 39 exercisable by another person only upon consent of the trustee or 40 the person holding an adverse interest. 41 (11) ‘Property’ means anything that may be the subject of 42 ownership, whether real or personal, legal or equitable, or any 43 interest therein. 1 [422] 55 1 (12) ‘Qualified beneficiary’ means a living beneficiary who, on 2 the date the beneficiary’s qualification is determined: 3 (A) is a distributee or permissible distributee of trust income 4 or principal; 5 (B) would be a distributee or permissible distributee of trust 6 income or principal if the interests of the distributees described in 7 subparagraph (A) terminated on that date, but the termination of 8 those interests would not cause the trust to terminate; or 9 (C) would be a distributee or permissible distributee of trust 10 income or principal if the trust terminated on that date. 11 (13) ‘Revocable’, as applied to a trust, means revocable by the 12 settlor without the consent of the trustee or a person holding an 13 adverse interest. 14 (14) ‘Settlor’ means a person, including a testator, who creates, 15 or contributes property to, a trust. If more than one person creates 16 or contributes property to a trust, each person is a settlor of the 17 portion of the trust property attributable to that person’s 18 contribution except to the extent another person has the power to 19 revoke or withdraw that portion. 20 (15) ‘Spendthrift provision’ means a term of a trust which 21 restrains both voluntary and involuntary transfer of a beneficiary’s 22 interest. 23 (16) ‘State’ means a State of the United States, the District of 24 Columbia, Puerto Rico, the United States Virgin Islands, or any 25 territory or insular possession subject to the jurisdiction of the 26 United States. The term includes an Indian tribe or band 27 recognized by federal law or formally acknowledged by a State. 28 (17) ‘Terms of a trust’ means the manifestation of the settlor’s 29 intent regarding a trust’s provisions as expressed in the trust 30 instrument or as may be established by other evidence that would 31 be admissible in a judicial proceeding. 32 (18) ‘Trust instrument’ means an instrument executed by the 33 settlor that contains terms of the trust, including any amendments 34 thereto. 35 (19) ‘Trustee’ includes an original, additional, and successor 36 trustee, and a cotrustee, whether or not appointed or confirmed by 37 a court. 38 (20) ‘Ascertainable standard’ means an ascertainable standard 39 relating to a trustee’s individual’s health, education, support, or 40 maintenance within the meaning of Section 2041(b)(1(A) or 41 2514(c)(1) of the Internal Revenue Code, as amended. 42 (21) ‘Distributee’ means any person who receives property of a 43 Trust from a Trustee, other than as creditor or purchaser.1 [422] 56 1 (22) ‘Interested person’ or ‘interested party’ means any person 2 or party deemed to be a necessary or proper party under Rule 19 of 3 the South Carolina Rules of Civil Procedure. 4 (23) ‘Internal Revenue Code’ means the Internal Revenue Code, 5 as amended from time to time. Each reference to a provision of 6 the Internal Revenue Code shall include any successor or 7 amendment thereto. 8 (24) ‘Serious breach of trust’ means either: a single act that 9 causes significant harm or involves flagrant misconduct, or a series 10 of smaller breaches, none of which individually justify removal 11 when considered alone, but which do so when considered together. 12 The terms and definitions contained in the South Carolina 13 Probate Code that do not conflict with the terms defined in this 14 section shall remain in effect for the South Carolina Trust Code. 15 16 Comment 17 18 A definition of “action” (paragraph (1)) is included for drafting 19 convenience, to avoid having to clarify in the numerous places in 20 the Uniform Trust Code where reference is made to an “action” by 21 the trustee that the term includes a failure to act. 22 “Beneficiary” (paragraph (2)) refers only to a beneficiary of a 23 trust as defined in the Uniform Trust Code. In addition to living 24 and ascertained individuals, beneficiaries may be unborn or 25 unascertained. Pursuant to Section 402(b), a trust is valid only if a 26 beneficiary can be ascertained now or in the future. The term 27 “beneficiary” includes not only beneficiaries who received their 28 interests under the terms of the trust but also beneficiaries who 29 received their interests by other means, including by assignment, 30 exercise of a power of appointment, resulting trust upon the failure 31 of an interest, gap in a disposition, operation of an antilapse statute 32 upon the predecease of a named beneficiary, or upon termination 33 of the trust. The fact that a person incidentally benefits from the 34 trust does not mean that the person is a beneficiary. For example, 35 neither a trustee nor persons hired by the trustee become 36 beneficiaries merely because they receive compensation from the 37 trust. See Restatement (Third) of Trusts Section 48 cmt. c 38 (Tentative Draft No. 2, approved 1999); Restatement (Second) of 39 Trusts Section 126 cmt. c (1959). 40 While the holder of a power of appointment is not considered a 41 trust beneficiary under the common law of trusts, holders of 42 powers are classified as beneficiaries under the Uniform Trust 43 Code. Holders of powers are included on the assumption that their1 [422] 57 1 interests are significant enough that they should be afforded the 2 rights of beneficiaries. A power of appointment as used in state 3 trust law and this Code is as defined in state property law and not 4 federal tax law although there is considerable overlap between the 5 two definitions. 6 A power of appointment is authority to designate the recipients 7 of beneficial interests in property. See Restatement (Second) of 8 Property: Donative Transfers Section 11.1 (1986). A power is 9 either general or nongeneral and either presently exercisable or not 10 presently exercisable. A general power of appointment is a power 11 exercisable in favor of the holder of the power, the power holder’s 12 creditors, the power holder’s estate, or the creditors of the power 13 holder’s estate. See Restatement (Second) of Property: Donative 14 Transfers Section 11.4 (1986). All other powers are nongeneral. 15 A power is presently exercisable if the power holder can currently 16 create an interest, present or future, in an object of the power. A 17 power of appointment is not presently exercisable if exercisable 18 only by the power holder’s will or if its exercise is not effective for 19 a specified period of time or until occurrence of some event. See 20 Restatement (Second) of Property: Donative Transfers 21 Section 11.5 (1986). Powers of appointment may be held in either 22 a fiduciary or nonfiduciary capacity. The definition of 23 “beneficiary” excludes powers held by a trustee but not powers 24 held by others in a fiduciary capacity. 25 While all categories of powers of appointment are included 26 within the definition of “beneficiary,” the Uniform Trust Code 27 elsewhere makes distinctions among types of powers. A “power 28 of withdrawal” (paragraph (10)) is defined as a presently 29 exercisable general power of appointment other than a power 30 exercisable only upon consent of the trustee or a person holding an 31 adverse interest. Under Section 302, the holder of a testamentary 32 general power of appointment may represent and bind persons 33 whose interests are subject to the power. 34 The definition of “beneficiary” includes only those who hold 35 beneficial interests in the trust. Because a charitable trust is not 36 created to benefit ascertainable beneficiaries but to benefit the 37 community at large (see Section 405(a)), persons receiving 38 distributions from a charitable trust are not beneficiaries as that 39 term is defined in this Code. However, pursuant to Section 110(b), 40 charitable organizations expressly designated to receive 41 distributions under the terms of a charitable trust, even though not 42 beneficiaries as defined, are granted the rights of qualified 43 beneficiaries under the Code.1 [422] 58 1 The Uniform Trust Code leaves certain issues concerning 2 beneficiaries to the common law. Any person with capacity to 3 take and hold legal title to intended trust property has capacity to 4 be a beneficiary. See Restatement (Third) of Trusts Section 43 5 (Tentative Draft No. 2, approved 1999); Restatement (Second) of 6 Trusts Sections 116-119 (1959). Except as limited by public 7 policy, the extent of a beneficiary’s interest is determined solely by 8 the settlor’s intent. See Restatement (Third) of Trusts Section 49 9 (Tentative Draft No. 2, approved 1999); Restatement (Second) of 10 Trusts Sections 127-128 (1959). While most beneficial interests 11 terminate upon a beneficiary’s death, the interest of a beneficiary 12 may devolve by will or intestate succession the same as a 13 corresponding legal interest. See Restatement (Third) of Trusts 14 Section 55(1) (Tentative Draft No. 2, approved 1999); Restatement 15 (Second) of Trusts Sections 140, 142 (1959). 16 Under the Uniform Trust Code, when a trust has both charitable 17 and noncharitable beneficiaries only the charitable portion 18 qualifies as a “charitable trust” (paragraph (3)). The great majority 19 of the Code’s provisions apply to both charitable and noncharitable 20 trusts without distinction. The distinctions between the two types 21 of trusts are found in the requirements relating to trust creation and 22 modification. Pursuant to Sections 405 and 413, a charitable trust 23 must have a charitable purpose and charitable trusts may be 24 modified or terminated under the doctrine of cy pres. Also, 25 Section 411 allows a noncharitable trust to in certain instances be 26 terminated by its beneficiaries while charitable trusts do not have 27 beneficiaries in the usual sense. To the extent of these distinctions, 28 a split-interest trust is subject to two sets of provisions, one 29 applicable to the charitable interests, the other the noncharitable. 30 For discussion of the definition of “conservator” (paragraph (4)), 31 see the definition of “guardian” (paragraph (6)). 32 To encourage trustees to accept and administer trusts containing 33 real property, the Uniform Trust Code contains several provisions 34 designed to limit exposure to possible liability for violation of 35 “environmental law” (paragraph (5)). Section 701(c)(2) authorizes 36 a nominated trustee to investigate trust property to determine 37 potential liability for violation of environmental law or other law 38 without accepting the trusteeship. Section 816(13) grants a trustee 39 comprehensive and detailed powers to deal with property 40 involving environmental risks. Section 1010(b) immunizes a 41 trustee from personal liability for violation of environmental law 42 arising from the ownership and control of trust property.1 [422] 59 1 Under the Uniform Trust Code, a “guardian” (paragraph (6)) 2 makes decisions with respect to personal care; a “conservator” 3 (paragraph (4)) manages property. The terminology used is that 4 employed in Article V of the Uniform Probate Code, and in its 5 free-standing Uniform Guardianship and Protective Proceedings 6 Act. Enacting jurisdictions not using these terms in the defined 7 sense should substitute their own terminology. For this reason, 8 both terms have been placed in brackets. The definition of 9 “guardian” accommodates those jurisdictions which allow 10 appointment of a guardian by a parent or spouse in addition to 11 appointment by a court. Enacting jurisdictions which allow 12 appointment of a guardian solely by a court should delete the 13 bracketed language “a parent, or a spouse.” 14 The phrase “interests of the beneficiaries” (paragraph (7)) is 15 used with some frequency in the Uniform Trust Code. The 16 definition clarifies that the interests are as provided in the terms of 17 the trust and not as determined by the beneficiaries. Absent 18 authority to do so in the terms of the trust, Section 108 prohibits a 19 trustee from changing a trust’s principal place of administration if 20 the transfer would violate the trustee’s duty to administer the trust 21 at a place appropriate to the interests of the beneficiaries. 22 Section 706(b) conditions certain of the grounds for removing a 23 trustee on the court’s finding that removal of the trustee will best 24 serve the interests of the beneficiaries. Section 801 requires the 25 trustee to administer the trust in the interests of the beneficiaries, 26 and Section 802 makes clear that a trustee may not place its own 27 interests above those of the beneficiaries. Section 808(d) requires 28 the holder of a power to direct who is subject to a fiduciary 29 obligation to act with regard to the interests of the beneficiaries. 30 Section 1002(b) may impose greater liability on a cotrustee who 31 commits a breach of trust with reckless indifference to the interests 32 of the beneficiaries. Section 1008 invalidates an exculpatory term 33 to the extent it relieves a trustee of liability for breach of trust 34 committed with reckless indifference to the interests of the 35 beneficiaries. 36 “Jurisdiction” (paragraph (8)), when used with reference to a 37 geographic area, includes a state or country but is not necessarily 38 so limited. Its precise scope will depend on the context in which it 39 is used. “Jurisdiction” is used in Sections 107 and 403 to refer to 40 the place whose law will govern the trust. The term is used in 41 Section 108 to refer to the trust’s principal place of administration. 42 The term is used in Section 816 to refer to the place where the1 [422] 60 1 trustee may appoint an ancillary trustee and to the place in whose 2 courts the trustee can bring and defend legal proceedings. 3 The definition of “property” (paragraph (11)) is intended to be 4 as expansive as possible and to encompass anything that may be 5 the subject of ownership. Included are choses in action, claims, 6 and interests created by beneficiary designations under policies of 7 insurance, financial instruments, and deferred compensation and 8 other retirement arrangements, whether revocable or irrevocable. 9 Any such property interest is sufficient to support creation of a 10 trust. See Section 401 comment. 11 Due to the difficulty of identifying beneficiaries whose interests 12 are remote and contingent, and because such beneficiaries are not 13 likely to have much interest in the day-to-day affairs of the trust, 14 the Uniform Trust Code uses the concept of “qualified 15 beneficiary” (paragraph (12)) to limit the class of beneficiaries to 16 whom certain notices must be given or consents received. The 17 definition of qualified beneficiaries is used in Section 705 to define 18 the class to whom notice must be given of a trustee resignation. 19 The term is used in Section 813 to define the class to be kept 20 informed of the trust’s administration. Section 417 requires that 21 notice be given to the qualified beneficiaries before a trust may be 22 combined or divided. Actions which may be accomplished by the 23 consent of the qualified beneficiaries include the appointment of a 24 successor trustee as provided in Section 704. Prior to transferring 25 a trust’s principal place of administration, Section 108(d) requires 26 that the trustee give at least 60 days notice to the qualified 27 beneficiaries. 28 The qualified beneficiaries consist of the beneficiaries currently 29 eligible to receive a distribution from the trust together with those 30 who might be termed the first-line remaindermen. These are the 31 beneficiaries who would become eligible to receive distributions 32 were the event triggering the termination of a beneficiary’s interest 33 or of the trust itself to occur on the date in question. Such a 34 terminating event will typically be the death or deaths of the 35 beneficiaries currently eligible to receive the income. Should a 36 qualified beneficiary be a minor, incapacitated, or unknown, or a 37 beneficiary whose identity or location is not reasonably 38 ascertainable, the representation and virtual representation 39 principles of Article 3 may be employed, including the possible 40 appointment by the court of a representative to represent the 41 beneficiary’s interest. 42 The qualified beneficiaries who take upon termination of the 43 beneficiary’s interest or of the trust can include takers in default of1 [422] 61 1 the exercise of a power of appointment. The term can also include 2 the persons entitled to receive the trust property pursuant to the 3 exercise of a power of appointment. Because the exercise of a 4 testamentary power of appointment is not effective until the 5 testator’s death and probate of the will, the qualified beneficiaries 6 do not include appointees under the will of a living person. Nor 7 would the term include the objects of an unexercised inter vivos 8 power. 9 Charitable trusts and trusts for a valid noncharitable purpose do 10 not have beneficiaries in the usual sense. However, certain 11 persons, while not technically beneficiaries, do have an interest in 12 seeing that the trust is enforced. Section 110 expands the 13 definition of qualified beneficiaries to encompass this wider group. 14 It grants the rights of qualified beneficiaries to the attorney general 15 of the state and charitable organizations expressly designated to 16 receive distributions under the terms of a charitable trust. It also 17 grants the rights of qualified beneficiaries to persons appointed by 18 the terms of the trust or by the court to enforce a trust created for 19 an animal or other noncharitable purpose. 20 The definition of “revocable” (paragraph (13)) clarifies that 21 revocable trusts include only trusts whose revocation is 22 substantially within the settlor’s control. The consequences of 23 classifying a trust as revocable are many. The Uniform Trust Code 24 contains provisions relating to liability of a revocable trust for 25 payment of the settlor’s debts (Section 505), the standard of 26 capacity for creating a revocable trust (Section 601), the procedure 27 for revocation (Section 602), the subjecting of the beneficiaries’ 28 rights to the settlor’s control (Section 603), the period for 29 contesting a revocable trust (Section 604), the power of the settlor 30 of a revocable trust to direct the actions of a trustee 31 (Section 808(a)), notice to the qualified beneficiaries upon the 32 settlor’s death (Section 813(b)), and the liability of a trustee of a 33 revocable trust for the obligations of a partnership of which the 34 trustee is a general partner (Section 1011(d)). 35 Because under Section 603(c) the holder of a power of 36 withdrawal has the rights of a settlor of a revocable trust, the 37 definition of “power of withdrawal” (paragraph (10)), and 38 “revocable” (paragraph (13)) are similar. Both exclude individuals 39 who can exercise their power only with the consent of the trustee 40 or person having an adverse interest. 41 The definition of “settlor” (paragraph (14)) refers to the person 42 who creates, or contributes property to, a trust, whether by will, 43 self-declaration, transfer of property to another person as trustee,1 [422] 62 1 or exercise of a power of appointment. For the requirements for 2 creating a trust, see Section 401. Determining the identity of the 3 “settlor” is usually not an issue. The same person will both sign 4 the trust instrument and fund the trust. Ascertaining the identity of 5 the settlor becomes more difficult when more than one person 6 signs the trust instrument or funds the trust. The fact that a person 7 is designated as the “settlor” by the terms of the trust is not 8 necessarily determinative. For example, the person who executes 9 the trust instrument may be acting as the agent for the person who 10 will be funding the trust. In that case, the person funding the trust, 11 and not the person signing the trust instrument, will be the settlor. 12 Should more than one person contribute to a trust, all of the 13 contributors will ordinarily be treated as settlors in proportion to 14 their respective contributions, regardless of which one signed the 15 trust instrument. See Section 602(b). 16 In the case of a revocable trust employed as a will substitute, 17 gifts to the trust’s creator are sometimes made by placing the 18 gifted property directly into the trust. To recognize that such a 19 donor is not intended to be treated as a settlor, the definition of 20 “settlor” excludes a contributor to a trust that is revocable by 21 another person or over which another person has a power of 22 withdrawal. Thus, a parent who contributes to a child’s revocable 23 trust would not be treated as one of the trust’s settlors. The 24 definition of settlor would treat the child as the sole settlor of the 25 trust to the extent of the child’s proportionate contribution. 26 Pursuant to Section 603(c), the child’s power of withdrawal over 27 the trust would also result in the child being treated as the settlor 28 with respect to the portion of the trust attributable to the parent’s 29 contribution. 30 Ascertaining the identity of the settlor is important for a variety 31 of reasons. It is important for determining rights in revocable 32 trusts. See Sections 505(a)(1), (3) (creditor claims against settlor 33 of revocable trust), 602 (revocation or modification of revocable 34 trust), and 604 (limitation on contest of revocable trust). It is also 35 important for determining rights of creditors in irrevocable trusts. 36 See Section 505(a)(2) (creditors of settlor can reach maximum 37 amount trustee can distribute to settlor). While the settlor of an 38 irrevocable trust traditionally has no continuing rights over the 39 trust except for the right under Section 411 to terminate the trust 40 with the beneficiaries’ consent, the Uniform Trust Code also 41 authorizes the settlor of an irrevocable trust to petition for removal 42 of the trustee and to enforce or modify a charitable trust. See1 [422] 63 1 Sections 405(c) (standing to enforce charitable trust), 413 (doctrine 2 of cy pres), and 706 (removal of trustee). 3 “Spendthrift provision” (paragraph (15)) means a term of a trust 4 which restrains the transfer of a beneficiary’s interest, whether by 5 a voluntary act of the beneficiary or by an action of a beneficiary’s 6 creditor or assignee, which at least as far as the beneficiary is 7 concerned, would be involuntary. A spendthrift provision is valid 8 under the Uniform Trust Code only if it restrains both voluntary 9 and involuntary transfer. For a discussion of this requirement and 10 the effect of a spendthrift provision in general, see Section 502. 11 The insertion of a spendthrift provision in the terms of the trust 12 may also constitute a material purpose sufficient to prevent 13 termination of the trust by agreement of the beneficiaries under 14 Section 411, although the Code does not presume this result. 15 “Terms of a trust” (paragraph (17)) is a defined term used 16 frequently in the Uniform Trust Code. While the wording of a 17 written trust instrument is almost always the most important 18 determinant of a trust’s terms, the definition is not so limited. Oral 19 statements, the situation of the beneficiaries, the purposes of the 20 trust, the circumstances under which the trust is to be administered, 21 and, to the extent the settlor was otherwise silent, rules of 22 construction, all may have a bearing on determining a trust’s 23 meaning. See Restatement (Third) of Trusts Section 4 cmt. a 24 (Tentative Draft No. 1, approved 1996); Restatement (Second) of 25 Trusts Section 4 cmt. a (1959). If a trust established by order of 26 court is to be administered as an express trust, the terms of the trust 27 are determined from the court order as interpreted in light of the 28 general rules governing interpretation of judgments. See 29 Restatement (Third) of Trusts Section 4 cmt. f (Tentative Draft 30 No. 1, approved 1996). 31 A manifestation of a settlor’s intention does not constitute 32 evidence of a trust’s terms if it would be inadmissible in a judicial 33 proceeding in which the trust’s terms are in question. See 34 Restatement (Third) of Trusts Section 4 cmt. b (Tentative Draft 35 No. 1, approved 1996); Restatement (Second) of Trusts Section 4 36 cmt. b (1959). See also Restatement (Third) Property: Donative 37 Transfers Sections 10.2, 11.1-11.3 (Tentative Draft No. 1, 38 approved 1995). For example, in many states a trust of real 39 property is unenforceable unless evidenced by a writing, although 40 Section 407 of this Code does not so require, leaving this issue to 41 be covered by separate statute if the enacting jurisdiction so elects. 42 Evidence otherwise relevant to determining the terms of a trust1 [422] 64 1 may also be excluded under other principles of law, such as the 2 parol evidence rule. 3 “Trust instrument” (paragraph (18)) is a subset of the definition 4 of “terms of a trust” (paragraph (17)), referring to only such terms 5 as are found in an instrument executed by the settlor. Section 403 6 provides that a trust is validly created if created in compliance with 7 the law of the place where the trust instrument was executed. 8 Pursuant to Section 604(a)(2), the contest period for a revocable 9 trust can be shortened by providing the potential contestant with a 10 copy of the trust instrument plus other information. Section 813(b) 11 (1) requires that the trustee upon request furnish a beneficiary with 12 a copy of the trust instrument. To allow a trustee to administer a 13 trust with some dispatch without concern about liability if the 14 terms of a trust instrument are contradicted by evidence outside of 15 the instrument, Section 1006 protects a trustee from liability to the 16 extent a breach of trust resulted from reasonable reliance on those 17 terms. Section 1013 allows a trustee to substitute a certification of 18 trust in lieu of providing a third person with a copy of the trust 19 instrument. Section 1106(a)(4) provides that unless there is a clear 20 indication of a contrary intent, rules of construction and 21 presumptions provided in the Uniform Trust Code apply to trust 22 instruments executed before the effective date of the Code. 23 The definition of “trustee” (paragraph (19)) includes not only 24 the original trustee but also an additional and successor trustee as 25 well as a cotrustee. Because the definition of trustee includes 26 trustees of all types, any trustee, whether original or succeeding, 27 single or cotrustee, has the powers of a trustee and is subject to the 28 duties imposed on trustees under the Uniform Trust Code. Any 29 natural person, including a settlor or beneficiary, has capacity to 30 act as trustee if the person has capacity to hold title to property free 31 of trust. See Restatement (Third) of Trusts Section 32 (Tentative 32 Draft No. 2, approved 1999); Restatement (Second) of Trusts 33 Section 89 (1959). State banking statutes normally impose 34 additional requirements before a corporation can act as trustee. 35 36 South Carolina Comment 37 38 There are a number of definitions in Section 62-7-103 referred 39 to throughout the South Carolina Trust Code that have no 40 equivalent in other portions of the South Carolina Code. These 41 include “Action,” “Charitable trust,” “Environmental law,” 42 “Interests of the beneficiaries,” “Jurisdiction,” “Power of 43 withdrawal,” “Qualified beneficiary,” “Revocable,” “Settlor,”1 [422] 65 1 “Spendthrift provision,” “Terms of a trust,” and “Trust 2 instrument.” In the interest of uniformity, such terms are included 3 in the South Carolina Trust Code except as noted below. 4 Subsection (4) is modified to reflect the definition of 5 “conservator” contained in South Carolina Probate Code Section 6 62-1-201(6). 7 Subsection (6) defines “guardian.” The South Carolina Probate 8 Code (Section 62-1-201(16)) specifically excludes “a statutory 9 guardian” and this modification was incorporated into the 10 definition. 11 Subsection (19) defines the term “trustee.” Section 62-1-201 of 12 the South Carolina Probate Code contains the additional language 13 “whether or not appointed or confirmed by court” and the South 14 Carolina Trust Code retains that additional language. 15 Subsection (21) defining “distributee” is a South Carolina 16 addition. 17 The South Carolina version of Section 62-7-103 expresses the 18 intent that the definitions contained in the South Carolina Probate 19 Code that are not otherwise defined within the South Carolina 20 Trust Code and that do not conflict with the definitions contained 21 in the South Carolina Trust Code shall continue to apply to the law 22 governing trusts in South Carolina. 23 24 Section 62-7-104. Knowledge. 25 26 (a) Subject to subsection (b), a person has knowledge of a fact 27 if the person: 28 (1) has actual knowledge of it; 29 (2) has received a notice or notification of it; or 30 (3) from all the facts and circumstances known to the person 31 at the time in question, has reason to know it. 32 (b) An organization that conducts activities through employees 33 has notice or knowledge of a fact involving a trust only from the 34 time the information was received by an employee having 35 responsibility to act for the trust, or would have been brought to 36 the employee’s attention if the organization had exercised 37 reasonable diligence. An organization exercises reasonable 38 diligence if it maintains reasonable routines for communicating 39 significant information to the employee having responsibility to act 40 for the trust and there is reasonable compliance with the routines. 41 Reasonable diligence does not require an employee of the 42 organization to communicate information unless the 43 communication is part of the individual’s regular duties or the1 [422] 66 1 individual knows a matter involving the trust would be materially 2 affected by the information. 3 4 Comment 5 6 This section specifies when a person is deemed to know a fact. 7 Subsection (a) states the general rule. Subsection (b) provides a 8 special rule dealing with notice to organizations. Pursuant to 9 subsection (a), a fact is known to a person if the person had actual 10 knowledge of the fact, received notification of it, or had reason to 11 know of the fact’s existence based on all of the circumstances and 12 other facts known to the person at the time. Under subsection (b), 13 notice to an organization is not necessarily achieved by giving 14 notice to a branch office. Nor does the organization necessarily 15 acquire knowledge at the moment the notice arrives in the 16 organization’s mailroom. Rather, the organization has notice or 17 knowledge of a fact only when the information is received by an 18 employee having responsibility to act for the trust, or would have 19 been brought to the employee’s attention had the organization 20 exercised reasonable diligence. 21 “Know” is used in its defined sense in Sections 109 (methods 22 and waiver of notice), 305 (appointment of representative), 604(b) 23 (limitation on contest of revocable trust), 812 (collecting trust 24 property), 1009 (nonliability of trustee upon beneficiary’s consent, 25 release, or ratification), and 1012 (protection of person dealing 26 with trustee). But as to certain actions, a person is charged with 27 knowledge of facts the person would have discovered upon 28 reasonable inquiry. See Section 1005 (limitation of action against 29 trustee following report of trustee). 30 This section is based on Uniform Commercial Code Section 31 1-202 (2000 Annual Meeting Draft). 32 33 South Carolina Comment 34 35 The reference to Uniform Trust Code Section 812 in the 36 Uniform Trust Code Comment is inapplicable to the South 37 Carolina Trust Code because the SCTC does not include the UTC 38 version of Section 812. 39 40 Section 62-7-105. Default and mandatory rules. 411 [422] 67 1 (a) Except as otherwise provided in the terms of the trust, this 2 article governs the duties and powers of a trustee, relations among 3 trustees, and the rights and interests of a beneficiary. 4 (b) The terms of a trust prevail over any provision of this 5 article except: 6 (1) the requirements for creating a trust; 7 (2) the duty of a trustee to act in good faith and in 8 accordance with the purposes of the trust; 9 (3) the requirement that a trust and its terms be for the 10 benefit of its beneficiaries, and that the trust have a purpose that is 11 lawful and possible to achieve; 12 (4) the power of the court to modify or terminate a trust 13 under Sections 62-7-410 through 62-7-416; 14 (5) the effect of a spendthrift provision and the rights of 15 certain creditors and assignees to reach a trust as provided in Part 16 5; 17 (6) the power of the court under Section 62-7-708(b) to 18 adjust a trustee’s compensation specified in the terms of the trust 19 which is unreasonably low or high; 20 (7) the effect of an exculpatory term under Section 21 62-7-1008; 22 (8) the rights under Sections 62-7-1010 through 62-7-1013 23 of a person other than a trustee or beneficiary; 24 (9) periods of limitation for commencing a judicial 25 proceeding; and 26 (10) the power of the court to take such action and exercise 27 such jurisdiction as may be necessary in the interests of justice; 28 and 29 (11) the subject-matter jurisdiction of the court and venue for 30 commencing a proceeding as provided in Sections 62-7-201 and 31 62-7-204. 32 33 Comment 34 35 Subsection (a) emphasizes that the Uniform Trust Code is 36 primarily a default statute. While this Code provides numerous 37 procedural rules on which a settlor may wish to rely, the settlor is 38 generally free to override these rules and to prescribe the 39 conditions under which the trust is to be administered. With only 40 limited exceptions, the duties and powers of a trustee, relations 41 among trustees, and the rights and interests of a beneficiary are as 42 specified in the terms of the trust.1 [422] 68 1 Subsection (b) lists the items not subject to override in the terms 2 of the trust. Because subsection (b) refers specifically to other 3 sections of the Code, enacting jurisdictions modifying these other 4 sections may also need to modify subsection (b). 5 Subsection (b)(1) confirms that the requirements for a trust’s 6 creation, such as the necessary level of capacity and the 7 requirement that a trust have a legal purpose, are controlled by 8 statute and common law, not by the settlor. For the requirements 9 for creating a trust, see Sections 401-409. Subsection (b)(12) 10 makes clear that the settlor may not reduce any otherwise 11 applicable period of limitations for commencing a judicial 12 proceeding. See Sections 604 (period of limitations for contesting 13 validity of revocable trust), and 1005 (period of limitation on 14 action for breach of trust). Similarly, a settlor may not so negate 15 the responsibilities of a trustee that the trustee would no longer be 16 acting in a fiduciary capacity. Subsection (b)(2) provides that the 17 terms may not eliminate a trustee’s duty to act in good faith and in 18 accordance with the purposes of the trust. Subsection (b)(3) 19 provides that the terms may not eliminate the requirement that a 20 trust and its terms must be for the benefit of the beneficiaries. 21 Subsection (b)(3) also provides that the terms may not eliminate 22 the requirement that the trust have a purpose that is lawful, not 23 contrary to public policy, and possible to achieve. Subsection (b) 24 (2)-(3) are echoed in Sections 404 (trust and its terms must be for 25 benefit of beneficiaries; trust must have a purpose that is lawful, 26 not contrary to public policy, and possible to achieve), 801 (trustee 27 must administer trust in good faith, in accordance with its terms 28 and purposes and the interests of the beneficiaries), 802(a) (trustee 29 must administer trust solely in interests of the beneficiaries), 814 30 (trustee must exercise discretionary power in good faith and in 31 accordance with its terms and purposes and the interests of the 32 beneficiaries), and 1008 (exculpatory term unenforceable to extent 33 it relieves trustee of liability for breach of trust committed in bad 34 faith or with reckless indifference to the purposes of the trust and 35 the interests of the beneficiaries). 36 The terms of a trust may not deny a court authority to take such 37 action as necessary in the interests of justice, including requiring 38 that a trustee furnish bond. Subsection (b)(6), (13). Additionally, 39 should the jurisdiction adopting this Code enact the optional 40 provisions on subject-matter jurisdiction and venue, subsection (b) 41 (14) similarly provides that such provisions cannot be altered in 42 the terms of the trust. The power of the court to modify or 43 terminate a trust under Sections 410 through 416 is not subject to1 [422] 69 1 variation in the terms of the trust. Subsection (b)(4). However, all 2 of these Code sections involve situations which the settlor could 3 have addressed had the settlor had sufficient foresight. These 4 include situations where the purpose of the trust has been 5 achieved, a mistake was made in the trust’s creation, or 6 circumstances have arisen that were not anticipated by the settlor. 7 Section 813 imposes a general obligation to keep the 8 beneficiaries informed as well as several specific notice 9 requirements. Subsections (b)(8) and (b)(9) specify limits on the 10 settlor’s ability to waive these information requirements. With 11 respect to beneficiaries age 25 or older, a settlor may dispense with 12 all of the requirements of Section 813 except for the duties to 13 inform the beneficiaries of the existence of the trust, of the identity 14 of the trustee, and to provide a beneficiary upon request with such 15 reports as the trustee may have prepared. Among the specific 16 requirements that a settlor may waive include the duty to provide a 17 beneficiary upon request with a copy of the trust instrument 18 (Section 813(b)(1)), and the requirement that the trustee provide 19 annual reports to the qualified beneficiaries (Section 813(c)). The 20 furnishing of a copy of the entire trust instrument and preparation 21 of annual reports may be required in a particular case, however, if 22 such information is requested by a beneficiary and is reasonably 23 related to the trust’s administration. 24 Responding to the desire of some settlors that younger 25 beneficiaries not know of the trust’s bounty until they have 26 reached an age of maturity and self-sufficiency, subsection (b)(8) 27 allows a settlor to provide that the trustee need not even inform 28 beneficiaries under age 25 of the existence of the trust. However, 29 pursuant to subsection (b)(9), if the younger beneficiary learns of 30 the trust and requests information, the trustee must respond. More 31 generally, subsection (b)(9) prohibits a settlor from overriding the 32 right provided to a beneficiary in Section 813(a) to request from 33 the trustee of an irrevocable trust copies of trustee reports and 34 other information reasonably related to the trust’s administration. 35 During the drafting of the Uniform Trust Code, the drafting 36 committee discussed and rejected a proposal that the ability of the 37 settlor to waive required notice be based on the nature of the 38 beneficiaries’ interest and not on the beneficiaries’ age. Advocates 39 of this alternative approach concluded that a settlor should be able 40 to waive required notices to the remainder beneficiaries, regardless 41 of their age. Enacting jurisdictions preferring this alternative 42 should substitute the language “adult and current or permissible 43 distributees of trust income or principal” for the reference to1 [422] 70 1 “qualified beneficiaries” in subsection (b)(8). They should also 2 delete the reference to beneficiaries “who have attained the age of 3 25 years.” 4 Waiver by a settlor of the trustee’s duty to keep the beneficiaries 5 informed of the trust’s administration does not otherwise affect the 6 trustee’s duties. The trustee remains accountable to the 7 beneficiaries for the trustee’s actions. 8 Neither subsection (b)(8) nor (b)(9) apply to revocable trusts. 9 The settlor of a revocable trust may waive all reporting to the 10 beneficiaries, even in the event the settlor loses capacity. If the 11 settlor is silent about the subject, reporting to the beneficiaries will 12 be required upon the settlor’s loss of capacity. See Section 603. 13 In conformity with traditional doctrine, the Uniform Trust Code 14 limits the ability of a settlor to exculpate a trustee from liability for 15 breach of trust. The limits are specified in Section 1008. 16 Subsection (b)(10) of this section provides a cross-reference. 17 Similarly, subsection (b)(7) provides a cross-reference to 18 Section 708(b), which limits the binding effect of a provision 19 specifying the trustee’s compensation. 20 Finally, subsection (b)(11) clarifies that a settlor is not free to 21 limit the rights of third persons, such as purchasers of trust 22 property. Subsection (b)(5) clarifies that a settlor may not restrict 23 the rights of a beneficiary’s creditors except to the extent a 24 spendthrift restriction is allowed as provided in Article 5. 25 26 2001 Amendment. By amendment in 2001, subsection (b)(3), 27 (8) and (9) were revised to read as above. The language in 28 subsection (b)(3) “that the trust have a purpose that is lawful, not 29 contrary to public policy, and possible to achieve” is new. This 30 addition clarifies that the settlor may not waive this common law 31 requirement, which is codified in the Code at Section 404. 32 Subsection (b)(8) and (9) formerly provided: 33 (8) the duty to notify the qualified beneficiaries of an 34 irrevocable trust who have attained 25 years of age of the existence 35 of the trust, and of their right to request trustee’s reports and other 36 information reasonably related to the administration of the trust; 37 (9) the duty to respond to the request of a beneficiary of an 38 irrevocable trust for trustee’s reports and other information 39 reasonably related to the administration of a trust. 40 The amendment clarifies that the information requirements not 41 subject to waiver are requirements specified in Section 813 of the 42 Code. 431 [422] 71 1 South Carolina Comment 2 3 Section 62-7-105(a) begins with the premise that the provisions 4 of the South Carolina Trust Code govern trusts when the terms of a 5 trust do not otherwise direct. However, subsection (b) lists eleven 6 separate requirements that may not be waived and will be 7 controlled by the terms of the SCTC irrespective of the terms of 8 the trust. 9 Subsection 105(b)(6) of the UTC prohibits a Settlor from 10 forgoing a bond requirement of their Trustee. The reference to 11 Uniform Trust Code subsection 105(b)(6) in the Uniform Trust 12 Code Comment is inapplicable to the South Carolina Trust Code 13 because the SCTC does not include the UTC version of subsection 14 105(b)(6). Section 62-7-702 of the South Carolina Trust Code 15 provides the situations for which the Trustee must provide bond. 16 The references to Uniform Trust Code subsection 105(b)(8)-(9) in 17 the Uniform Trust Code Comment are inapplicable to the South 18 Carolina Trust Code because the SCTC does not include the UTC 19 versions of subsection 105(b)(8)-(9). The other references to 20 subsection 105(b) in the Uniform Trust Code Comment should be 21 read to accommodate the SCTC’s failure to include UTC 22 subsection 105(b)(6), (8), and (9). For example, the reference to 23 UTC subsection 105(b)(10) in the UTC Comment should be read 24 to apply to SCTC Section 62-7-105(b)(7). 25 26 Section 62-7-106. Common law of trusts; principles of 27 equity. 28 29 The common law of trusts and principles of equity supplement 30 this article, except to the extent modified by this article or another 31 statute of this State. 32 33 Comment 34 35 The Uniform Trust Code codifies those portions of the law of 36 express trusts that are most amenable to codification. The Code is 37 supplemented by the common law of trusts, including principles of 38 equity, particularly as articulated in the Restatement of Trusts, 39 Restatement (Third) of Property: Wills and Other Donative 40 Transfers, and the Restatement of Restitution. The common law of 41 trusts is not static but includes the contemporary and evolving 42 rules of decision developed by the courts in exercise of their power 43 to adapt the law to new situations and changing conditions. It also1 [422] 72 1 includes the traditional and broad equitable jurisdiction of the 2 court, which the Code in no way restricts. 3 The statutory text of the Uniform Trust Code is also 4 supplemented by these Comments, which, like the Comments to 5 any Uniform Act, may be relied on as a guide for interpretation. 6 See Acierno v. Worthy Bros. Pipeline Corp., 656 A.2d 1085, 1090 7 (Del. 1995) (interpreting Uniform Commercial Code); Yale 8 University v. Blumenthal, 621 A.2d 1304, 1307 (Conn. 1993) 9 (interpreting Uniform Management of Institutional Funds Act); 2 10 Norman Singer, Statutory Construction Section 52.05 (6th ed. 11 2000); Jack Davies, Legislative Law and Process in a Nutshell 12 Section 55-4 (2d ed. 1986). 13 14 South Carolina Comment 15 16 See South Carolina Probate Code Section 62-1-103. 17 18 Section 62-7-107. Governing law. 20 21 The meaning and effect of the terms of a trust are determined 22 by: 23 (1) the law of the jurisdiction designated in the terms of the 24 trust; or 25 (2) in the absence of a controlling designation in the terms of 26 the trust, the law of the jurisdiction having the most significant 27 relationship to the matter at issue. 28 29 Comment 30 31 This section provides rules for determining the law that will 32 govern the meaning and effect of particular trust terms. The law to 33 apply to determine whether a trust has been validly created is 34 determined under Section 403. 35 Paragraph (1) allows a settlor to select the law that will govern 36 the meaning and effect of the terms of the trust. The jurisdiction 37 selected need not have any other connection to the trust. The 38 settlor is free to select the governing law regardless of where the 39 trust property may be physically located, whether it consists of real 40 or personal property, and whether the trust was created by will or 41 during the settlor’s lifetime. This section does not attempt to 42 specify the strong public policies sufficient to invalidate a settlor’s 43 choice of governing law. These public policies will vary 44 depending upon the locale and may change over time.1 [422] 73 1 Paragraph (2) provides a rule for trusts without governing law 2 provisions - the meaning and effect of the trust’s terms are to be 3 determined by the law of the jurisdiction having the most 4 significant relationship to the matter at issue. Factors to consider 5 in determining the governing law include the place of the trust’s 6 creation, the location of the trust property, and the domicile of the 7 settlor, the trustee, and the beneficiaries. See Restatement 8 (Second) of Conflict of Laws Sections 270 cmt. c and 272 cmt. d 9 (1971). Other more general factors that may be pertinent in 10 particular cases include the relevant policies of the forum, the 11 relevant policies of other interested jurisdictions and degree of 12 their interest, the protection of justified expectations and certainty, 13 and predictability and uniformity of result. See Restatement 14 (Second) of Conflict of Laws Section 6 (1971). Usually, the law 15 of the trust’s principal place of administration will govern 16 administrative matters and the law of the place having the most 17 significant relationship to the trust’s creation will govern the 18 dispositive provisions. 19 This section is consistent with and was partially patterned on the 20 Hague Convention on the Law Applicable to Trusts and on their 21 Recognition, signed on July 1, 1985. Like this section, the Hague 22 Convention allows the settlor to designate the governing law. 23 Hague Convention art. 6. Absent a designation, the Convention 24 provides that the trust is to be governed by the law of the place 25 having the closest connection to the trust. Hague Convention 26 art. 7. The Convention also lists particular public policies for 27 which the forum may decide to override the choice of law that 28 would otherwise apply. These policies are protection of minors 29 and incapable parties, personal and proprietary effects of marriage, 30 succession rights, transfer of title and security interests in property, 31 protection of creditors in matters of insolvency, and, more 32 generally, protection of third parties acting in good faith. Hague 33 Convention art. 15. 34 For the authority of a settlor to designate a trust’s principal place 35 of administration, see Section 108(a). 36 37 South Carolina Comment 38 39 Under prior South Carolina law, there was no statutory 40 counterpart to this section; common law principles controlled. 41 Subsection (1) of UTC Section 107 was revised to give a settlor 42 the ability to dictate applicable state law without restriction. See, 43 however, Russell v. Wachovia Bank, 353 S.C. 208, 578 S.E.2d 3291 [422] 74 1 (2003), in which the South Carolina Supreme Court cited language 2 from the Restatement (Second) of Conflict of Laws Sections 3 268-270 (1971) in adopting a rule similar to that of UTC Section 4 107. Because SCTC Section 62-7-108 includes an additional 5 paragraph not in the UTC, which is at SCTC Section 62-7-108(a), 6 the reference to UTC Section 108(a) in the UTC Comment is 7 appropriate for SCTC Section 62-7-108(b). 8 9 Section 62-7-108. Principal place of administration. 10 (a) Unless otherwise designated by the terms of a trust, the 11 principal place of administration of a trust is the trustee’s usual 12 place of business where the records pertaining to the trust are kept, 13 or at the trustee’s residence if he has no such place of business. In 14 the case of cotrustees, the principal place of administration, if not 15 otherwise designated in the trust instrument, is (1) the usual place 16 of business of the corporate trustee if there is but one corporate 17 cotrustee, or (2) the usual place of business or residence of the 18 individual trustee who is a professional fiduciary if there is but one 19 such person and no corporate cotrustee, and otherwise (3) the usual 20 place of business or residence of any of the cotrustees as agreed 21 upon by them. 22 (b) Without precluding other means for establishing a 23 sufficient connection with the designated jurisdiction, terms of a 24 trust designating the principal place of administration are valid and 25 controlling if: 26 (1) a trustee’s principal place of business is located in or a 27 trustee is a resident of the designated jurisdiction; or 28 (2) all or part of the administration occurs in the designated 29 jurisdiction. 30 (c) A trustee is under a continuing duty to administer the trust 31 at a place appropriate to its purposes, its administration, and the 32 interests of the beneficiaries. 33 (d) Without precluding the right of the court to order, approve, 34 or disapprove a transfer, the trustee, in furtherance of the duty 35 prescribed by subsection (c), may transfer the trust’s principal 36 place of administration to another State or to a jurisdiction outside 37 of the United States. 38 (e) Unless otherwise designated in the trust, the trustee shall 39 notify the qualified beneficiaries of a proposed transfer of a trust’s 40 principal place of administration not less than 60 days before 41 initiating the transfer. The notice of proposed transfer must 42 include:1 [422] 75 1 (1) the name of the jurisdiction to which the principal place 2 of administration is to be transferred; 3 (2) the address and telephone number at the new location at 4 which the trustee can be contacted; 5 (3) an explanation of the reasons for the proposed transfer; 6 (4) the date on which the proposed transfer is anticipated to 7 occur; and 8 (5) the date, not less than 60 days after the giving of the 9 notice, by which the qualified beneficiary must notify the trustee 10 of an objection to the proposed transfer. 11 (f) The authority of a trustee under this section to transfer a 12 trust’s principal place of administration terminates if a qualified 13 beneficiary notifies the trustee of an objection to the proposed 14 transfer on or before the date specified in the notice. 15 (g) In connection with a transfer of the trust’s principal place 16 of administration, the trustee may transfer some or all of the trust 17 property to a successor trustee designated in the terms of the trust 18 or appointed pursuant to Section 62-7-704. 19 20 Comment 21 22 This section prescribes rules relating to a trust’s principal place 23 of administration. Locating a trust’s principal place of 24 administration will ordinarily determine which court has primary if 25 not exclusive jurisdiction over the trust. It may also be important 26 for other matters, such as payment of state income tax or 27 determining the jurisdiction whose laws will govern the trust. See 28 Section 107 comment. 29 Because of the difficult and variable situations sometimes 30 involved, the Uniform Trust Code does not attempt to further 31 define principal place of administration. A trust’s principal place 32 of administration ordinarily will be the place where the trustee is 33 located. Determining the principal place of administration 34 becomes more difficult, however, when cotrustees are located in 35 different states or when a single institutional trustee has trust 36 operations in more than one state. In such cases, other factors may 37 become relevant, including the place where the trust records are 38 kept or trust assets held, or in the case of an institutional trustee, 39 the place where the trust officer responsible for supervising the 40 account is located. 41 A concept akin to principal place of administration is used by 42 the Office of the Comptroller of the Currency. Reserves that 43 national banks are required to deposit with state authorities is1 [422] 76 1 based on the location of the office where trust assets are primarily 2 administered. See 12 C.F.R. Section 9.14(b). 3 Under the Uniform Trust Code, the fixing of a trust’s principal 4 place of administration will determine where the trustee and 5 beneficiaries have consented to suit (Section 202), and the rules for 6 locating venue within a particular state (Section 204). It may also 7 be considered by a court in another jurisdiction in determining 8 whether it has jurisdiction, and if so, whether it is a convenient 9 forum. 10 A settlor expecting to name a trustee or cotrustees with 11 significant contacts in more than one state may eliminate possible 12 uncertainty about the location of the trust’s principal place of 13 administration by specifying the jurisdiction in the terms of the 14 trust. Under subsection (a), a designation in the terms of the trust 15 is controlling if (1) a trustee is a resident of or has its principal 16 place of business in the designated jurisdiction, or (2) all or part of 17 the administration occurs in the designated jurisdiction. 18 Designating the principal place of administration should be 19 distinguished from designating the law to determine the meaning 20 and effect of the trust’s terms, as authorized by Section 107. A 21 settlor is free to designate one jurisdiction as the principal place of 22 administration and another to govern the meaning and effect of the 23 trust’s provisions. 24 Subsection (b) provides that a trustee is under a continuing duty 25 to administer the trust at a place appropriate to its purposes, its 26 administration, and the interests of the beneficiaries. “Interests of 27 the beneficiaries,” defined in Section 103(7), means the beneficial 28 interests provided n the terms of the trust. Ordinarily, absent a 29 substantial change or circumstances, the trustee may assume that 30 the original place of administration is also the appropriate place of 31 administration. The duty to administer the trust at an appropriate 32 place may also dictate that the trustee not move the trust. 33 Subsections (c)-(f) provide a procedure for changing the 34 principal place of administration to another state or country. Such 35 changes are often beneficial. A change may be desirable to secure 36 a lower state income tax rate, or because of relocation of the 37 trustee or beneficiaries, the appointment of a new trustee, or a 38 change in the location of the trust investments. The procedure for 39 transfer specified in this section applies only in the absence of a 40 contrary provision in the terms of the trust. See Section 105. To 41 facilitate transfer in the typical case, where all concur that a 42 transfer is either desirable or is at least not harmful, a transfer can 43 be accomplished without court approval unless a qualified1 [422] 77 1 beneficiary objects. To allow the qualified beneficiaries sufficient 2 time to review a proposed transfer, the trustee must give the 3 qualified beneficiaries at least 60 days prior notice of the transfer. 4 Notice must be given not only to qualified beneficiaries as defined 5 in Section 103(12) but also to those granted the rights of qualified 6 beneficiaries under Section 110. To assure that those receiving 7 notice have sufficient information upon which to make a decision, 8 minimum contents of the notice are specified. If a qualified 9 beneficiary objects, a trustee wishing to proceed with the transfer 10 must seek court approval. 11 In connection with a transfer of the principal place of 12 administration, the trustee may transfer some or all of the trust 13 property to a new trustee located outside of the state. The 14 appointment of a new trustee may also be essential if the current 15 trustee is ineligible to administer the trust in the new place. 16 Subsection (f) clarifies that the appointment of the new trustee 17 must comply with the provisions on appointment of successor 18 trustees as provided in the terms of the trust or under Section 704. 19 Absent an order of succession in the terms of the trust, 20 Section 704(c) provides the procedure for appointment of a 21 successor trustee of a noncharitable trust, and Section 704(d) the 22 procedure for appointment of a successor trustee of a charitable 23 trust. 24 While transfer of the principal place of administration will 25 normally change the governing law with respect to administrative 26 matters, a transfer does not normally alter the controlling law with 27 respect to the validity of the trust and the construction of its 28 dispositive provisions. See 5A Austin W. Scott & William F. 29 Fratcher, The Law of Trusts Section 615 (4th ed. 1989). 30 31 South Carolina Comment 32 33 Because SCTC Section 62-7-108 includes an additional 34 paragraph not in the UTC, which is at SCTC Section 62-7-108(a), 35 the references to the subsections of UTC Section 108 in the UTC 36 Comment should be adjusted correspondingly for SCTC Section 37 62-7-108. 38 SCTC Section 62-7-108(a) incorporates the provisions of former 39 SCPC Section 62-7-202 (which dealt with venue), except SCTC 40 subsection 108(a) is not limited to matters of venue. 41 SCTC Section 62-7-108(e), which corresponds to UTC 42 subsection 108(d), adds to the UTC version the introductory phrase 43 “unless otherwise designated in the trust.”1 [422] 78 1 2 Section 62-7-109. Methods and waiver of notice. 3 4 (a) Notice to a person under this article or the sending of a 5 document to a person under this article must be accomplished in a 6 manner reasonably suitable under the circumstances and likely to 7 result in receipt of the notice or document. Permissible methods of 8 notice or for sending a document include first-class mail, personal 9 delivery, delivery to the person’s last known place of residence or 10 place of business, or a properly directed electronic message. 11 (b) Notice otherwise required under this article or a document 12 otherwise required to be sent under this article need not be 13 provided to a person whose identity or location is unknown to and 14 not reasonably ascertainable by the trustee. 15 (c) Notice under this article or the sending of a document 16 under this article may be waived by the person to be notified or 17 sent the document. 18 (d) If notice of a hearing on any petition is required and, except 19 for specific notice requirements as otherwise provided, the 20 petitioner shall cause notice of the time and place of hearing of any 21 petition to be given to any interested person or his attorney if he 22 has appeared by attorney or requested that notice be sent to his 23 attorney. Notice shall be given: 24 (1) by mailing a copy thereof at least twenty days before the 25 time set for the hearing by certified, registered, or ordinary first 26 class mail addressed to the person being notified at the post office 27 address given in his request for notice, if any, or at his office or 28 place of residence, if known: 29 (2) by delivering a copy thereof to the person being notified 30 personally at least twenty days before the time set for the hearing; 31 or 32 (3) if the address or identity of any person is not known and 33 cannot be ascertained with reasonable diligence by publishing a 34 copy thereof in the same manner as required by law in the case of 35 the publication of a summons for an absent defendant in the court 36 of common pleas. 37 (e) The court for good cause shown may provide for a different 38 method or time of giving notice for any hearing. 39 (f) Proof of the giving of notice shall be made on or before the 40 hearing and filed in the proceeding. 41 42 Comment 431 [422] 79 1 Subsection (a) clarifies that notices under the Uniform Trust 2 Code may be given by any method likely to result in its receipt by 3 the person to be notified. The specific methods listed in the 4 subsection are illustrative, not exhaustive. Subsection (b) relieves 5 a trustee of responsibility for what would otherwise be an 6 impossible task, the giving of notice to a person whose identity or 7 location is unknown and not reasonably ascertainable by the 8 trustee. The section does not define when a notice is deemed to 9 have been sent or delivered or person deemed to be unknown or 10 not reasonably ascertainable, the drafters preferring to leave this 11 issue to the enacting jurisdiction’s rules of civil procedure. 12 Under the Uniform Trust Code, certain actions can be taken 13 upon unanimous consent of the beneficiaries or qualified 14 beneficiaries. See Sections 411 (termination of noncharitable 15 irrevocable trust) and 704 (appointment of successor trustee). 16 Subsection (b) of this section only authorizes waiver of notice. A 17 consent required from a beneficiary in order to achieve unanimity 18 is not waived because the beneficiary is missing. But the fact a 19 beneficiary cannot be located may be a sufficient basis for a 20 substitute consent to be given by another person on the 21 beneficiary’s behalf under the representation principles of 22 Article 3. 23 To facilitate administration, subsection (c) allows waiver of 24 notice by the person to be notified or sent the document. Among 25 the notices and documents to which this subsection can be applied 26 are notice of a proposed transfer of principal place of 27 administration (Section 108(d)) or of a trustee’s report 28 (Section 813(c)). This subsection also applies to notice to 29 qualified beneficiaries of a proposed trust combination or division 30 (Section 417), of a temporary assumption of duties without 31 accepting trusteeship (Section 701(c)(1)), and of a trustee’s 32 resignation (Section 705(a)(1)). 33 Notices under the Uniform Trust Code are nonjudicial. Pursuant 34 to subsection (d), notice of a judicial proceeding must be given as 35 provided in the applicable rules of civil procedure. 36 37 South Carolina Comment 38 39 Previous South Carolina law had no precise counterpart. 40 However, the South Carolina Probate Code contains various 41 provisions respecting notice. The general notice section, SCPC 42 Section 62-1-401 provides that notice of a hearing or other petition 43 shall be delivered at least twenty (20) days before the time set for1 [422] 80 1 the hearing by certified, registered, or ordinary first class mail, or 2 by delivering a copy to the person being notified at least twenty 3 (20) days before the time set for hearing. That section also 4 provides for the service of notice of hearing by publication if the 5 address or identity of the person cannot be ascertained with 6 reasonable diligence. SCTC Section 62-7-109(d) differs from the 7 UTC version and incorporates the substance of SCPC Section 8 62-1-401. The SCTC adds Subsections 62-7-109(e) and (f), which 9 are not in UTC Section 109. The references in the UTC Comment 10 to the subsections of UTC Section 109 should be adjusted 11 appropriately. 12 In a nonjudicial context, SCTC Section 62-7-109(b) does not 13 require notification of a person whose identity or location is 14 unknown or cannot be reasonably ascertainable. 15 16 Section 62-7-110. Requirement of notice to others. 17 18 (a) Whenever notice to qualified beneficiaries of a trust is 19 required under this article, the trustee must also give notice to any 20 other beneficiary who has sent the trustee a request for notice. 21 (b) A charitable organization expressly designated to receive 22 distributions under the terms of a charitable trust has the rights of a 23 qualified beneficiary under this article if the charitable 24 organization, on the date the charitable organization’s qualification 25 is being determined: 26 (A) is a distributee or permissible distributee of trust income 27 or principal; 28 (B) would be a distributee or permissible distributee of trust 29 income or principal upon the termination of the interests of other 30 distributees or permissible distributees then receiving or eligible to 31 receive distributions; or 32 (C) would be a distributee or permissible distributee of trust 33 income or principal if the trust terminated on that date. 34 (c) A person appointed to enforce a trust created for the care of 35 an animal or another noncharitable purpose as provided in Section 36 62-7-408 or 62-7-409 has the rights of a qualified beneficiary 37 under this article. 38 39 Comment 40 41 Under the Uniform Trust Code, certain notices need be given 42 only to the “qualified” beneficiaries. For the definition of 43 “qualified beneficiary,” see Section 103(12). Among these notices1 [422] 81 1 are notice of a transfer of the trust’s principal place of 2 administration (Section 108(d)), notice of a trust division or 3 combination (Section 417), notice of a trustee resignation 4 (Section 705(a)(1)), and notice of a trustee’s annual report 5 (Section 813(c)). Subsection (a) of this section authorizes other 6 beneficiaries to receive one or more of these notices by filing a 7 request for notice with the trustee. 8 Under the Code, certain actions, such as the appointment of a 9 successor trustee, can be accomplished by the consent of the 10 qualified beneficiaries. See, e.g., Section 704 (filling vacancy in 11 trusteeship). Subsection (a) only addresses notice, not required 12 consent. A person who requests notice under subsection (a) does 13 not thereby acquire a right to participate in actions that can be 14 taken only upon consent of the qualified beneficiaries. 15 Charitable trusts do not have beneficiaries in the usual sense. 16 However, certain persons, while not technically beneficiaries, do 17 have an interest in seeing that the trust is enforced. In the case of a 18 charitable trust, this includes the state’s attorney general and 19 charitable organizations expressly designated to receive 20 distributions under the terms of the trust, who under subsections 21 (b)-(c) are granted the rights of qualified beneficiaries. Because 22 the charitable organization must be named in the terms of the trust 23 and must be designated to receive distributions, excluded are 24 organizations who may receive distributions only in the trustee’s 25 discretion and organizations holding remainder interests subject to 26 a contingency. 27 Subsection (b) similarly grants the rights of qualified 28 beneficiaries to persons appointed by the terms of the trust or by 29 the court to enforce a trust created for an animal or other trust with 30 a valid purpose but no ascertainable beneficiary. For the 31 requirements for creating such trusts, see Sections 408 and 409. 32 “Attorney general” is placed in brackets in subsection (c) to 33 accommodate jurisdictions which grant enforcement authority over 34 charitable trusts to another designated official. 35 This section does not limit other means by which the attorney 36 general or other designated official can enforce a charitable trust. 37 38 2001 Amendment. By amendment in 2001, “charitable 39 organization expressly designated to receive distributions” was 40 substituted for “charitable organization expressly entitled to 41 receive benefits” in subsection (b). The amendment conforms the 42 language of this section to terminology used elsewhere in the 43 Code.1 [422] 82 1 2 South Carolina Comment 3 4 Former South Carolina had no statutory counterpart. SCTC 5 Section 62-7-110 includes provisions contained in the 2004 6 Amendments to the UTC, which are not discussed in the Comment 7 to UTC Section 110. SCTC Section 62-7-110 does not include a 8 counterpart to UTC subsection 110(d), in the 2004 UTC 9 Amendments, which gives the state Attorney General the rights of 10 a qualified beneficiary in certain cases. See, however, SCTC 11 Section 62-7-405, which provides certain rights and powers to the 12 South Carolina Attorney General. 13 14 Section 62-7-111. Nonjudicial settlement agreements. 15 16 (a) For purposes of this section, ‘interested persons’ means 17 persons whose consent would be required in order to achieve a 18 binding settlement were the settlement to be approved by the court. 19 (b) Interested persons may enter into a binding nonjudicial 20 settlement agreement with respect to only the following trust 21 matters: 22 (1) the approval of a trustee’s report or accounting; 23 (2) direction to a trustee to perform or refrain from 24 performing a particular administrative act or the grant to a trustee 25 of any necessary or desirable administrative power; 26 (3) the resignation or appointment of a trustee and the 27 determination of a trustee’s compensation; 28 (4) transfer of a trust’s principal place of administration; and 29 (5) liability of a trustee for an action relating to the trust. 30 (e) Any interested person may request the court to approve a 31 nonjudicial settlement agreement, to determine whether the 32 representation as provided in Part 3 was adequate, and to 33 determine whether the agreement contains terms and conditions 34 the court could have properly approved. 35 36 Comment 37 38 While the Uniform Trust Code recognizes that a court may 39 intervene in the administration of a trust to the extent its 40 jurisdiction is invoked by interested persons or otherwise provided 41 by law (see Section 201(a)), resolution of disputes by nonjudicial 42 means is encouraged. This section facilitates the making of such 43 agreements by giving them the same effect as if approved by the1 [422] 83 1 court. To achieve such certainty, however, subsection (c) requires 2 that the nonjudicial settlement must contain terms and conditions 3 that a court could properly approve. Under this section, a 4 nonjudicial settlement cannot be used to produce a result not 5 authorized by law, such as to terminate a trust in an impermissible 6 manner. 7 Trusts ordinarily have beneficiaries who are minors; 8 incapacitated, unborn or unascertained. Because such beneficiaries 9 cannot signify their consent to an agreement, binding settlements 10 can ordinarily be achieved only through the application of 11 doctrines such as virtual representation or appointment of a 12 guardian ad litem, doctrines traditionally available only in the case 13 of judicial settlements. The effect of this section and the Uniform 14 Trust Code more generally is to allow for such binding 15 representation even if the agreement is not submitted for approval 16 to a court. For the rules on representation, including appointments 17 of representatives by the court to approve particular settlements, 18 see Article 3. 19 Subsection (d) is a nonexclusive list of matters to which a 20 nonjudicial settlement may pertain. Other matters which may be 21 made the subject of a nonjudicial settlement are listed in the 22 Article 3 General Comment. The fact that the trustee and 23 beneficiaries may resolve a matter nonjudicially does not mean 24 that beneficiary approval is required. For example, a trustee may 25 resign pursuant to Section 705 solely by giving notice to the 26 qualified beneficiaries, a living settlor, and any cotrustees. But a 27 nonjudicial settlement between the trustee and beneficiaries will 28 frequently prove helpful in working out the terms of the 29 resignation. 30 Because of the great variety of matters to which a nonjudicial 31 settlement may be applied, this section does not attempt to 32 precisely define the “interested persons” whose consent is required 33 to obtain a binding settlement as provided in subsection (a). 34 However, the consent of the trustee would ordinarily be required to 35 obtain a binding settlement with respect to matters involving a 36 trustee’s administration, such as approval of a trustee’s report or 37 resignation. 38 39 South Carolina Comment 40 41 The South Carolina Probate Code has counterparts to South 42 Carolina Trust Code Section 62-7-111. In the estate context, 43 SCPC Section 62-3-912 provides for private agreements among1 [422] 84 1 successors to a decedent, which shall be binding on the personal 2 representative. Such agreements are however, subject to the rights 3 of creditors and taxing authorities. Under SCPC Section 62-3-912, 4 successors include testamentary trusts if the trustees thereof deem 5 it prudent to enter such an agreement. However, “[n]othing herein 6 relieves trustees of any duties owed to the beneficiaries of trust.” 7 Additionally, SCPC Sections 62-3-1101 and 62-3-1102 provide a 8 mechanism for compromise of controversies approved in a formal 9 proceeding in the Probate Court. The terms of the compromise are 10 to be set forth in an agreement that is presented to the Probate 11 Court for approval. Interested persons, including parents of minor 12 children, are to sign the agreement. Joinder is not required in 13 respect to interested persons whose identity cannot be reasonably 14 ascertained. Such compromises are subject to the rights of 15 creditors and to taxing authorities. Trustees of testamentary trusts, 16 to the extent they enter the compromise, are bound by its terms. 17 See also S. Alan Medlin, The Law of Wills and Trusts, Volume I, 18 Estate Planning in South Carolina (2002) at Section 509 19 (modification and early termination of irrevocable and 20 unamendable trusts). 21 Uniform Trust Code Section 111 allows binding nonjudicial 22 settlements for any trust matter, subject to certain limitations. 23 SCTC Section 62-7-111 is more restrictive, authorizing binding 24 nonjudicial settlements only for the enumerated matters. 25 Consequently, the Comment to UTC Section 111 should be 26 adjusted accordingly. 27 28 Section 62-7-112. Rules of construction. 29 30 The rules of construction that apply in this State to the 31 interpretation of and disposition of property by will also apply as 32 appropriate to the interpretation of the terms of a trust and the 33 disposition of the trust property. 34 35 Comment 36 37 This section is patterned after Restatement (Third) of Trusts 38 Section 25(2) and comment e (Tentative Draft No. 1, approved 39 1996), although this section, unlike the Restatement, also applies 40 to irrevocable trusts. The revocable trust is used primarily as a 41 will substitute, with its key provision being the determination of 42 the persons to receive the trust property upon the settlor’s death. 43 Given this functional equivalence between the revocable trust and1 [422] 85 1 a will, the rules for interpreting the disposition of property at death 2 should be the same whether the individual has chosen a will or 3 revocable trust as the individual’s primary estate planning 4 instrument. Over the years, the legislatures of the States and the 5 courts have developed a series of rules of construction reflecting 6 the legislative or judicial understanding of how the average testator 7 would wish to dispose of property in cases where the will is silent 8 or insufficiently clear. Few legislatures have yet to extend these 9 rules of construction to revocable trusts, and even fewer to 10 irrevocable trusts, although a number of courts have done so as a 11 matter of judicial construction. See Restatement (Third) of Trusts 12 Section 25, Reporter’s Notes to cmt. d and e (Tentative Draft 13 No. 1, approved 1996). 14 Because of the wide variation among the States on the rules of 15 construction applicable to wills, this Code does not attempt to 16 prescribe the exact rules to be applied to trusts but instead adopts 17 the philosophy of the Restatement that the rules applicable to trusts 18 ought to be the same, whatever those rules might be. 19 Rules of construction are not the same as constructional 20 preferences. A constructional preference is general in nature, 21 providing general guidance for resolving a wide variety of 22 ambiguities. An example is a preference for a construction that 23 results in a complete disposition and avoid illegality. Rules of 24 construction, on the other hand, are specific in nature, providing 25 guidance for resolving specific situations or construing specific 26 terms. Unlike a constructional preference, a rule of construction, 27 when applicable, can lead to only one result. See Restatement 28 (Third) of Property: Donative Transfers Section 11.3 and cmt. b 29 (Tentative Draft No. 1, approved 1995). 30 Rules of construction attribute intention to individual donors 31 based on assumptions of common intention. Rules of construction 32 are found both in enacted statutes and in judicial decisions. Rules 33 of construction can involve the meaning to be given to particular 34 language in the document, such as the meaning to be given to 35 “heirs” or “issue.” Rules of construction also address situations the 36 donor failed to anticipate. These include the failure to anticipate 37 the predecease of a beneficiary or to specify the source from which 38 expenses are to be paid. Rules of construction can also concern 39 assumptions as to how a donor would have revised donative 40 documents in light of certain events occurring after execution. 41 These include rules dealing with the effect of a divorce and 42 whether a specific devisee will receive a substitute gift if the1 [422] 86 1 subject matter of the devise is disposed of during the testator’s 2 lifetime. 3 Instead of enacting this section, a jurisdiction enacting this Code 4 may wish to enact detailed rules on the construction of trusts, 5 either in addition to its rules on the construction of wills or as part 6 of one comprehensive statute applicable to both wills and trusts. 7 For this reason and to encourage this alternative, the section has 8 been made optional. For possible models, see Uniform Probate 9 Code, Article 2, Parts 7 and 8, which was added to the UPC in 10 1990, and California Probate Code Sections 21101-21630, enacted 11 in 1994. 12 13 South Carolina Comment 14 15 The most direct counterpart in the law of wills is South Carolina 16 Probate Code Section 62-2-601 (Rules of Construction and 17 Presumption). That section provides that the testator’s intent 18 controls the legal effect of his dispositions, and it refers to 19 succeeding sections, which contain some, but not all, rules of 20 construction with respect to wills. Other will construction rules 21 are left to the common law in South Carolina. As to construction 22 of wills, see S. Alan Medlin, The Law of Wills and Trusts, Volume 23 1, Estate Planning in South Carolina (2002) at Section 330 et seq. 24 South Carolina Trust Code Section 62-7-112 is in part analogous 25 to SCPC Sections 62-1-102 and 63-1-103. SCPC Section 26 62-1-102, entitled “Purposes; Rule of Construction,” provides for a 27 liberal interpretation of the SCPC in furtherance of the policies set 28 forth in that section. SCPC Section 62-1-103 provides that the 29 provisions of the SCPC supplement existing principles of law and 30 equity. 31 32 Part 2 33 34 Judicial Proceedings 35 36 General Comment 37 38 This article addresses selected issues involving judicial 39 proceedings concerning trusts, particularly trusts with contacts in 40 more than one State or country. This article is not intended to 41 provide comprehensive coverage of court jurisdiction or procedure 42 with respect to trusts. These issues are better addressed elsewhere,1 [422] 87 1 for example in the State’s rules of civil procedure or as provided 2 by court rule. 3 Section 201 makes clear that the jurisdiction of the court is 4 available as invoked by interested persons or as otherwise 5 provided by law. Proceedings involving the administration of a 6 trust normally will be brought in the court at the trust’s principal 7 place of administration. Section 202 provides that the trustee and 8 beneficiaries are deemed to have consented to the jurisdiction of 9 the court at the principal place of administration as to any matter 10 relating to the trust. Sections 203 and 204 are optional, bracketed 11 provisions relating to subject-matter jurisdiction and venue. 12 13 South Carolina Comment 14 15 There is significant overlap between Part 2 of the Uniform Trust 16 Code covering judicial proceedings and former Part II under 17 Article 7 of the South Carolina Probate Code. To promote 18 consistency and familiarity with existing South Carolina law and 19 practice, the relevant South Carolina Probate Code language has 20 been maintained whenever possible under this part of the South 21 Carolina Trust Code. Additionally, several separate statutes 22 formerly under the South Carolina Probate Code regarding court 23 jurisdiction of trusts have been consolidated into a single section 24 herein. 25 26 Section 62-7-201. Role of court in administration of trust. 27 28 (a) Subject to the provisions of Section 62-1-302(c), the 29 probate court has exclusive jurisdiction of proceedings initiated by 30 interested parties concerning the internal affairs of trusts. 31 Proceedings which may be maintained under this section are those 32 concerning the administration and distribution of trusts, the 33 declaration of rights, and the determination of other matters 34 involving trustees and beneficiaries of trusts. These include, but 35 are not limited to, proceedings to: 36 (1) ascertain beneficiaries, determine any question arising in 37 the administration or distribution of any trust including questions 38 of construction of trust instruments, instruct trustees, and 39 determine the existence or nonexistence of any immunity, power, 40 privilege, duty, or right; 41 (2) review and settle interim or final accounts; 42 (3) review the propriety of employment of any person by a 43 trustee including any attorney, auditor, investment advisor or other1 [422] 88 1 specialized agent or assistant, and the reasonableness of the 2 compensation of any person so employed, and the reasonableness 3 of the compensation determined by the trustee for his own 4 services. Any person who has received excessive compensation 5 from a trust may be ordered to make appropriate refunds. The 6 provisions of this section do not apply to the extent there is a 7 contract providing for the compensation to be paid for the trustee’s 8 services or if the trust directs otherwise; and 9 (4) appoint or remove a trustee. 10 (b) A proceeding under this section does not result in 11 continuing supervisory proceedings. The management and 12 distribution of a trust estate, submission of accounts and reports to 13 beneficiaries, payment of trustee’s fees and other obligations of a 14 trust, acceptance and change of trusteeship, and other aspects of 15 the administration of a trust shall proceed expeditiously consistent 16 with the terms of the trust, free of judicial intervention and without 17 order, approval, or other action of any court, subject to the 18 jurisdiction of the court as invoked by interested parties or as 19 otherwise exercised as provided by law or by the terms of the trust. 20 (c) The probate court has concurrent jurisdiction with the 21 circuit courts of this State of actions and proceedings concerning 22 the external affairs of trusts. These include, but are not limited to, 23 the following proceedings: 24 (1) determine the existence or nonexistence of trusts created 25 other than by will; 26 (2) actions by or against creditors or debtors of trusts; and 27 (3) other actions and proceedings involving trustees and 28 third parties; 29 (d) The probate court has concurrent jurisdiction with the 30 circuit courts of this State over attorney’s fees. Attorney’s fees 31 may be set at a fixed or hourly rate or by contingency fee. 32 (e) The court will not, over the objection of a party, entertain 33 proceedings under this section involving a trust registered or 34 having its principal place of administration in another state, unless 35 (1) when all appropriate parties could not be bound by litigation in 36 the courts of the state where the trust is registered or has its 37 principal place of administration or (2) when the interests of justice 38 otherwise would seriously be impaired. The court may condition a 39 stay or dismissal of a proceeding under this section on the consent 40 of any party to jurisdiction of the state in which the trust is 41 registered or has its principal place of business, or the court may 42 grant a continuance or enter any other appropriate order. 431 [422] 89 1 Comment to Uniform Trust Code Section 201 2 3 While the Uniform Trust Code encourages the resolution of 4 disputes without resort to the courts by providing such options as 5 the nonjudicial settlement authorized by Section 111, the court is 6 always available to the extent its jurisdiction is invoked by 7 interested persons. The jurisdiction of the court with respect to 8 trust matters is inherent and historical and also includes the ability 9 to act on its own initiative, to appoint a special master to 10 investigate the facts of a case, and to provide a trustee with 11 instructions even in the absence of an actual dispute. 12 Contrary to the trust statutes in some States, the Uniform Trust 13 Code does not create a system of routine or mandatory court 14 supervision. While subsection (b) authorizes a court to direct that 15 a particular trust be subject to continuing court supervision, the 16 court’s intervention will normally be confined to the particular 17 matter brought before it. 18 Subsection (c) makes clear that the court’s jurisdiction may be 19 invoked even absent an actual dispute. Traditionally, courts in 20 equity have heard petitions for instructions and have issued 21 declaratory judgments if there is a reasonable doubt as to the 22 extent of the trustee’s powers or duties. The court will not 23 ordinarily instruct trustees on how to exercise discretion, however. 24 See Restatement (Second) of Trusts Section 187, 259 (1959). This 25 section does not limit the court’s equity jurisdiction. Beyond 26 mentioning petitions for instructions and actions to declare rights, 27 subsection (c) does not attempt to list the types of judicial 28 proceedings involving trust administration that might be brought 29 by a trustee or beneficiary. Such an effort is made in California 30 Probate Code Section 17200. Excluding matters not germane to 31 the Uniform Trust Code, the California statute lists the following 32 as items relating to the “internal affairs” of a trust: determining 33 questions of construction; determining the existence or 34 nonexistence of any immunity, power, privilege, duty, or right; 35 determining the validity of a trust provision; ascertaining 36 beneficiaries and determining to whom property will pass upon 37 final or partial termination of the trust; settling accounts and 38 passing upon the acts of a trustee, including the exercise of 39 discretionary powers; instructing the trustee; compelling the 40 trustee to report information about the trust or account to the 41 beneficiary; granting powers to the trustee; fixing or allowing 42 payment of the trustee’s compensation or reviewing the 43 reasonableness of the compensation; appointing or removing a1 [422] 90 1 trustee; accepting the resignation of a trustee; compelling redress 2 of a breach of trust by any available remedy; approving or 3 directing the modification or termination of a trust; approving or 4 directing the combination or division of trusts; and authorizing or 5 directing transfer of a trust or trust property to or from another 6 jurisdiction. 7 8 Comment to Uniform Trust Code Section 203 9 10 This section provides a means for distinguishing the jurisdiction 11 of the court having primary jurisdiction for trust matters, whether 12 denominated the probate court, chancery court, or by some other 13 name, from other courts in a State that may on occasion resolve 14 disputes concerning trusts. The section has been placed in 15 brackets because the enacting jurisdiction may already address 16 subject-matter jurisdiction by other statute or court rule. The topic 17 also need not be addressed in States having unified court systems. 18 For an explanation of types of proceedings which may be brought 19 concerning the administration of a trust, see the Comment to 20 Section 201. 21 22 South Carolina Comment 23 24 There is significant overlap between Part 2 of the Uniform Trust 25 Code covering judicial proceedings and former Part II under 26 Article 7 of the South Carolina Probate Code. To promote 27 consistency and familiarity with existing South Carolina law and 28 practice, the relevant South Carolina Probate Code language has 29 been maintained whenever possible under this part of the South 30 Carolina Trust Code. Additionally, several separate statutes 31 formerly under the South Carolina Probate Code regarding court 32 jurisdiction of trusts have been consolidated into a single section 33 herein. 34 SCTC subsections 62-7-201(a) and (b) incorporate former South 35 Carolina Probate Code Section 62-7-201 regarding the Probate 36 Court’s exclusive jurisdiction over the internal affairs of trusts. 37 Subsection (3)(a) has been taken from former South Carolina 38 Probate Code Section 62-7-205. Such exclusive jurisdiction is 39 subject to Section 62-1-302(c) of the South Carolina Probate Code 40 regarding a party’s right to remove a proceeding to the circuit 41 court. 42 Subsections (c) and (d) are taken from former South Carolina 43 Probate Code Section 62-7-204(A). 1 [422] 91 1 Subsection (e) is taken from former South Carolina Probate 2 Code Section 62-7-203. 3 Subsection (e) refers to a trust’s “principal place of 4 administration” which is addressed under South Carolina Trust 5 Code Section 62-7-108. 6 Whereas the Uniform Trust Code encourages resolution of 7 disputes without resort to courts through options such as 8 nonjudicial settlements authorized by Section 111, the South 9 Carolina Trust Code limits nonjudicial settlements to specified 10 matters set forth in Section 62-7-111, thereby generally 11 maintaining the practice requiring court involvement for resolution 12 of trust disputes. 13 SCTC Section 62-7-201 covers matters dealt with in Uniform 14 Trust Code Sections 201 and 203. Consequently, the UTC 15 Comments from both sections are included hereinabove, but 16 because SCTC Section 62-7-201 differs significantly from those 17 UTC sections, the UTC Comments should be adjusted accordingly. 18 19 Section 62-7-202. Jurisdiction over trustee and beneficiary. 20 21 (a) By accepting the trusteeship of a trust having its principal 22 place of administration in this State or by moving the principal 23 place of administration to this State, the trustee submits personally 24 to the jurisdiction of the courts of this State regarding any matter 25 involving the trust. 26 (b) With respect to their interests in the trust, the beneficiaries 27 of a trust having its principal place of administration in this State 28 are subject to the jurisdiction of the courts of this State regarding 29 any matter involving the trust. By accepting a distribution from 30 such a trust, the recipient submits personally to the jurisdiction of 31 the courts of this State regarding any matter involving the trust. 32 (c) This section does not preclude other methods of obtaining 33 jurisdiction over a trustee, beneficiary, or other person receiving 34 property from the trust. 35 36 Comment 37 38 This section clarifies that the courts of the principal place of 39 administration have jurisdiction to enter orders relating to the trust 40 that will be binding on both the trustee and beneficiaries. Consent 41 to jurisdiction does not dispense with any required notice, 42 however. With respect to jurisdiction over a beneficiary, the1 [422] 92 1 Comment to Uniform Probate Code Section 7-103, upon which 2 portions of this section are based, is instructive: 3 It also seems reasonable to require beneficiaries to go to the seat 4 of the trust when litigation has been instituted there concerning a 5 trust in which they claim beneficial interests, much as the rights of 6 shareholders of a corporation can be determined at a corporate 7 seat. The settlor has indicated a principal place of administration 8 by its selection of a trustee or otherwise, and it is reasonable to 9 subject rights under the trust to the jurisdiction of the Court where 10 the trust is properly administered. 11 The jurisdiction conferred over the trustee and beneficiaries by 12 this section does not preclude jurisdiction by courts elsewhere on 13 some other basis. Furthermore, the fact that the courts in a new 14 State acquire jurisdiction under this section following a change in a 15 trust’s principal place of administration does not necessarily mean 16 that the courts of the former principal place of administration lose 17 jurisdiction, particularly as to matters involving events occurring 18 prior to the transfer. 19 The jurisdiction conferred by this section is limited. Pursuant to 20 subsection (b), until a distribution is made, jurisdiction over a 21 beneficiary is limited to the beneficiary’s interests in the trust. 22 Personal jurisdiction over a beneficiary is conferred only upon the 23 making of a distribution. Subsection (b) also gives the court 24 jurisdiction over other recipients of distributions. This would 25 include individuals who receive distributions in the mistaken belief 26 they are beneficiaries. 27 For a discussion of jurisdictional issues concerning trusts, see 28 5A Austin W. Scott & William F. Fratcher, The Law of Trusts 29 Sections 556-573 (4th ed. 1989). 30 31 South Carolina Comment 32 33 There was no corresponding statute under the South Carolina 34 Probate Code. 35 A trust’s “principal place of administration” is addressed in 36 SCTC Section 62-7-108. 37 38 Section 62-7-203. [Reserved]. 39 40 Section 62-7-204. Venue. 41 42 (a) Except as otherwise provided in subsection (b), venue for a 43 judicial proceeding involving a trust is in the county of this State in1 [422] 93 1 which the trust’s principal place of administration is or will be 2 located and, if the trust is created by will and the estate is not yet 3 closed, in the county in which the decedent’s estate is being 4 administered. 5 (b) If a trust has no trustee, venue for a judicial proceeding for 6 the appointment of a trustee is in a county in which any trust 7 property is located or the county where the last Trustee had its 8 principal place of administration, and if the trust is created by will, 9 in the county in which the decedent’s estate was or is being 10 administered. 11 (c) If proceedings concerning the same trust could be 12 maintained in more than one place in South Carolina, the court in 13 which the proceeding is first commenced has the exclusive right to 14 proceed. 15 (d) If proceedings concerning the same trust are commenced in 16 more than one court of South Carolina, the court in which the 17 proceeding was first commenced shall continue to hear the matter, 18 and the other courts shall hold the matter in abeyance until the 19 question of venue is decided, and, if the ruling court determines 20 that venue is properly in another court, it shall transfer the 21 proceeding to the other court. 22 (e) If a court finds that, in the interest of justice, a proceeding 23 or file concerning a trust should be in another court in South 24 Carolina, the court making the finding may transfer the proceeding 25 or file to the other court. 26 27 Comment 28 29 This optional, bracketed section is made available for 30 jurisdictions that conclude that venue for a judicial proceeding 31 involving a trust is not adequately addressed in local rules of civil 32 procedure. For jurisdictions enacting this section, general rules 33 governing venue continue to apply in cases not covered by this 34 section. This includes most proceedings where jurisdiction over a 35 trust, trust property, or parties to a trust is based on a factor other 36 than the trust’s principal place of administration. The general rules 37 governing venue also apply when the principal place of 38 administration of a trust is in another locale, but jurisdiction is 39 proper in the enacting State. 40 41 South Carolina Comment 421 [422] 94 1 South Carolina Trust Code subsections 62-7-204 (a) and (b) are 2 taken from former South Carolina Probate Code Section 62-7-202. 3 SCTC subsections (c), (d), and (e) are taken from former South 4 Carolina Probate Code Section 62-1-303. 5 A trust’s “principal place of administration” is addressed in 6 SCTC Section 62-7-108. 7 Because SCTC Section 62-7-204 differs significantly from UTC 8 Section 204, the UTC Comment should be adjusted accordingly. 9 10 Part 3 11 Representation 12 13 General Comment 14 15 This article deals with representation of beneficiaries, both 16 representation by fiduciaries (personal representatives, trustees, 17 guardians, and conservators), and what is known as virtual 18 representation. Representation is a topic not adequately addressed 19 under the trust law of most States. Representation is addressed in 20 the Restatement (First) of Property Sections 180-186 (1936), but 21 the coverage of this article is more complete. 22 Section 301 is the introductory section, laying out the scope of 23 the article. The representation principles of this article have 24 numerous applications under this Code. The representation 25 principles of the article apply for purposes of settlement of 26 disputes, whether by a court or nonjudicially. They apply for the 27 giving of required notices. They apply for the giving of consents 28 to certain actions. 29 Sections 302-305 cover the different types of representation. 30 Section 302 deals with representation by the holder of a general 31 testamentary power of appointment. (Revocable trusts and 32 presently exercisable general powers of appointment are covered 33 by Section 603, which grant the settlor or holder of the power all 34 rights of the beneficiaries or persons whose interests are subject to 35 the power). Section 303 deals with representation by a fiduciary, 36 whether of an estate, trust, conservatorship, or guardianship. The 37 section also allows a parent without a conflict of interest to 38 represent and bind a minor or unborn child. Section 304 is the 39 virtual representation provision. It provides for representation of 40 and the giving of a binding consent by another person having a 41 substantially identical interest with respect to the particular issue. 42 Section 305 authorizes the court to appoint a representative to 43 represent the interests of unrepresented persons or persons for1 [422] 95 1 whom the court concludes the other available representation might 2 be inadequate. 3 The provisions of this article are subject to modification in the 4 terms of the trust. See Section 105. Settlors are free to specify 5 their own methods for providing substituted notice and obtaining 6 substituted consent. 7 8 South Carolina Comment 9 10 There is significant overlap between Part 3 of the Uniform Trust 11 Code covering judicial proceedings and South Carolina Probate 12 Code provisions concerning representation of others. To promote 13 consistency and familiarity with existing South Carolina law and 14 practice, the relevant South Carolina Probate Code language has 15 been maintained whenever possible under this part of the South 16 Carolina Trust Code 17 18 Section 62-7-301. When parties bound by others. 19 20 (a) For purposes of this part, ‘beneficiary representative’ refers 21 to a person who may represent and bind another person concerning 22 the affairs of trusts. 23 (b) Notice to a beneficiary representative has the same effect as 24 if notice were given directly to the represented person. Notice of 25 a hearing on any petition in a judicial proceeding must be given 26 pursuant to Section 62-7-109(d). 27 (c) The consent of a beneficiary representative is binding on 28 the person represented unless the person represented objects to the 29 representation before the consent would otherwise have become 30 effective. 31 (d) Except as otherwise provided in Sections 62-7-411 and 32 62-7-602, a person who under this part may represent a settlor who 33 lacks capacity may receive notice and give a binding consent on 34 the settlor’s behalf. 35 (e) In judicial proceedings, orders binding a beneficiary 36 representative under this part bind the person(s) represented by 37 that beneficiary representative. 38 39 Comment 40 41 This section is general and introductory, laying out the scope of 42 the article.1 [422] 96 1 Subsection (a) validates substitute notice to a person who may 2 represent and bind another person as provided in the succeeding 3 sections of this article. Notice to the substitute has the same effect 4 as if given directly to the other person. Subsection (a) does not 5 apply to notice of a judicial proceeding. Pursuant to Section 6 109(d), notice of a judicial proceeding must be given as provided 7 in the applicable rules of civil procedure, which may require that 8 notice not only be given to the representative but also to the person 9 represented. For a model statute for the giving of notice in such 10 cases, see Unif. Probate Code Section 1-403(3). Subsection (a) 11 may be used to facilitate the giving of notice to the qualified 12 beneficiaries of a proposed transfer of principal place of 13 administration (Section 108(d)), of a proposed trust combination or 14 division (Section 417), of a temporary assumption of duties 15 without accepting trusteeship (Section 701(c)(1)), of a trustee’s 16 resignation (Section 705(a)(1)), and of a trustee’s report (Section 17 813(c)). 18 Subsection (b) deals with the effect of a consent, whether by 19 actual or virtual representation. Subsection (b) may be used to 20 facilitate consent of the beneficiaries to modification or 21 termination of a trust, with or without the consent of the settlor 22 (Section 411), agreement of the qualified beneficiaries on 23 appointment of a successor trustee of a noncharitable trust 24 (Section 704(c)(2)), and a beneficiary’s consent to or release or 25 affirmance of the actions of a trustee (Section 1009). A consent by 26 a representative bars a later objection by the person represented, 27 but a consent is not binding if the person represented raises an 28 objection prior to the date the consent would otherwise become 29 effective. The possibility that a beneficiary might object to a 30 consent given on the beneficiary’s behalf will not be germane in 31 many cases because the person represented will be unborn or 32 unascertained. However, the representation principles of this 33 article will sometimes apply to adult and competent beneficiaries. 34 For example, while the trustee of a revocable trust entitled to a 35 pourover devise has authority under Section 303 to approve the 36 personal representative’s account on behalf of the trust 37 beneficiaries, such consent would not be binding on a trust 38 beneficiary who registers an objection. Subsection (b) implements 39 cases such as Barber v. Barber, 837 P.2d 714 (Alaska 1992), 40 which held that the a refusal to allow an objection by an adult 41 competent remainder beneficiary violated due process. 42 Subsection (c) implements the policy of Sections 411 and 602 43 requiring express authority in the power of attorney or approval of1 [422] 97 1 court before the settlor’s agent, conservator or guardian may 2 consent on behalf of the settlor to the termination or revocation of 3 the settlor’s revocable trust. 4 5 South Carolina Comment 6 7 This section applies to both judicial and nonjudicial matters 8 involving trusts. Nonjudicial matters may include, for example, 9 the transfer of a trust’s principal place of business, a proposed trust 10 combination or division, a trustee’s resignation, appointment of a 11 successor trustee by consent, a trustee’s resignation, and the 12 consent to, release of, or affirmance of a trustee’s actions. See 13 SCTC Section 62-7-111. 14 The application of this section to judicial proceedings is 15 currently provided for in South Carolina Probate Code Section 16 62-1-401. Subsection (b) of South Carolina Trust Code Section 17 62-7-301 confirms that notice of a hearing on a petition in a 18 judicial proceeding must be given in the manner prescribed under 19 SCTC Section 62-7-109(d). However, this section does not 20 expressly address the manner of commencing a judicial 21 proceeding. 22 Subsection (a) defines the term “beneficiary representative” for 23 purposes of this part in an effort to avoid confusion between the 24 Uniform Trust Code term “representative” and the familiar term 25 “personal representative” under the South Carolina Probate Code. 26 Subsection (d) addressing a person who may represent an 27 incapacitated settlor specifically references the possibility of 28 additional requirements imposed under Section 62-7-411 regarding 29 modification or termination of noncharitable irrevocable trusts by 30 consent and Section 62-7-602 addressing revocation or amendment 31 of revocable trusts. 32 Subsection (e) confirms that orders in a judicial proceeding 33 binding a beneficiary representative bind the person(s) represented 34 by that beneficiary representative. 35 Because SCTC Section 62-7-301 differs significantly from the 36 corresponding UTC section, the UTC Comment should be adjusted 37 accordingly. 38 39 Section 62-7-302. Representation by holder of general 40 testamentary power of appointment. 41 42 To the extent there is no conflict of interest between the holder 43 of a presently exercisable general power of appointment and the1 [422] 98 1 persons represented with respect to the particular question or 2 dispute, the holder may represent and bind persons whose 3 interests, as permissible appointees, takers in default, or otherwise, 4 are subject to the power. The term ‘presently exercisable general 5 power of appointment’ includes a testamentary general power of 6 appointment having no conditions precedent to its exercise other 7 than the death of the holder, the validity of the holder’s last Will 8 and Testament, and the inclusion of a provision in the Will 9 sufficient to exercise this power. 10 11 Comment 12 This section specifies the circumstances under which a holder of 13 a general testamentary power of appointment may receive notices 14 on behalf of and otherwise represent and bind persons whose 15 interests are subject to the power, whether as permissible 16 appointees, takers in default, or otherwise. Such representation is 17 allowed except to the extent there is a conflict of interest with 18 respect to the particular matter or dispute. Typically, the holder of 19 a general testamentary power of appointment is also a life income 20 beneficiary of the trust, oftentimes of a trust intended to qualify for 21 the federal estate tax marital deduction. See I.R.C. 22 Section 2056(b)(5). Without the exception for conflict of interest, 23 the holder of the power could act in a way that could enhance the 24 holder’s income interests to the detriment of the appointees or 25 takers in default, whoever they may be. 26 27 South Carolina Comment 28 29 This section tracks the language of current South Carolina 30 Probate Code Section 62-1-108 which defines the term “presently 31 exercisable general power of appointment.” This section does not 32 extend the substitute representation under this section to limited or 33 nongeneral powers of appointment (which are also not covered 34 under South Carolina Probate Code Section 62-1-108). 35 36 Section 62-7-303. Representation by fiduciaries and 37 parents. 38 39 (a) To the extent there is no conflict of interest between the 40 following beneficiary representatives and the person represented or 41 among those being represented with respect to a particular 42 question or dispute:1 [422] 99 1 (1) a conservator may represent and bind the estate that the 2 conservator controls to the extent of the powers and authority 3 conferred upon conservators generally or by court order; 4 (2) a guardian may represent and bind the ward if a 5 conservator of the ward’s estate has not been appointed to the 6 extent of the powers and authority conferred upon guardians 7 generally or by court order; 8 (3) an agent may represent and bind the principal to the 9 extent the agent has authority to act with respect to the particular 10 question or dispute; 11 (4) a trustee may represent and bind the beneficiaries of the 12 trust with respect to questions or disputes involving the trust; 13 (5) a personal representative of a decedent’s estate may 14 represent and bind persons interested in the estate with respect to 15 questions or disputes involving the decedent’s estate; and, 16 (6) a parent may represent and bind the parent’s minor or 17 unborn child if a conservator or guardian for the child has not been 18 appointed. 19 (b) The order in which the beneficiary representatives are listed 20 above sets forth the priority each such beneficiary representative 21 has relative to the others. In any judicial proceeding or upon 22 petition to the court, the court for good cause may appoint a 23 beneficiary representative having lower priority or a person having 24 no priority. 25 26 Comment 27 28 This section allows for representation of persons by their 29 fiduciaries (conservators, guardians, agents, trustees, and personal 30 representatives), a principle that has long been part of the law. 31 Paragraph (6), which allows parents to represent their children, is 32 more recent, having originated in 1969 upon approval of the 33 Uniform Probate Code. This section is not limited to 34 representation of beneficiaries. It also applies to representation of 35 the settlor. Representation is not available if the fiduciary or 36 parent is in a conflict position with respect to the particular matter 37 or dispute, however. A typical conflict would be where the 38 fiduciary or parent seeking to represent the beneficiary is either the 39 trustee or holds an adverse beneficial interest. 40 Paragraph (2) authorizes a guardian to bind and represent a ward 41 if a conservator of the ward’s estate has not been appointed. 42 Granting a guardian authority to represent the ward with respect to 43 interests in the trust can avoid the need to seek appointment of a1 [422] 100 1 conservator. This grant of authority to act with respect to the 2 ward’s trust interest may broaden the authority of a guardian in 3 some States although not in States that have adopted the Section 4 1-403 of the Uniform Probate Code, from which this section was 5 derived. Under the Uniform Trust Code, a “conservator” is 6 appointed by the court to manage the ward’s property, a 7 “guardian” to make decisions with respect to the ward’s personal 8 affairs. See Section 103. 9 Paragraph (3) authorizes an agent to represent a principal only to 10 the extent the agent has authority to act with respect to the 11 particular question or dispute. Pursuant to Sections 411 and 602, 12 an agent may represent a settlor with respect to the amendment, 13 revocation or termination of the trust only to the extent this 14 authority is expressly granted either in the trust or the power. 15 Otherwise, depending on the particular question or dispute, a 16 general grant of authority in the power may be sufficient to confer 17 the necessary authority. 18 19 South Carolina Comment 20 21 South Carolina Probate Code Section 62-1-403 is the 22 counterpart to South Carolina Trust Code Section 62-7-303. The 23 SCTC, however, adds representation by an agent on behalf of the 24 principal under Subsection (a)(3). 25 The authority of a conservator or guardian under this section is 26 subject to the authority conferred upon conservators and guardians 27 generally under provisions of the South Carolina Probate Code or 28 by court order, it not being the intent herein to enlarge a 29 conservator’s or guardian’s powers otherwise. 30 Subsection (b) prioritizes the right to act as substitute 31 representative where more than one such representation may apply. 32 33 Section 62-7-304. Representation by person having 34 substantially identical interest. 35 36 Unless otherwise represented, a minor, incapacitated, or unborn 37 individual, or a person whose identity or location is unknown and 38 not reasonably ascertainable, may be represented by and bound by 39 another having a substantially identical interest with respect to the 40 particular question or dispute, but only to the extent there is no 41 conflict of interest between the beneficiary representative and the 42 person represented and provided the interest of the person1 [422] 101 1 represented is adequately represented by the beneficiary 2 representative. 3 4 Comment 5 6 This section authorizes a person with a substantially identically 7 interest with respect to a particular question or dispute to represent 8 and bind an otherwise unrepresented minor, incapacitated or 9 unborn individual, or person whose location is unknown and not 10 reasonably ascertainable. This section is derived from Section 11 1-403(2)(iii) of the Uniform Probate Code, but with several 12 modifications. Unlike the UPC, this section does not expressly 13 require that the representation be adequate, the drafters preferring 14 to leave this issue to the courts. Furthermore, this section extends 15 the doctrine of virtual representation to representation of minors 16 and incapacitated individuals. Finally, this section does not apply 17 to the extent there is a conflict of interest between the 18 representative and the person represented. 19 Restatement (First) of Property Sections 181 and 185 (1936) 20 provide that virtual representation is inapplicable if the interest 21 represented was not sufficiently protected. Representation is 22 deemed sufficiently protective as long as it does not appear that the 23 representative acted in hostility to the interest of the person 24 represented. Restatement (First) of Property Section 185 (1936). 25 Evidence of inactivity or lack of skill is material only to the extent 26 it establishes such hostility. Restatement (First) of Property 27 Section 185 cmt. b (1936). 28 Typically, the interests of the representative and the person 29 represented will be identical. A common example would be a trust 30 providing for distribution to the settlor’s children as a class, with 31 an adult child being able to represent the interests of children who 32 are either minors or unborn. Exact identity of interests is not 33 required, only substantial identity with respect to the particular 34 question or dispute. Whether such identity is present may depend 35 on the nature of the interest. For example, a presumptive 36 remaindermen may be able to represent alternative remaindermen 37 with respect to approval of a trustee’s report but not with respect to 38 interpretation of the remainder provision or termination of the 39 trust. Even if the beneficial interests of the representative and 40 person represented are identical, representation is not allowed in 41 the event of conflict of interest. The representative may have 42 interests outside of the trust that are adverse to the interest of the 43 person represented, such as a prior relationship with the trustee or1 [422] 102 1 other beneficiaries. See Restatement (First) of Property 2 Section 185 cmt. d (1936). 3 4 South Carolina Comment 5 6 South Carolina Probate Code Section 62-1-403(2)(iii) is the 7 current counterpart to this Section 62-7-304. However, the South 8 Carolina Trust Code adds an incapacitated person to the list of 9 those who may be represented by another person under this 10 section. 11 Whereas the Uniform Trust Code conditions the application of 12 this provision on there being no conflict of interest between the 13 beneficiary representative and the person represented, South 14 Carolina adds the additional condition that the interest of the 15 person represented be adequately represented by the beneficiary 16 representative, consistent with current South Carolina Probate 17 Code Section 62-1-403(2)(iii). 18 19 Section 62-7-305. Appointment of representative. 20 21 At any point in a judicial proceeding, a court may appoint a 22 guardian ad litem to represent the interest of a minor, an 23 incapacitated, unborn, or ascertained person, or a person whose 24 identity or address is unknown, if the court determines that 25 representation of the interest otherwise would be inadequate. If 26 not precluded by conflict of interests, a guardian ad litem may be 27 appointed to represent several persons or interests. The court shall 28 set out its reasons for appointing a guardian ad litem as a part of 29 the record of the proceeding. 30 31 Comment 32 33 This section is derived from Section 1-403(4) of the Uniform 34 Probate Code. However, this section substitutes “ representative” 35 for “guardian ad litem” to signal that a representative under this 36 Code serves a different role. Unlike a guardian ad litem, under this 37 section a representative can be appointed to act with respect to a 38 nonjudicial settlement or to receive a notice on a beneficiary’s 39 behalf. Furthermore, in making decisions, a representative may 40 consider general benefit accruing to living members of the family. 41 “Representative” is placed in brackets in case the enacting 42 jurisdiction prefers a different term. The court may appoint a1 [422] 103 1 representative to act for a person even if the person could be 2 represented under another section of this article. 3 4 South Carolina Comment 5 6 Whereas the Uniform Trust Code encourages nonjudicial 7 settlements and authorizes court appointment of a representative to 8 act like a guardian ad litem but without ongoing court 9 involvement, South Carolina expressly limits the scope of 10 nonjudicial settlements to those matters specified in Section 11 62-7-111 and follows current practice for the appointment of 12 guardians ad litem and ongoing court involvement pursuant to 13 South Carolina Probate Code Section 62-1-403(4). 14 15 PART 4 16 17 Creation, Validity, Modification, and Termination of Trusts 18 19 Section 62-7-401. Methods of creating trust. 20 21 (a) A trust described in Section 62-7-102 may be created by: 22 (1) transfer of property to another person as trustee during 23 the settlor’s lifetime or by will or other disposition taking effect 24 upon the settlor’s death; 25 (2) written declaration signed by the owner of property that 26 the owner holds identifiable property as trustee; or 27 (3) exercise of a power of appointment in favor of a trustee. 28 (b) When any conveyance shall be made of any lands or 29 tenements by which a trust or confidence shall or may arise or 30 result by the implication or construction of law or be transferred or 31 extinguished by act or operation of law, such trust or confidence 32 shall be of like force and effect as it would have been without 33 Section 62-7-401(a). 34 (c) A revocable inter vivos trust may be created either by 35 declaration of trust or by a transfer of property and is not rendered 36 invalid because the settler retains substantial control over the trust 37 including, but not limited to, (1) a right of revocation, (2) 38 substantial beneficial interests in the trust, or (3) the power to 39 control investments or reinvestments. Nothing herein, however, 40 shall prevent a finding that a revocable inter vivos trust, 41 enforceable for other purposes, is illusory for purposes of 42 determining a spouse’s elective share rights under Section 43 62-2-201 et seq. A finding that a revocable inter vivos trust is1 [422] 104 1 illusory and thus invalid for purposes of determining a spouse’s 2 elective share rights under Section 62-2-201 et seq. shall not 3 render that revocable inter vivos trust invalid, but would allow 4 inclusion of the trust assets as part of the probate estate of the 5 settlor only for the purpose of calculating the elective share and 6 would make available the trust assets for satisfaction of the 7 elective share only to the extent necessary under Section 62-2-207. 8 9 Comment 10 11 This section is based on Restatement (Third) of Trusts Section 12 10 (Tentative Draft No. 1, approved 1996), and Restatement 13 (Second) of Trusts Section 17 (1959). Under the methods 14 specified for creating a trust in this section, a trust is not created 15 until it receives property. For what constitutes an adequate 16 property interest, see Restatement (Third) of Trusts Sections 40-41 17 (Tentative Draft No. 2, approved 1999); Restatement (Second) of 18 Trusts Sections 74-86 (1959). The property interest necessary to 19 fund and create a trust need not be substantial. A revocable 20 designation of the trustee as beneficiary of a life insurance policy 21 or employee benefit plan has long been understood to be a 22 property interest sufficient to create a trust. See Section 103(12) 23 (“property” defined). Furthermore, the property interest need not 24 be transferred contemporaneously with the signing of the trust 25 instrument. A trust instrument signed during the settlor’s lifetime 26 is not rendered invalid simply because the trust was not created 27 until property was transferred to the trustee at a much later date, 28 including by contract after the settlor’s death. A pourover devise 29 to a previously unfunded trust is also valid and may constitute the 30 property interest creating the trust. See Unif Testamentary 31 Additions to Trusts Act Section 1 (1991), codified at Uniform 32 Probate Code Section 2-511 (pourover devise to trust valid 33 regardless of existence, size, or character of trust corpus). See also 34 Restatement (Third) of Trusts Section 19 (Tentative Draft No. 1, 35 approved 1996). 36 While this section refers to transfer of property to a trustee, a 37 trust can be created even though for a period of time no trustee is 38 in office. See Restatement (Third) of Trusts Section 2 cmt. g 39 (Tentative Draft No. 1, approved 1996); Restatement (Second) of 40 Trusts Section 2 cmt. i (1959). A trust can also be created without 41 notice to or acceptance by a trustee or beneficiary. See 42 Restatement (Third) of Trusts Section 14 (Tentative Draft No. 1,1 [422] 105 1 approved 1996); Restatement (Second) of Trusts Sections 35-36 2 (1959). 3 The methods specified in this section are not exclusive. Section 4 102 recognizes that trusts can also be created by special statute or 5 court order. See also Restatement (Third) of Trusts Section 1 cmt. 6 a (Tentative Draft No. 1, approved 1996); Unif. Probate Code 7 Section 2-212 (elective share of incapacitated surviving spouse to 8 be held in trust on terms specified in statute); Unif. Probate Code 9 Section 5-411(a)(4) (conservator may create trust with court 10 approval); Restatement (Second) of Trusts Section 17 cmt. i (1959) 11 (trusts created by statutory right to bring wrongful death action). 12 A trust can also be created by a promise that creates enforceable 13 rights in a person who immediately or later holds these rights as 14 trustee. See Restatement (Third) of Trusts Section 10(e) 15 (Tentative Draft No. 1, approved 1996). A trust thus created is 16 valid notwithstanding that the trustee may resign or die before the 17 promise is fulfilled. Unless expressly made personal, the promise 18 can be enforced by a successor trustee. For examples of trusts 19 created by means of promises enforceable by the trustee, see 20 Restatement (Third) of Trusts Section 10 cmt. g (Tentative Draft 21 No. 1, approved 1996); Restatement (Second) of Trusts Sections 22 14 cmt. h, 26 cmt. n (1959). 23 A trust created by self-declaration is best created by 24 reregistering each of the assets that comprise the trust into the 25 settlor’s name as trustee. However, such reregistration is not 26 necessary to create the trust. See, e.g., In re Estate of Heggstad, 20 27 Cal. Rptr. 2d 433 (Ct. App. 1993); Restatement (Third) of Trusts 28 Section 10 cmt. a (Tentative Draft No. 1, approved 1996); 29 Restatement (Second) of Trusts Section 17 cmt. a (1959). A 30 declaration of trust can be funded merely by attaching a schedule 31 listing the assets that are to be subject to the trust without 32 executing separate instruments of transfer. But such practice can 33 make it difficult to later confirm title with third party transferees 34 and for this reason is not recommended. 35 While a trust created by will may come into existence 36 immediately at the testator’s death and not necessarily only upon 37 the later transfer of title from the personal representative, Section 38 701 makes clear that the nominated trustee does not have a duty to 39 act until there is an acceptance of the trusteeship, express or 40 implied. To avoid an implied acceptance, a nominated 41 testamentary trustee who is monitoring the actions of the personal 42 representative but who has not yet made a final decision on 43 acceptance should inform the beneficiaries that the nominated1 [422] 106 1 trustee has assumed only a limited role. The failure so to inform 2 the beneficiaries could result in liability if misleading conduct by 3 the nominated trustee causes harm to the trust beneficiaries. See 4 Restatement (Third) of Trusts Section 35 cmt. b (Tentative Draft 5 No 2, approved 1999). 6 While this section confirms the familiar principle that a trust 7 may be created by means of the exercise of a power of 8 appointment (paragraph (3)), this Code does not legislate 9 comprehensively on the subject of powers of appointment but 10 addresses only selected issues. See Sections 302 (representation by 11 holder of general testamentary power of appointment); 505(b) 12 (creditor claims against holder of power of withdrawal); and 13 603(c) (rights of holder of power of withdrawal). For the law on 14 powers of appointment generally, see Restatement (Second) of 15 Property: Donative Transfers Sections 11.1-24.4 (1986); 16 Restatement (Third) of Property: Wills and Other Donative 17 Transfers (in progress). 18 19 South Carolina Comment 20 21 Section 62-7-401(a) provides different methods to create a trust, 22 creating a distinction between third-party-trusteed trusts in 23 subsection (a)(1) and self-trusteed trusts in subsection (a)(2). 24 Subsection (a)(1) provides that, if a third party is to serve as 25 trustee, transfer of property to that other person, whether during 26 life or at death, is sufficient to create a trust; no writing is required. 27 Subsection (a)(2) requires that, if the settlor is also to be the 28 trustee, then some written declaration signed by the settlor is 29 required to create the trust. Such a declaration need not be a trust 30 agreement, but can be some written evidence signed by the settlor 31 sufficient to establish that the settlor intended to hold the property 32 in trust. 33 Pre-SCTC South Carolina law made a distinction between trusts 34 for personal property and trusts in land. Trusts in personal 35 property could be proved, as well as created, by parol declarations. 36 See Harris v. Bratton, 34 S.C. 259, 13 S.E. 447 (1891). On the 37 other hand, a valid trust of any “land, tenements, or hereditaments” 38 had to be proved by a writing signed by the party creating the trust. 39 See former South Carolina Probate Code Section 62-7-101, which 40 did not require that the trust be created by a writing, but merely 41 that it be established by a writing. An exception to the 42 requirement of a writing to establish a trust in land was found in 43 former SCPC Section 62-7-103 for trusts arising by implication of1 [422] 107 1 law, such as resulting and constructive trusts. Because the 2 Uniform Trust Code applies only to express trusts and not to trusts 3 implied in law (UTC Section 102), former SCPC section 62-7-103 4 has been incorporated as SCTC Section 62-7-401(b). 5 Former SCPC Section 62-7-112 has been retained as SCTC 6 Section 62-7-401(c). Former SCPC Section 62-7-112 was enacted 7 after the Siefert decision, Seifert v. Southern Nat’l Bank of South 8 Carolina, 305 S.C. 353, 409 S.E.2d 337 (1991), to clarify that the 9 settlor’s retention of substantive control over a trust, such as a right 10 to revoke, does not render that trust invalid. 11 The methods set out in Section 62-7-401 are not the exclusive 12 methods to create a trust as recognized by Section 62-7-102. 13 14 Section 62-7-402. Requirements for creation; merger of 15 title. 16 (a) A trust is created only if: 17 (1) the settlor has capacity to create a trust; 18 (2) the settlor indicates an intention to create the trust; 19 (3) the trust has a definite beneficiary or is: 20 (A) a charitable trust; 21 (B) a trust for the care of an animal, as provided in Section 22 62-7-408; or 23 (C) a trust for a noncharitable purpose, as provided in 24 Section 62-7-409; 25 (4) the trustee has duties to perform; and 26 (5) the same person is not the sole trustee and sole current 27 and future beneficiary. 28 (b) A beneficiary is definite if the beneficiary can be 29 ascertained now or in the future, subject to any applicable rule 30 against perpetuities. 31 (c) A power in a trustee to select a beneficiary from an 32 indefinite class is valid. If the power is not exercised within a 33 reasonable time, the power fails and the property subject to the 34 power passes to the persons who would have taken the property 35 had the power not been conferred. 36 (d) For purposes of Section 62-7-402(a)(5), if a person holds 37 legal title to property in a fiduciary capacity and also has an 38 equitable or beneficial title in the same property, either by transfer, 39 by declaration, or by operation of law, no merger of the legal and 40 equitable titles shall occur unless: 41 (1) the fiduciary is the sole fiduciary and is also the sole 42 current and future beneficiary; and1 [422] 108 1 (2) the legal title and the equitable title are of the same 2 quality and duration. 3 If either one of these conditions is not met, no merger may occur 4 and the fiduciary relationship does not terminate. 5 6 Comment 7 8 Subsection (a) codifies the basic requirements for the creation of 9 a trust. To create a valid trust, the settlor must indicate an 10 intention to create a trust. See Restatement (Third) of Trusts 11 Section 13 (Tentative Draft No. 1, approved 1996); Restatement 12 (Second) of Trusts Section 23 (1959). But only such 13 manifestations of intent as are admissible as proof in a judicial 14 proceeding may be considered. See Section 103(17) (“terms of a 15 trust” defined). 16 To create a trust, a settlor must have the requisite mental 17 capacity. To create a revocable or testamentary trust, the settlor 18 must have the capacity to make a will. To create an irrevocable 19 trust, the settlor must have capacity during lifetime to transfer the 20 property free of trust. See Section 601 (capacity of settlor to create 21 revocable trust), and see generally Restatement (Third) of Trusts 22 Section 11 (Tentative Draft No. 1, approved 1996); Restatement 23 (Second) of Trusts Sections 18-22 (1959); and Restatement (Third) 24 of Property: Wills and Other Donative Transfers Section 8.1 25 (Tentative Draft No. 3, 2001). 26 Subsection (a)(3) requires that a trust, other than a charitable 27 trust, a trust for the care of an animal, or a trust for another valid 28 noncharitable purpose, have a definite beneficiary. While some 29 beneficiaries will be definitely ascertained as of the trust’s 30 creation, subsection (b) recognizes that others may be ascertained 31 in the future as long as this occurs within the applicable 32 perpetuities period. The definite beneficiary requirement does not 33 prevent a settlor from making a disposition in favor of a class of 34 persons. Class designations are valid as long as the membership of 35 the class will be finally determined within the applicable 36 perpetuities period. For background on the definite beneficiary 37 requirement, see Restatement (Third) of Trusts Sections 44-46 38 (Tentative Draft No. 2, approved 1999); Restatement (Second) of 39 Trusts Sections 112-122 (1959). 40 Subsection (a)(4) recites standard doctrine that a trust is created 41 only if the trustee has duties to perform. See Restatement (Third) 42 of Trusts Section 2 (Tentative Draft No. 1, approved 1996); 43 Restatement (Second) of Trusts Section 2 (1959). Trustee duties1 [422] 109 1 are usually active, but a validating duty may also be passive, 2 implying only that the trustee has an obligation not to interfere 3 with the beneficiaries’ enjoyment of the trust property. Such 4 passive trusts, while valid under this Code, may be terminable 5 under the enacting jurisdiction’s Statute of Uses. See Restatement 6 (Third) of Trusts Section 6 (Tentative Draft No. 1, approved 7 1996); Restatement (Second) of Trusts Sections 67-72 (1959). 8 Subsection (a)(5) addresses the doctrine of merger, which, as 9 traditionally stated, provides that a trust is not created if the settlor 10 is the sole trustee and sole beneficiary of all beneficial interests. 11 The doctrine of merger has been inappropriately applied by the 12 courts in some jurisdictions to invalidate self-declarations of trust 13 in which the settlor is the sole life beneficiary but other persons are 14 designated as beneficiaries of the remainder. The doctrine of 15 merger is properly applicable only if all beneficial interests, both 16 life interests and remainders, are vested in the same person, 17 whether in the settlor or someone else. An example of a trust to 18 which the doctrine of merger would apply is a trust of which the 19 settlor is sole trustee, sole beneficiary for life, and with the 20 remainder payable to the settlor’s probate estate. On the doctrine 21 of merger generally, see Restatement (Third) of Trusts Section 69 22 (Tentative Draft No. 3, 2001); Restatement (Second) of Trusts 23 Section 341 (1959). 24 Subsection (c) allows a settlor to empower the trustee to select 25 the beneficiaries even if the class from whom the selection may be 26 made cannot be ascertained. Such a provision would fail under 27 traditional doctrine; it is an imperative power with no designated 28 beneficiary capable of enforcement. Such a provision is valid, 29 however, under both this Code and the Restatement, if there is at 30 least one person who can meet the description. If the trustee does 31 not exercise the power within a reasonable time, the power fails 32 and the property will pass by resulting trust. See Restatement 33 (Third) of Trusts Section 46 (Tentative Draft No. 2, approved 34 1999). See also Restatement (Second) of Trusts Section 122 35 (1959); Restatement (Second) of Property: Donative Transfers 36 Section 12.1 cmt. a (1986). 37 38 South Carolina Comment 39 40 The SCTC adds the phrase “current and future” to UTC 41 subsection (a)(5). 42 No similar statutory provisions existed under prior South 43 Carolina law except that former SCPC Section 62-7-603(A)(3)1 [422] 110 1 specified the requirements for merger of equitable and legal title. 2 Former Section 62-7-603(A)(3) has been retained as subsection 3 (d). 4 South Carolina case law provides that, for a trust to exist, certain 5 elements must be present, including a declaration creating the 6 trust, a trust res, and designated beneficiaries. See Whetstone v. 7 Whetstone, 309 S.C. 227, 231-32, 420 S.E.2d 877, 879 (Ct. App. 8 1992). The declaration of trust has to be in writing when the trust 9 property includes realty. See Id. 10 The Supreme Court has found that, with respect to the spousal 11 elective share, a revocable inter vivos trust that conferred only 12 custodial powers on the trustee, and that expressly barred the 13 trustee from exercising any powers of sale, investment, or 14 reinvestment during the settlor’s lifetime without the settlor’s 15 consent, was illusory and invalid. See Seifert v. Southern Nat. 16 Bank of South Carolina, 409 S.E.2d 337, 305 S.C. 353 (1991). 17 Former SCPC Section 62-7-112 was subsequently enacted and is 18 retained at SCTC Section 62-7-401. 19 20 Section 62-7-403. Trusts created in other jurisdictions. 21 22 A trust not created by will is validly created if its creation 23 complies with the law of the jurisdiction in which the trust 24 instrument was executed, or the law of the jurisdiction in which, at 25 the time of creation: 26 (1) the settlor was domiciled, had a place of abode, or was a 27 national; 28 (2) a trustee was domiciled or had a place of business; or 29 (3) any trust property was located. 30 31 Comment 32 33 The validity of a trust created by will is ordinarily determined by 34 the law of the decedent’s domicile. No such certainty exists with 35 respect to determining the law governing the validity of inter vivos 36 trusts. Generally, at common law a trust was created if it complied 37 with the law of the state having the most significant contacts to the 38 trust. Contacts for making this determination include the domicile 39 of the trustee, the domicile of the settlor at the time of trust 40 creation, the location of the trust property, the place where the trust 41 instrument was executed, and the domicile of the beneficiary. See 42 5A Austin Wakeman Scott & William Franklin Fratcher, The Law 43 of Trusts Sections 597, 599 (4th ed. 1987). Furthermore, if the1 [422] 111 1 trust has contacts with two or more states, one of which would 2 validate the trust’s creation and the other of which would deny the 3 trust’s validity, the tendency is to select the law upholding the 4 validity of the trust. See 5A Austin Wakeman Scott &.William 5 Franklin Fratcher, The Law of Trusts 600 (4th ed. 1987). 6 Section 403 extends the common law rule by validating a trust if 7 its creation complies with the law of any of a variety of states in 8 which the settlor or trustee had significant contacts. Pursuant to 9 Section 403, a trust not created by will is validly created if its 10 creation complies with the law of the jurisdiction in which the trust 11 instrument was executed, or the law of the jurisdiction in which, at 12 the time of creation the settlor was domiciled, had a place of 13 abode, or was a national; the trustee was domiciled or had a place 14 of business; or any trust property was located. 15 Section 403 is comparable to Section 2-506 of the Uniform 16 Probate Code, which validates wills executed in compliance with 17 the law of a variety of places in which the testator had a significant 18 contact. Unlike the UPC, however, Section 403 is not limited to 19 execution of the instrument but applies to the entire process of a 20 trust’s creation, including compliance with the requirement that 21 there be trust property. In addition, unlike the UPC, Section 403 22 validates a trust valid under the law of the domicile or place of 23 business of the designated trustee, or if valid under the law of the 24 place where any of the trust property is located. 25 The section does not supercede local law requirements for the 26 transfer of real property, such that title can be transferred only by 27 recorded deed. 28 29 South Carolina Comment 30 31 Former South Carolina Probate Code Section 62-7-106 32 recognized religious, educational, or charitable trusts validly 33 created in the Settlor’s state of domicile where a beneficiary or 34 object of the trust resided or was located in South Carolina. The 35 remainder of this SCTC section appears to have no prior South 36 Carolina statutory equivalent. 37 Section 62-7-403 is comparable to South Carolina Probate Code 38 Section 62-2-505 recognizing the validity of wills executed in 39 compliance with the law of a variety of places where the testator 40 had a significant contact, but expands the possible jurisdictions 41 beyond those allowed for a valid will. 42 43 Section 62-7-404. Trust purposes.1 [422] 112 1 2 A trust may be created only to the extent its purposes are lawful 3 and possible to achieve. A trust and its terms must be for the 4 benefit of its beneficiaries. 5 6 Comment 7 8 For an explication of the requirement that a trust must not have a 9 purpose that is unlawful or against public policy, see Restatement 10 (Third) of Trusts Sections 27-30 (Tentative Draft No. 2, approved 11 1999); Restatement (Second) of Trusts Sections 59-65 (1959). A 12 trust with a purpose that is unlawful or against public policy is 13 invalid. Depending on when the violation occurred, the trust may 14 be invalid at its inception or it may become invalid at a later date. 15 The invalidity may also affect only particular provisions. 16 Generally, a trust has a purpose, which is illegal if (1) its 17 performance involves the commission of a criminal or tortious act 18 by the trustee; (2) the settlor’s purpose in creating the trust was to 19 defraud creditors or others; or (3) the consideration for the creation 20 of the trust was illegal. See Restatement (Third) of Trusts 21 Section 28 cmt. a (Tentative Draft No. 2, approved 1999); 22 Restatement (Second) of Trusts Section 60 cmt. a (1959). 23 Purposes violative of public policy include those that tend to 24 encourage criminal or tortious conduct, that interfere with freedom 25 to marry or encourage divorce, that limit religious freedom, or 26 which are frivolous or capricious. 27 See Restatement (Third) of Trusts Section 29 cmt. d-h 28 (Tentative Draft No. 2, 1999); Restatement (Second) of Trusts 29 Section 62 (1959). 30 Pursuant to Section 402(a), a trust must have an identifiable 31 beneficiary unless the trust is of a type that does not have 32 beneficiaries in the usual sense, such as a charitable trust or, as 33 provided in Sections 408 and 409, trusts for the care of an animal 34 or other valid noncharitable purpose. The general purpose of trusts 35 having identifiable beneficiaries is to benefit those beneficiaries in 36 accordance with their interests as defined in the trust’s terms. The 37 requirement of this section that a trust and its terms be for the 38 benefit of its beneficiaries, which is derived from Restatement 39 (Third) of Trusts Section 27(2) (Tentative Draft No. 2, approved 40 1999), implements this general purpose. While a settlor has 41 considerable latitude in specifying how a particular trust purpose is 42 to be pursued, the administrative and other nondispositive trust 43 terms must reasonably relate to this purpose and not divert the trust1 [422] 113 1 property to achieve a trust purpose that is invalid, such as one 2 which is frivolous or capricious. 3 See Restatement (Third) of Trusts Section 27 cmt. b (Tentative 4 Draft No. 2, approved 1999). 5 Section 412(b), which allows the court to modify administrative 6 terms that are impracticable, wasteful, or impair the trust’s 7 administration, is a specific application of the requirement that a 8 trust and its terms be for the benefit of the beneficiaries. The fact 9 that a settlor suggests or directs an unlawful or other inappropriate 10 means for performing a trust does not invalidate the trust if the 11 trust has a substantial purpose that can be achieved by other 12 methods. See Restatement (Third) of Trusts Section 28 cmt. e 13 (Tentative Draft No. 2, approved 1999). 14 15 South Carolina Comment 16 17 South Carolina Trust Code Section 62-7-404 does not include 18 the words “not contrary to public policy,” found in Uniform Trust 19 Code Section 404, recognizing that existing South Carolina law 20 would invalidate trusts that are contrary to public policy. The 21 failure to include these words from the uniform act is not intended 22 to change the existing common law. 23 There was no South Carolina statutory provision that correlated 24 with UTC Section 404. South Carolina case law has been 25 consistent with UTC Section 404 in refusing to impose an express 26 trust, resulting trust, or constructive trust on property in favor of a 27 transferor attempting to impose a trust on property he transferred 28 to the transferee, when the facts indicate no written agreement 29 between them existed, the transferor had a fraudulent purpose for 30 the transfers, and the transferee committed no fraud or deceit. See 31 Settlemeyer v. McCluney, 359 S.C. 317, 596 S.E.2d 514 (S.C. Ct. 32 App. 2004); All v. Prillaman, 200 S.C. 279, 20 S.E.2d 741 (S.C. 33 1942). “The law will not permit a party to deliberately put his 34 property out of his control for a fraudulent purpose, and then, 35 through intervention of a court of equity, regain the same after his 36 fraudulent purpose has been accomplished” All v. Prillaman, 200 37 S.C. 279, 308, 20 S.E.2d 741, 753, quoting Jolly v. Graham, 78 38 N.E. 919, 920 (Ill. 1906). See also Colin McK. Grant Home V. 39 Medlock, 292 S.C. 466, 349 S.E.2d 655 (Ct. App. 1987), involving 40 a charitable trust, in which the equitable doctrine of equitable 41 deviation was used to eliminate the racial restrictions from a 42 charitable trust’s requirements. See also Buck v. Toler, 146 S.C. 43 294, 141 S.E. 1 (1928), in which a testamentary trust that violated1 [422] 114 1 the rule against perpetuities and that was determined to have been 2 created by the Testatrix merely to tie up the property was found to 3 be void. 4 5 Section 62-7-405. Charitable purposes; enforcement. 6 7 (a) A charitable trust may be created for the relief of distress or 8 poverty, the advancement of education or religion, the promotion 9 of health, scientific, literary, benevolent, governmental or 10 municipal purposes, or other purposes, the achievement of which 11 purposes is beneficial to the community. 12 (b) If the terms of a charitable trust do not indicate a particular 13 charitable purpose or beneficiary, the court may select one or more 14 charitable purposes or beneficiaries. The selection must be 15 consistent with the settlor’s intention to the extent it can be 16 ascertained. 17 (c) The settlor of a charitable trust, the trustee, and the 18 Attorney General, among others may maintain a proceeding to 19 enforce the trust. 20 (d) Unless excepted by statute or rule or regulation of the 21 Attorney General, the trustees of charitable trusts in existence on 22 the effective date of this article, or thereafter created, under the 23 laws of this State, shall file a certified copy of the trust instrument 24 with the Attorney General within ninety days after such date or 25 within sixty days after the creation of the trust, whichever is later. 26 (e) The Attorney General may make such rules and regulations 27 relating to the information to be contained with the filing of a trust 28 as required by this part. 29 (f) All trustees of any trust governed by the laws of this State 30 whose governing instrument does not expressly provide that this 31 section shall not apply to such trust are required to act or to refrain 32 from acting so as not to subject the trust to the taxes imposed by 33 Sections 4941, 4942, 4943, 4944, or 4945 of the Internal Revenue 34 Code, or corresponding provisions of any subsequent United States 35 internal revenue law. 36 (g) Nothing contained in Sections 33-31-150 and 33-31-151 37 may be construed to cause a forfeiture or reversion of any of the 38 property of a trust which is subject to such sections, or to make the 39 purposes of the trust impossible of accomplishment. 40 41 Comment 421 [422] 115 1 The required purposes of a charitable trust specified in 2 subsection (a) restate the well-established categories of charitable 3 purposes listed in Restatement (Third) of Trusts Section 28 4 (Tentative Draft No. 3, approved 2001), and Restatement (Second) 5 of Trusts Section 368 (1959), which ultimately derive from the 6 Statute of Charitable Uses, 43 Eliz. I, c.4 (1601). The directive to 7 the courts to validate purposes the achievement of which are 8 beneficial to the community has proved to be remarkably 9 adaptable over the centuries. The drafters concluded that it should 10 not be disturbed. 11 Charitable trusts are subject to the restriction in Section 404 that 12 a trust purpose must be legal and not contrary to public policy. 13 This would include trusts that involve invidious discrimination. 14 See Restatement (Third) of Trusts Section 28 cmt. f (Tentative 15 Draft No. 3, approved 2001). 16 Under subsection (b), a trust that states a general charitable 17 purpose does not fail if the settlor neglected to specify a particular 18 charitable purpose or organization to receive distributions. The 19 court may instead validate the trust by specifying particular 20 charitable purposes or recipients, or delegate to the trustee the 21 framing of an appropriate scheme. See Restatement (Second) of 22 Trusts Section 397 cmt. d (1959). Subsection (b) of this section is 23 a corollary to Section 413, which states the doctrine of cy pres. 24 Under Section 413(a), a trust failing to state a general charitable 25 purpose does not fail upon failure of the particular means specified 26 in the terms of the trust. The court must instead apply the trust 27 property in a manner consistent with the settlor’s charitable 28 purposes to the extent they can be ascertained. 29 Subsection (b) does not apply to the long-established estate 30 planning technique of delegating to the trustee the selection of the 31 charitable purposes or recipients. In that case, judicial intervention 32 to supply particular terms is not necessary to validate the creation 33 of the trust. The necessary terms instead will be supplied by the 34 trustee. See Restatement (Second) of Trusts Section 396 (1959). 35 Judicial intervention under subsection (b) will become necessary 36 only if the trustee fails to make a selection. See Restatement 37 (Second) of Trusts Section 397 cmt. d (1959). Pursuant to Section 38 110(b), the charitable organizations selected by the trustee would 39 not have the rights of qualified beneficiaries under this Code 40 because they are not expressly designated to receive distributions 41 under the terms of the trust. 42 Contrary to Restatement (Second) of Trusts Section 391 (1959), 43 subsection (c) grants a settlor standing to maintain an action to1 [422] 116 1 enforce a charitable trust. The grant of standing to the settlor does 2 not negate the right of the state attorney general or persons with 3 special interests to enforce either the trust or their interests. For 4 the law on the enforcement of charitable trusts, see Susan N. 5 Gary, Regulating the Management of Charities: Trust Law, 6 Corporate Law, and Tax Law, 21 U. Hawaii L. Rev. 593 (1999). 7 8 South Carolina Comment 9 10 South Carolina Trust Code Section 62-7-405 adds “distress” to 11 the Uniform Trust Code version, to cover disasters or sudden 12 catastrophes in addition to “poverty.” The SCTC also adds 13 “scientific, literary and benevolent” to the UTC version. 14 Practically, the specified charitable purposes will be identical to 15 Internal Revenue Code Section 501 (c)(3). 16 Section 62-7-405(b) must be read in conjunction with SCTC 17 Sections 62-7-404 and 62-7-413. SCTC Section 62-7-413 would 18 incorporate the doctrine of equitable deviation in South Carolina 19 law. See the South Carolina Comment to SCTC Section 62-7-413. 20 SCTC Section 62-7-405(c) adds “the trustee and the Attorney 21 General” to those who may maintain a proceeding to enforce the 22 trust under the UTC version. 23 Former South Carolina Probate Code Sections 62-7-501 through 24 62-7-507, Part 5 of Article 7 of Title 62, covered charitable trusts. 25 These sections are revised and incorporated in SCTC Section 26 62-7-405. 27 SCPC Section 62-7-501 required individual trustees of certain 28 charitable trusts to file a copy of the trust with the Attorney 29 General. Section 62-7-405(e) makes this initial filing applicable to 30 all charitable trusts. 31 SCPC Section 62-7-502 required that certain charitable trusts 32 file annual reports with the attorney general. 33 SCPC Section 62-7-505 exempted many charitable trusts from 34 the filing requirements of Part Five: 35 “… trusts or trustees of the following: Churches, cemeteries, 36 orphanages operated in conjunction with churches, hospitals, 37 colleges, or universities, or school districts, nor shall it apply to 38 banking institutions which act as trustees under the supervision of 39 the State Board of Financial Institutions or under the supervision 40 of federal banking agencies.” 41 SCPC Sections 62-7-502 and 62-7-505 are repealed. The 42 exemption is anachronistic. SCTC Section 62-7-405(d) requires1 [422] 117 1 that every charitable trust make an initial filing at inception with 2 the Attorney General. 3 SCPC Section 62-7-504 is retained at Section 62-7-405(e), 4 empowering the Attorney General to issue regulations to require 5 further reporting from charitable trusts. 6 SCPC Section 62-7-506 incorporated the prohibited transaction 7 provisions applicable to private foundations and charitable trusts 8 into every trust and is retained in SCTC Section 62-7-405(f). 9 (Existing Section 33-31-150 applies the restrictions to 10 not-for-profit South Carolina corporations.) 11 SCPC Section 62-7-507 made clear that incurring an excise tax 12 for violation of the prohibited transaction provisions will not result 13 in trust termination, and is retained in Section 62-7-405(g). 14 South Carolina expressly rejects the portion of the UTC 15 Comment which makes “public policy” or “invidious 16 discrimination” a basis to find that a trust violates Section 17 62-7-404. 18 Charitable trusts are subject to the restriction in Section 404 that 19 a trust purpose must be legal and not contrary to public policy. 20 This would include trusts that involve invidious discrimination. 21 See Restatement (Third) of Trusts Section 28 cmt. f (Tentative 22 Draft No. 3, approved 2001). 23 South Carolina common law does not allow enforcement of a 24 trust for an unlawful purpose. South Carolina’s existing case law 25 is sufficient to prohibit discrimination in a charitable trust. 26 27 Section 62-7-406. Creation of trust induced by fraud, 28 duress, or undue influence. 29 30 A trust is voidable to the extent its creation was induced by 31 fraud, duress, or undue influence. 32 33 Comment 34 35 This section is a specific application of Restatement (Third) of 36 Trusts Section 12 (Tentative Draft No. 1, approved 1996), and 37 Restatement (Second) of Trusts Section 333 (1959), which provide 38 that a trust can be set aside or reformed on the same grounds as 39 those which apply to a transfer of property not in trust, among 40 which include undue influence, duress, and fraud, and mistake. 41 This section addresses undue influence, duress, and fraud. For 42 reformation of a trust on grounds of mistake, see Section 415. See 43 also Restatement (Third) of Property: Wills and Other Donative1 [422] 118 1 Transfers Section 8.3 (Tentative Draft No. 3, approved 2001), 2 which closely tracks the language above. Similar to a will, the 3 invalidity of a trust on grounds of undue influence, duress, or fraud 4 may be in whole or in part. 5 6 South Carolina Comment 7 8 The South Carolina version of this section changes the word 9 “void” to “voidable” to eliminate any suggestion that a trust might 10 be void ab initio or that the trustee’s actions might be invalid even 11 though taken in good faith and before any determination that the 12 trust is void. 13 Third parties dealing with the trustee of a voidable trust will be 14 protected by South Carolina Trust Code Section 62-7-1012. 15 This section is similar to present South Carolina law regarding 16 the validity of wills. 17 18 Section 62-7-407. Evidence of oral trust. 19 20 Except as otherwise required by statute, a trust need not be 21 evidenced by a trust instrument. The creation of an oral trust and 22 its terms may be established only by clear and convincing 23 evidence. 24 25 Comment 26 27 While it is always advisable for a settlor to reduce a trust to 28 writing, the Uniform Trust Code follows established law in 29 recognizing oral trusts. Such trusts are viewed with caution, 30 however. The requirement of this section that an oral trust can be 31 established only by clear and convincing evidence is a higher 32 standard than is in effect in many States. See Restatement (Third) 33 of Trusts Section 20 Reporter’s Notes (Tentative Draft No. 1, 34 approved 1996). 35 Absent some specific statutory provision, such as a provision 36 requiring that transfers of real property be in writing, a trust need 37 not be evidenced by a writing. States with statutes of frauds or 38 other provisions requiring that the creation of certain trusts must be 39 evidenced by a writing may wish specifically to cite such 40 provisions. 41 For the Statute of Frauds generally, see Restatement (Second) of 42 Trusts Sections 40-52 (1959). For a description of what the 43 writing must contain, assuming that a writing is required, see1 [422] 119 1 Restatement (Third) of Trusts Section 22 (Tentative Draft No. 1, 2 approved 1996); Restatement (Second) of Trusts Section 46-49 3 (1959). For a discussion of when the writing must be signed, see 4 Restatement (Third) of Trusts Section 23 (Tentative Draft No. 1, 5 approved 1996); Restatement (Second) of Trusts Section 41-42 6 (1959). For the law of oral trusts, see Restatement (Third) of 7 Trusts Section 20 (Tentative Draft No. 1, approved 1996); 8 Restatement (Second) of Trusts Sections 43-45 (1959). 9 10 South Carolina Comment 11 12 This section is in accordance with existing South Carolina law 13 requiring oral trusts to be proved by clear and convincing 14 evidence. However, South Carolina statutory law has consistently 15 required that the declaration or creation of trusts in lands, 16 tenaments or hereditaments be manifested and proved by some 17 writing such as a trust agreement or last will. Absent such a 18 writing, the trust would be void, per former South Carolina Probate 19 Code Section 62-7-101 et. seq. Historically, a distinction has been 20 made between the creation of the trust and the conveyance of real 21 property thereto, but the writing must manifest a previous trust. 22 This section no longer distinguishes between trusts funded with 23 real estate from those funded with personalty. Both must be 24 established by clear and convincing evidence. See Beckham v. 25 Short, 380 S.E. 2d 826 (S.C. 1989). 26 South Carolina Trust Code Section 62-7-401(a)(2) requires a 27 writing to create a declaration of trust (a self-trusteed trust). 28 29 Section 62-7-408. Trust for care of animal. 30 31 (a) A trust may be created to provide for the care of an animal 32 or animals alive or in gestation during the settlor’s lifetime, 33 whether or not alive at the time the trust is created. The trust 34 terminates upon the death of the last surviving animal. 35 (b) A trust authorized by this section may be enforced by a 36 person appointed in the terms of the trust or, if no person is so 37 appointed, by a person appointed by the court. A person 38 concerned for the welfare of the animal may request the court to 39 appoint a person to enforce the trust or to remove a person 40 appointed. 41 (c) Property of a trust authorized by this section may be 42 applied only to its intended use, except to the extent the court 43 determines that the value of the trust property exceeds the amount1 [422] 120 1 required for the intended use. Except as otherwise provided in the 2 terms of the trust, property not required for the intended use must 3 be distributed to the settlor, if then living, otherwise to the settlor’s 4 successors in interest. 5 6 Comment 7 8 This section and the next section of the Code validate so called 9 honorary trusts. Unlike honorary trusts created pursuant to the 10 common law of trusts, which are arguably no more than powers of 11 appointment, the trusts created by this and the next section are 12 valid and enforceable. For a discussion of the common law 13 doctrine, see Restatement (Third) of Trusts Section 47 (Tentative 14 Draft No. 2, approved 1999); Restatement (Second) of Trusts 15 Section 124 (1959). 16 This section addresses a particular type of honorary trust, the 17 trust for the care of an animal. Section 409 specifies the 18 requirements for trusts without ascertainable beneficiaries that are 19 created for other noncharitable purposes. A trust for the care of an 20 animal may last for the life of the animal. While the animal will 21 ordinarily be alive on the date the trust is created, an animal may 22 be added as a beneficiary after that date as long as the addition is 23 made prior to the settlor’s death. Animals in gestation but not yet 24 born at the time of the trust’s creation may also be covered by its 25 terms. A trust authorized by this section may be created to benefit 26 one designated animal or several designated animals. 27 Subsection (b) addresses enforcement. Noncharitable trusts 28 ordinarily may be enforced by their beneficiaries. Charitable trusts 29 may be enforced by the State’s attorney general or by a person 30 deemed to have a special interest. See Restatement (Second) of 31 Trusts Section 391 (1959). But at common law, a trust for the care 32 of an animal or a trust without an ascertainable beneficiary created 33 for a noncharitable purpose was unenforceable because there was 34 no person authorized to enforce the trustee’s obligations. 35 Sections 408 and 409 close this gap. The intended use of a trust 36 authorized by either section may be enforced by a person 37 designated in the terms of the trust or, if none, by a person 38 appointed by the court. In either case, Section 110(b) grants to the 39 person appointed the rights of a qualified beneficiary for the 40 purpose of receiving notices and providing consents. If the trust is 41 created for the care of an animal, a person with an interest in the 42 welfare of the animal has standing to petition for an appointment. 43 The person appointed by the court to enforce the trust should also1 [422] 121 1 be a person who has exhibited an interest in the animal’s welfare. 2 The concept of granting standing to a person with a demonstrated 3 interest in the animal’s welfare is derived from the Uniform 4 Guardianship and Protective Proceedings Act, which allows a 5 person interested in the welfare of a ward or protected person to 6 file petitions on behalf of the ward or protected person. See, e.g., 7 Uniform Probate Code Sections 5-210(b), 5-414(a). 8 Subsection (c) addresses the problem of excess funds. If the 9 court determines that the trust property exceeds the amount needed 10 for the intended purpose and that the terms of the trust do not 11 direct the disposition, a resulting trust is ordinarily created in the 12 settlor or settlor’s successors in interest. See Restatement (Third) 13 of Trusts Section 47 (Tentative Draft No. 2, approved 1999); 14 Restatement (Second) of Trusts Section 124 (1959). Successors in 15 interest include the beneficiaries under the settlor’s will, if the 16 settlor has a will, or in the absence of an effective will provision, 17 the settlor’s heirs. The settlor may also anticipate the problem of 18 excess funds by directing their disposition in the terms of the trust. 19 The disposition of excess funds is within the settlor’s control: See 20 Section 105(a). While a trust for an animal is usually not created 21 until the settlor’s death; subsection (a) allows such a trust to be 22 created during the settlor’s lifetime. Accordingly, if the settlor is 23 still living, subsection (c) provides for distribution of excess funds 24 to the settlor, and not to the settlor’ s successors in interest. 25 Should the means chosen not be particularly efficient, a trust 26 created for the care of an animal can also be terminated by the 27 trustee or court under Section 414. Termination of a trust under 28 that section, however, requires that the trustee or court develop an 29 alternative means for carrying out the trust purposes. See Section 30 414(c). 31 This section and the next section are suggested by Section 2-907 32 of the Uniform Probate Code, but much of this and the following 33 section is new. 34 35 South Carolina Comment 36 37 South Carolina Trust Code Section 62-7-408 differs in several 38 minor ways from the uniform version. Two provisions found in 39 the UTC Comment have been added to the body of Section 40 62-7-408(a): (1) that the trust can benefit animals alive during the 41 settlor’s lifetime, regardless of whether they are alive at the time 42 the trust is created, and (2) that animals in gestation at the settlor’s1 [422] 122 1 death can be included in the trust. Surplus language in the UTC 2 has also been omitted from the SCTC version. 3 SCTC Section 62-7-408(b) modifies the UTC version, 4 attempting to clarify that a person need only be concerned for an 5 animal’s welfare to petition the court. That person does not have 6 to have a legally cognizable interest in the animal. 7 A trust created under this section would not be recognized under 8 former South Carolina law. Thus, this section creates a new 9 concept for South Carolina. 10 11 Section 62-7-409. Noncharitable trust without ascertainable 12 beneficiary. 13 14 Except as otherwise provided in this Section or by another 15 statute, the following rules apply: 16 (1) A trust may be created for a noncharitable purpose without 17 a definite or definitely ascertainable beneficiary or for a 18 noncharitable but otherwise valid purpose to be selected by the 19 trustee. The trust may not be enforced for more than the period 20 allowed under the South Carolina Uniform Statutory Rule Against 21 Perpetuities (S.C. Code Section 27-6-10 et. seq.), except for the 22 care and maintenance of a cemetery or cemetery plots, graves, 23 mausoleums, columbaria, grave markers, or monuments. 24 (2) A trust authorized by this section may be enforced by a 25 person appointed in the terms of the trust or, if no person is so 26 appointed, by a person appointed by the court. 27 (3) Property of a trust authorized by this section may be 28 applied only to its intended use, except to the extent the court 29 determines that the value of the trust property exceeds the amount 30 required for the intended use. Except as otherwise provided in the 31 terms of the trust, property not required for the intended use must 32 be distributed to the settlor, if then living, otherwise to the settlor’s 33 successors in interest. 34 35 Comment 36 37 This section authorizes two types of trusts without ascertainable 38 beneficiaries; trusts for general but noncharitable purposes, and 39 trusts for a specific noncharitable purpose other than the care of an 40 animal, on which see Section 408. Examples of trusts for general 41 noncharitable purposes include a bequest of money to be 42 distributed to such objects of benevolence as the trustee might 43 select. Unless such attempted disposition was interpreted as1 [422] 123 1 charitable, at common law the disposition was honorary only and 2 did not create a trust. Under this section, however, the disposition 3 is enforceable as a trust for a period of up to 21 years, although 4 that number is placed in brackets to indicate that States may wish 5 to select a different time limit. 6 The most common example of a trust for a specific 7 noncharitable purpose is a trust for the care of a cemetery plot. 8 The lead-in language to the section recognizes that some special 9 purpose trusts, particularly those for care of cemetery plots, are 10 subject to other statutes. Such legislation will typically endeavor 11 to facilitate perpetual care as opposed to care limited to 21 years as 12 under this section. 13 For the requirement that a trust, particularly the type of trust 14 authorized by this section, must have a purpose that is not 15 capricious, see Section 404 Comment. For examples of the types 16 of trusts authorized by this section, see Restatement (Third) of 17 Trusts Section 47 (Tentative Draft No. 2, approved 1999), and 18 Restatement (Second) of Trusts Section 62 cmt. W and Section 19 124 (1959). The case law on capricious purposes is collected in 2 20 Austin W. Scott & William F. Fratcher, The Law of Trusts Section 21 124.7 (4th ed. 1987). 22 This section is similar to Section 408, although less detailed. 23 Much of the Comment to Section 408 also applies to this section. 24 25 South Carolina Comment 26 27 South Carolina Trust Code Section 62-7-409 had no exact 28 statutory counterpart under prior South Carolina law, although this 29 Section continues South Carolina’s allowance of trusts for the 30 perpetual care of cemetery plots as set forth in S. C. Code Section 31 27-5-70. These trusts are allowed to run for the maximum period 32 allowed under the South Carolina Uniform Rule Against 33 Perpetuities, S.C. Code Section 27-6-10 et. seq. – a longer period 34 than the 21 years allowed under the Uniform Trust Code version of 35 Section 409. The rule against perpetuities limitation does not 36 apply to cemeteries, cemetery plots, grave sites, mausoleums, 37 columbaria, grave markers, or monuments. 38 Perpetual care cemeteries are addressed in Title 40, Chapter 8, 39 Sections 40-8-10 et. seq. 40 41 Section 62-7-410. Modification or termination of trust; 42 proceedings for approval or disapproval. 431 [422] 124 1 (a) In addition to the methods of termination prescribed by 2 Sections 62-7-411 through 62-7-414, a trust terminates to the 3 extent the trust is revoked or expires pursuant to its terms. 4 (b) A proceeding to approve or disapprove a proposed 5 modification or termination under Sections 62-7-411 through 6 62-7-416, or trust combination or division under Section 62-7-417, 7 may be commenced by a trustee or beneficiary, and a proceeding 8 to approve or disapprove a proposed modification or termination 9 under Section 62-7-411 may be commenced by the settlor. The 10 settlor of a charitable trust as well as the Attorney General, among 11 others, may maintain a proceeding to modify the trust under 12 Section 62-7-413. 13 Comment 14 15 Subsection (a) lists the grounds on which trusts typically 16 terminate. For a similar formulation, see Restatement (Third) of 17 Trusts Section 61 (Tentative Draft No. 3, approved 2001). 18 Terminations under subsection (a) may be in either whole or in 19 part. Other types of terminations, all of which require action by a 20 court, trustee, or beneficiaries, are covered in Sections 411-414, 21 which also address trust modification. Of these sections, all but 22 Section 411 apply to charitable trusts and all but Section 413 apply 23 to noncharitable trusts. 24 Withdrawal of the trust property is not an event terminating a 25 trust. The trust remains in existence although the trustee has no 26 duties to perform unless and until property is later contributed to 27 the trust. 28 Subsection (b) specifies the persons who have standing to seek 29 court approval or disapproval of proposed trust modifications, 30 terminations, combinations, or divisions. An approval or 31 disapproval may be sought for an action that does not require court 32 permission, including a petition questioning the trustee’s 33 distribution upon termination of a trust under $50,000 (Section 34 414), and a petition to approve or disapprove a proposed trust 35 division or consolidation (Section 417). Subsection (b) makes the 36 settlor an interested person with respect to a judicial proceeding 37 brought by the beneficiaries under Section 411 to terminate or 38 modify a trust. Contrary to Restatement (Second) of Trusts 39 Section 391 (1959), subsection (b) grants a settlor standing to 40 petition the court under Section 413 to apply cy pres to modify the 41 settlor’s charitable trust. 42 43 South Carolina Comment1 [422] 125 1 2 South Carolina Trust Code Section 62-7-410 provides for the 3 automatic termination of trusts. This SCTC Section does not adopt 4 the provisions of Uniform Trust Code Section 62-7-410, calling for 5 termination of the trust when “no purpose of the trust remains to be 6 achieved, or the purposes of the trust have become unlawful, 7 contrary to public policy, or impossible to achieve.” These may be 8 grounds to terminate a trust under the SCTC, but only upon 9 appropriate notice to parties in interest and an opportunity for a 10 hearing. A declaratory judgment may be sought to determine if the 11 trust has terminated. 12 13 Section 62-7-411. Modification or termination of 14 noncharitable irrevocable trust by consent with court 15 approval. 16 17 (a) A noncharitable irrevocable trust may be modified or 18 terminated with court approval upon consent of the settlor and all 19 beneficiaries, even if the modification or termination is 20 inconsistent with a material purpose of the trust. A settlor’s power 21 to consent to a trust’s modification or termination may be 22 exercised by an agent under a power of attorney only to the extent 23 expressly authorized by the power of attorney or the terms of the 24 trust; by the settlor’s conservator with the approval of the court 25 supervising the conservator if an agent is not so authorized; or by 26 the settlor’s guardian with the approval of the court supervising the 27 guardianship if an agent is not so authorized and a conservator has 28 not been appointed. 29 (b) A noncharitable irrevocable trust may be terminated upon 30 consent of all beneficiaries if the court concludes that continuance 31 of the trust is not necessary to achieve any material purpose of the 32 trust. A noncharitable irrevocable trust may be modified upon 33 consent of all of the beneficiaries if the court concludes that 34 modification is not inconsistent with a material purpose of the 35 trust. 36 (c) Upon termination of a trust under subsection (a) or (b), the 37 trustee shall distribute the trust property as ordered by the court. 38 (d) If not all of the beneficiaries consent to a proposed 39 modification or termination of the trust under subsection (a) or (b), 40 the modification or termination may be approved by the court if 41 the court is satisfied that: 42 (1) if all of the beneficiaries had consented, the trust could 43 have been modified or terminated under this section; and1 [422] 126 1 (2) the interests of a beneficiary who does not consent will 2 be adequately protected. 3 4 Comment 5 6 This section describes the circumstances in which termination or 7 modification of a noncharitable irrevocable trust may be compelled 8 by the beneficiaries, with or without the concurrence of the settlor. 9 For provisions governing modification or termination of trusts 10 without the need to seek beneficiary consent, see Sections 412 11 (modification or termination due to unanticipated circumstances or 12 inability to administer trust effectively), 414 (termination or 13 modification of uneconomic noncharitable trust), and 416 14 (modification to achieve settlor’s tax objectives). If the trust is 15 revocable by the settlor, the method of revocation specified in 16 Section 602 applies. 17 Subsection (a) states the test for termination or modification by 18 the beneficiaries with the concurrence of the settlor. Subsection 19 (b) states the test for termination or modification by unanimous 20 consent of the beneficiaries without the concurrence of the settlor. 21 The rules on trust termination in subsections (a)-(b) carries 22 forward the Claflin rule, first stated in the famous case of Claflin 23 v. Claflin, 20 N.E. 454 (Mass. 1889). Subsection (c) addresses the 24 effect of a spendthrift provision. Subsection (d) directs how the 25 trust property is to be distributed following a termination under 26 either subsection (a) or (b). Subsection (e) creates a procedure for 27 judicial approval of a proposed termination or modification when 28 the consent of less than all of the beneficiaries is available. 29 Under this section, a trust may be modified or terminated over a 30 trustee’s objection. However, pursuant to Section 410, the trustee 31 has standing to object to a proposed termination or modification. 32 The settlor’s right to join the beneficiaries in terminating or 33 modifying a trust under this section does not rise to the level of a 34 taxable power. See Treas. Reg. Section 20.2038-1(a)(2). No gift 35 tax consequences result from a termination as long as the 36 beneficiaries agree to distribute the trust property in accordance 37 with the value of their proportionate interests. 38 The provisions of Article 3 on representation, virtual 39 representation and the appointment and approval of representatives 40 appointed by the court apply to the determination of whether all 41 beneficiaries have signified consent under this section. The 42 authority to consent on behalf of another person, however, does 43 not include authority to consent over the other person’s objection.1 [422] 127 1 See Section 301(b). Regarding the persons who may consent on 2 behalf of a beneficiary, see Sections 302 through 305. A consent 3 given by a representative is invalid to the extent there is a conflict 4 of interest between the representative and the person represented. 5 Given this limitation, virtual representation of a beneficiary’s 6 interest by another beneficiary pursuant to Section 304 will rarely 7 be available in a trust termination case, although it should be 8 routinely available in cases involving trust modification, such as a 9 grant to the trustee of additional powers. If virtual or other form of 10 representation is unavailable, Section 305 of the Code permits the 11 court to appoint a representative who may give the necessary 12 consent to the proposed modification or termination on behalf of 13 the minor, incapacitated, unborn, or unascertained beneficiary. 14 The ability to use virtual and other forms of representation to 15 consent on a beneficiary’s behalf to a trust termination or 16 modification has not traditionally been part of the law, although 17 there are some notable exceptions. Compare Restatement 18 (Second) Section 337(1) (1959) (beneficiary must not be under 19 incapacity), with Hatch v. Riggs National Bank, 361 F.2d 559 20 (D.C. Cir. 1966) (guardian ad litem authorized to consent on 21 beneficiary’s behalf). 22 Subsection (a) also addresses the authority of an agent, 23 conservator, or guardian to act on a settlor’s behalf. Consistent 24 with Section 602 on revocation or modification of a revocable 25 trust, the section assumes that a settlor, in granting an agent 26 general authority, did not intend for the agent to have authority to 27 consent to the termination or modification of a trust, authority that 28 could be exercised to radically alter the settlor’s estate plan. In 29 order for an agent to validly consent to a termination or 30 modification of the settlor’s revocable trust, such authority must be 31 expressly conveyed either in the power or in the terms of the trust. 32 Subsection (a), however, does not impose restrictions on consent 33 by a conservator or guardian, other than prohibiting such action if 34 the settlor is represented by an agent. The section instead leaves 35 the issue of a conservator’s or guardian’s authority to local law. 36 Many conservatorship statutes recognize that termination or 37 modification of the settlor’s trust is a sufficiently important 38 transaction that a conservator should first obtain the approval of 39 the court supervising the conservatorship. See, e.g., Unif Probate 40 Code Section 5-411(a)(4). Because the Uniform Trust Code uses 41 the term “conservator” to refer to the person appointed by the court 42 to manage an individual’s property (see Section 103(4)), a1 [422] 128 1 guardian may act on behalf of a settlor under this section only if a 2 conservator has not been appointed. 3 Subsection (a) is similar to Restatement (Third) of Trusts 4 Section 65(2) (Tentative Draft No. 3, approved 2001), and 5 Restatement (Second) of Trusts Section 338(2) (1959), both of 6 which permit termination upon joint action of the settlor and 7 beneficiaries. Unlike termination by the beneficiaries alone under 8 subsection (b), termination with the concurrence of the settlor does 9 not require a finding that the trust no longer serves a material 10 purpose. No finding of failure of material purpose is required 11 because all parties with a possible interest in the trust’s 12 continuation, both the settlor and beneficiaries, agree there is no 13 further need for the trust. Restatement Third goes further than 14 subsection (b) of this section and Restatement Second, however, in 15 also allowing the beneficiaries to compel termination of a trust that 16 still serves a material purpose if the reasons for termination 17 outweigh the continuing material purpose. 18 Subsection (b), similar to Restatement Third but not 19 Restatement Second, allows modification by beneficiary action. 20 The beneficiaries may modify any term of the trust if the 21 modification is not inconsistent with a material purpose of the 22 trust. Restatement Third, though, goes further than this Code in 23 also allowing the beneficiaries to use trust modification as a basis 24 for removing the trustee if removal would not be inconsistent with 25 a material purpose of the trust. Under the Code, however, Section 26 706 is the exclusive provision on removal of trustees. 27 Section 706(b)(4) recognizes that a request for removal upon 28 unanimous agreement of the qualified beneficiaries is a factor for 29 the court to consider, but before removing the trustee the court 30 must also find that such action best serves the interests of all the 31 beneficiaries, that removal is not inconsistent with a material 32 purpose of the trust, and that a suitable cotrustee or successor 33 trustee is available. Compare Section 706(b)(4), with Restatement 34 (Third) Section 65 cmt. f (Tentative Draft No. 3, approved 2001). 35 The requirement that the trust no longer serve a material purpose 36 before it can be terminated by the beneficiaries does not mean that 37 the trust has no remaining function. In order to be material, the 38 purpose remaining to be performed must be of some significance: 39 Material purposes are not readily to be inferred. A finding of such 40 a purpose generally requires some showing of a particular concern 41 or objective on the part of the settlor, such as concern with regard 42 to the beneficiary’s management skills, judgment, or level of 43 maturity. Thus, a court may look for some circumstantial or other1 [422] 129 1 evidence indicating that the trust arrangement represented to the 2 settlor more than a method of allocating the benefits of property 3 among multiple beneficiaries, or a means of offering to the 4 beneficiaries (but not imposing on them) a particular advantage. 5 Sometimes, of course, the very nature or design of a trust suggests 6 its protective nature or some other material purpose. 7 Restatement (Third) of Trusts Section 65 cmt. d (Tentative Draft 8 No. 3, approved 2001). 9 Subsection (c) of this section deals with the effect of a 10 spendthrift provision on the right of a beneficiary to concur in a 11 trust termination or modification. Spendthrift terms have 12 sometimes been construed to constitute a material purpose without 13 inquiry into the intention of the particular settlor. For examples, 14 see Restatement (Second) of Trusts Section 337 (1959); George G. 15 Bogert & George T. Bogert, The Law of Trusts and Trustees 16 Section 1008 (Rev. 2d ed. 1983); and 4 Austin W. Scott & William 17 F. Fratcher, The Law of Trusts Section 337 (4th ed. 1989). This 18 result is troublesome because spendthrift provisions are often 19 added to instruments with little thought. Subsection (c), similar to 20 Restatement (Third) of Trusts Section 65 cmt. a (Tentative Draft 21 No. 3, approved 2001), does not negate the possibility that 22 continuation of a trust to assure spendthrift protection might have 23 been a material purpose of the particular settlor. The question of 24 whether that was the intent of a particular settlor is instead a matter 25 of fact to be determined on the totality of the circumstances. 26 Subsection (d) recognizes that the beneficiaries’ power to 27 compel termination of the trust includes the right to direct how the 28 trust property is to be distributed. While subsection (a) requires 29 the settlor’s consent to terminate an irrevocable trust, the settlor 30 does not control the subsequent distribution of the trust property. 31 Once termination has been approved, how the trust property is to 32 be distributed is solely for the beneficiaries to decide. 33 Subsection (e), similar to Restatement (Third) of Trusts Section 34 65 cmt. c (Tentative Draft No. 3, approved 2001), and Restatement 35 (Second) of Trusts Sections 338(2) & 340(2) (1959), addresses 36 situations in which a termination or modification is requested by 37 less than all the beneficiaries, either because a beneficiary objects, 38 the consent of a beneficiary cannot be obtained, or representation 39 is either unavailable or its application uncertain. Subsection (e) 40 allows the court to fashion an appropriate order protecting the 41 interests of the nonconsenting beneficiaries while at the same time 42 permitting the remainder of the trust property to be distributed 43 without restriction. The order of protection for the nonconsenting1 [422] 130 1 beneficiaries might include partial continuation of the trust, the 2 purchase of an annuity, or the valuation and cashout of the interest. 3 4 South Carolina Comment 5 6 South Carolina Trust Code Section 62-7-411(a) adds the phrase 7 “with court approval” to the first sentence of the Uniform Trust 8 Code version and the phrase “modification or” to the second 9 sentence of the UTC version. The SCTC omits UTC subsection 10 411(c), which provided that a spendthrift provision would not be 11 presumed to constitute a material purpose of the trust. SCTC 12 Section 62-7-411(c) substitutes the phrase “as ordered by the 13 court” to the UTC version of subsection (d) for the phrase “as 14 agreed by the beneficiaries.” 15 No similar statutory provisions existed under prior South 16 Carolina law. 17 Under existing South Carolina law, a court has the power to 18 alter or modify an irrevocable trust to effectuate the intent of the 19 settler, but it is the duty of the courts to preserve, not destroy, 20 trusts. See Chiles v. Chiles, 270 S.C. 379, 242 S.E.2d 426 (S.C. 21 1978). When a settler sought modification of an irrevocable trust 22 without the consent of the beneficiaries, the court would modify 23 the trust to effectuate the Settlor’s intent only when some exigency 24 or emergency made the modification indispensable to the 25 preservation of the trust. See Chiles. 26 Under existing South Carolina law, a spendthrift trust cannot be 27 terminated by agreement of all beneficiaries when the purpose of 28 the trust is to provide an income stream for life or until the trust 29 fund was exhausted, since to do so would defeat a material purpose 30 of the trust. See Germann v. New York Life Insurance Co, 286 31 S.C. 34 , 331 S.E.2d 385(S.C. Ct. App. 1985). 32 33 Section 62-7-412. Modification or termination because of 34 unanticipated circumstances or inability to administer trust 35 effectively. 36 37 (a) The court may modify the administrative or dispositive 38 terms of a trust or terminate the trust if, because of circumstances 39 not anticipated by the settlor, modification or termination will 40 further the purposes of the trust. To the extent practicable, the 41 modification must be made in accordance with the settlor’s 42 probable intention.1 [422] 131 1 (b) The court may modify the administrative terms of a trust if 2 continuation of the trust on its existing terms would be 3 impracticable or wasteful or impair the trust’s administration. 4 (c) Upon termination of a trust under this section, the trustee 5 shall distribute the trust property as ordered by the court. 6 7 Comment 8 9 This section broadens the court’s ability to apply equitable 10 deviation to terminate or modify a trust. Subsection (a) allows a 11 court to modify the dispositive provisions to increase support of a 12 beneficiary might be appropriate if the beneficiary has become 13 unable to provide for support due to poor health or serious injury. 14 Subsection (a) is similar to Restatement (Third) of Trusts Section 15 66(1) (Tentative Draft No. 3, approved 2001), except that this 16 section, unlike the Restatement, does not impose a duty on the 17 trustee to petition the court if the trustee is aware of circumstances 18 justifying judicial modification. The purpose of the “equitable 19 deviation” authorized by subsection (a) is not to disregard the 20 settlor’s intent but to modify inopportune details to effectuate 21 better the settlor’s broader purposes. Among other things, 22 equitable deviation may be used to modify administrative or 23 dispositive terms due to the failure to anticipate economic change 24 or the incapacity of a beneficiary. For numerous illustrations, see 25 Restatement (Third) of Trusts Section 66 cmt. b (Tentative Draft 26 No. 3, approved 2001). While it is necessary that there be 27 circumstances not anticipated by the settlor before the court may 28 grant relief under subsection (a), the circumstances may have been 29 in existence when the trust was created. This section thus 30 complements Section 415, which allows for reformation of a trust 31 based on mistake of fact or law at the creation of the trust. 32 Subsection (b) broadens the court’s ability to modify the 33 administrative terms of a trust. The standard under subsection (b) 34 is similar to the standard for applying cy pres to a charitable trust. 35 See Section 413(a). Just as a charitable trust may be modified if its 36 particular charitable purpose becomes impracticable or wasteful, 37 so can the administrative terms of any trust, charitable or 38 non-charitable. Subsections (a) and (b) are not mutually exclusive. 39 Many situations justifying modification of administrative terms 40 under subsection (a) will also justify modification under subsection 41 (b). Subsection (b) is also an application of the requirement in 42 Section 404 that a trust and its terms must be for the benefit of its 43 beneficiaries. See also Restatement (Third) of Trusts Section1 [422] 132 1 27(2) & cmt. b (Tentative Draft No. 2, approved 1999). Although 2 the settlor is granted considerable latitude in defining the purposes 3 of the trust, the principle that a trust have a purpose which is for 4 the benefit of its beneficiaries precludes unreasonable restrictions 5 on the use of trust property. An owner’s freedom to be capricious 6 about the use of the owner’s own property ends when the property 7 is impressed with a trust for the benefit of others. See Restatement 8 (Second) of Trusts Section 124 cmt. g (1959). Thus, attempts to 9 impose unreasonable restrictions on the use of trust property will 10 fail. See Restatement (Third) of Trusts Section 27 Reporter’s 11 Notes to cmt. b (Tentative Draft No. 2, approved 1999). 12 Subsection (b), unlike subsection (a), does not have a direct 13 precedent in the common law, but various states have insisted on 14 such a measure by statute. See, e.g., Mo. Rev. Stat. Section 15 456.590.1. 16 Upon termination of a trust under this section, subsection (c) 17 requires that the trust be distributed in a manner consistent with the 18 purposes of the trust. As under the doctrine of cy pres, 19 effectuating a distribution consistent with the purposes of the trust 20 requires an examination of what the settlor would have intended 21 had the settlor been aware of the unanticipated circumstances. 22 Typically, such terminating distributions will be made to the 23 qualified beneficiaries, often in proportion to the actuarial value of 24 their interests, although the section does not so prescribe. For the 25 definition of qualified beneficiary, see Section 103(12). 26 Modification under this section, because it does not require 27 beneficiary action, is not precluded by a spendthrift provision. 28 29 South Carolina Comment 30 31 South Carolina Trust Code Section 62-7-412(a) conceptually 32 broadens the traditional authority of the court to modify trust 33 provisions because of unanticipated circumstances, especially with 34 respect to dispositive provisions. 35 South Carolina Trust Code Section 62-7-412(c) modifies the 36 uniform version to provide that, upon termination, trust property is 37 to be distributed as ordered by the court. 38 39 Section 62-7-413. Equitable deviation 40 41 (a) Except as otherwise provided in Subsection (b), if a 42 particular charitable purpose becomes unlawful, impracticable, 43 impossible to achieve, or wasteful:1 [422] 133 1 (1) the trust does not fail, in whole or in part; 2 (2) the trust property does not revert to the settlor or the 3 settlor’s successors in interest; and 4 (3) the court may deviate from the terms of the trust to 5 modify or terminate the trust by directing that the trust property be 6 applied or distributed, in whole or in part, in a manner consistent 7 with the settlor’s charitable intent. 8 (b) A provision in the terms of a charitable trust that would 9 result in distribution of the trust property to a noncharitable 10 beneficiary prevails over the power of the court under 11 subsection (a) to modify or terminate the trust only if, when the 12 provision takes effect: 13 (1) the trust property is to revert to the settlor and the settlor 14 is still living; or 15 (2) fewer than the number of years allowed under the South 16 Carolina Uniform Statutory Rule Against Perpetuities (S.C. Code 17 Section 27-6-10 et seq.) have elapsed since the date of the trust’s 18 creation. 19 20 Comment 21 22 Subsection (a) codifies the court’s inherent authority to apply cy 23 pres. The power may be applied to modify an administrative or 24 dispositive term. The court may order the trust terminated and 25 distributed to other charitable entities. Partial termination may 26 also be ordered if the trust property is more than sufficient to 27 satisfy the trust’s current purposes. Subsection (a), which is 28 similar to Restatement (Third) of Trusts Section 67 (Tentative 29 Draft No. 3, approved 2001), modifies the doctrine of cy pres by 30 presuming that the settlor had a general charitable intent when a 31 particular charitable purpose becomes impossible or impracticable 32 to achieve. Traditional doctrine did not supply that presumption, 33 leaving it to the courts to determine whether the settlor had a 34 general charitable intent. If such an intent is found, the trust 35 property is applied to other charitable purposes. If not, the 36 charitable trust fails. See Restatement (Second) of Trusts 37 Section 399 (1959). In the great majority of cases the settlor 38 would prefer that the property be used for other charitable 39 purposes. Courts are usually able to find a general charitable 40 purpose to which to apply the property, no matter how vaguely 41 such purpose may have been expressed by the settlor. Under 42 subsection (a), if the particular purpose for which the trust was 43 created becomes impracticable, unlawful, impossible to achieve, or1 [422] 134 1 wasteful, the trust does not fail. The court instead must either 2 modify the terms of the trust or distribute the property of the trust 3 in a manner consistent with the settlor’s charitable purposes. 4 The settlor, with one exception, may mandate that the trust 5 property pass to a noncharitable beneficiary upon failure of a 6 particular charitable purpose. Responding to concerns about the 7 clogging of title and other administrative problems caused by 8 remote default provisions upon failure of a charitable purpose, 9 subsection (b) invalidates a gift over to a noncharitable beneficiary 10 upon failure of a particular charitable purpose unless the trust 11 property is to revert to a living settlor or fewer than 21 years have 12 elapsed since the trust’s creation. Subsection (b) will not apply to 13 a charitable lead trust, under which a charity receives payments for 14 a term certain with a remainder to a noncharity. In the case of a 15 charitable lead trust, the settlor’s particular charitable purpose does 16 not fail upon completion of the specified trust term and distribution 17 of the remainder to the noncharity. Upon completion of the 18 specified trust term, the settlor’s particular charitable purpose has 19 instead been fulfilled. For a discussion of the reasons for a 20 provision such as subsection (b), see Ronald Chester, Cy Pres of 21 Gift Over: The Search for Coherence in Judicial Reform of Failed 22 Charitable Trusts, 23 Suffolk U. L. Rev. 41 (1989). 23 The doctrine of cy pres is applied not only to trusts, but also to 24 other types of charitable dispositions, including those to charitable 25 corporations. This Section does not control dispositions made in 26 nontrust form. However, in formulating rules for such 27 dispositions, the courts often refer to the principles governing 28 charitable trusts, which would include this Code. 29 For the definition of charitable purpose, see Section 405(a). 30 Pursuant to Sections 405(c) and 410(b), a petition requesting a 31 court to enforce a charitable trust or to apply cy pres may be 32 maintained by a settlor. Such actions can also be maintained by a 33 cotrustee, the state attorney general, or by a person having a 34 special interest in the charitable disposition. See Restatement 35 (Second) of Trusts Section 391 (1959). 36 37 South Carolina Comment 38 39 This section clarifies and codifies in part existing South Carolina 40 law that recognizes “Equitable Deviation,” which is the power of a 41 court in certain situations to change the provisions of a charitable 42 trust. The words “cy pres” in the Uniform Trust Code version 43 have been deleted and replaced with “Equitable Deviation”1 [422] 135 1 because South Carolina courts have refused to recognize the 2 doctrine of cy pres. See, e.g., Mars v. Gilbert, 93 S.C. 455, 77 S.E. 3 131 (S.C. 1913) (expressly rejecting the doctrine of equitable cy 4 pres, but making clear that literal compliance with the terms of a 5 will is not always required when the conditions have changed). 6 See also All Saints Parish, Waccamaw, a South Carolina 7 non-profit corporation, a/k/a The Episcopal Church of All Saints 8 and a/k/a The Vestry and Church Wardens of the Episcopal 9 Church of All Saints Parish, 358 S.C. 209; 595 S.E.2d 253 (S.C. 10 Ct. App.2004). 11 South Carolina has long recognized the doctrine of equitable 12 deviation, which permits a court of equity to deviate from the strict 13 terms of a trust when changed conditions render the 14 accomplishment of the charitable purpose impossible or 15 impracticable. 16 17 Section 62-7-414. Modification or termination of 18 uneconomic trust. 19 20 (a) After notice to the qualified beneficiaries, the trustee of a 21 trust consisting of trust property having a total value less than 22 $100,000 may terminate the trust if the trustee concludes that the 23 value of the trust property is insufficient to justify the cost of 24 administration. 25 (b) The court may modify or terminate a trust or remove the 26 trustee and appoint a different trustee if it determines that the value 27 of the trust property is insufficient to justify the cost of 28 administration. 29 (c) Upon termination of a trust under this section, the trustee 30 shall distribute the trust property as ordered by the court or, if the 31 court does not specify the manner of distribution, in a manner 32 consistent with the purposes of the trust. 33 (d) This section does not apply to an easement for conservation 34 or preservation. 35 36 Comment 37 38 Subsection (a) assumes that a trust with a value of $50,000 or 39 less is sufficiently likely to be inefficient to administer that a 40 trustee should be able to terminate it without the expense of a 41 judicial termination proceeding. The amount has been placed in 42 brackets to signal to enacting jurisdictions that they may wish to 43 designate a higher or lower figure. Because subsection (a) is a1 [422] 136 1 default rule, a settlor is free to set a higher or lower figure or to 2 specify different procedures or to prohibit termination without a 3 court order. See Section 105 and Article 4 General Comment. 4 Subsection (b) allows the court to modify or terminate a trust if 5 the costs of administration would otherwise be excessive in 6 relation to the size of the trust. The court may terminate a trust 7 under this section even if the settlor has forbidden it. See Section 8 105(b)(4). Judicial termination under this subsection may be used 9 whether or not the trust is larger or smaller than $50,000. 10 When considering whether to terminate a trust under either 11 subsection (a) or (b), the trustee or court should consider the 12 purposes of the trust. Termination under this Section is not always 13 wise. Even if administrative costs may seem excessive in relation 14 to the size of the trust, protection of the assets from beneficiary 15 mismanagement may indicate that the trust be continued. The 16 court may be able to reduce the costs of administering the trust by 17 appointing a new trustee. 18 Upon termination of a trust under this section, subsection (c) 19 requires that the trust property be distributed in a manner 20 consistent with the purposes of the trust. In addition to outright 21 distribution to the beneficiaries, Section 816(21) authorizes 22 payment to be made by a variety of alternate payees. Distribution 23 under this section will typically be made to the qualified 24 beneficiaries in proportion to the actuarial value of their interests. 25 Even though not accompanied by the usual trappings of a trust, 26 the creation and transfer of an easement for conservation or 27 preservation will frequently create a charitable trust. The 28 organization to whom the easement was conveyed will be deemed 29 to be acting as trustee of what will ostensibly appear to be a 30 contractual or property arrangement. Because of the fiduciary 31 obligation imposed, the termination or substantial modification of 32 the easement by the “trustee” could constitute a breach of trust. 33 The drafters of the Uniform Trust Code concluded that easements 34 for conservation or preservation are sufficiently different from the 35 typical cash and securities found in small trusts that they should be 36 excluded from this section, and subsection (d) so provides. Most 37 creators of such easements, it was surmised, would prefer that the 38 easement be continued unchanged even if the easement, and hence 39 the trust, has a relatively low market value. For the law of 40 conservation easements, see Restatement (Third) of Property: 41 Servitudes Section 1.6 (2000). 42 While this Section is not directed principally at honorary trusts, 43 it may be so applied. See Sections 408, 409.1 [422] 137 1 Because termination of a trust under this Section is initiated by 2 the trustee or ordered by the court, termination is not precluded by 3 a spendthrift provision. 4 5 South Carolina Comment 6 7 South Carolina Trust Code Section 62-7-414(a) sets the floor for 8 termination of a small trust at $100,000. Also, in subsection (c) a 9 phrase added to the uniform version clarifies that the court may 10 specify how the trust assets should be distributed -- e.g., in cases 11 when the court is involved in a termination under subsection (b). 12 If the trustee or cotrustee is a beneficiary and would receive part 13 or all of the trust assets upon termination of a trust under 14 subsection (a), then the trustee’s power to terminate is subject to 15 the limitations in SCTC Section 62-7-814. 16 Subsection (a) had no counterpart in prior South Carolina law, 17 though a trust document might contain similar provisions. 18 19 Section 62-7-415. Reformation to correct mistakes. 21 The court may reform the terms of a trust, even if unambiguous, 22 to conform the terms to the settlor’s intention if it is proved by 23 clear and convincing evidence that both the settlor’s intent and the 24 terms of the trust were affected by a mistake of fact or law, 25 whether in expression or inducement. 26 27 Comment 28 29 Reformation of inter vivos instruments to correct a mistake of 30 law or fact is a long-established remedy. Restatement (Third) of 31 Property: Donative Transfers Section 12.1 (Tentative Draft No. 1, 32 approved 1995), which this section copies, clarifies that this 33 doctrine also applies to wills. 34 This section applies whether the mistake is one of expression or 35 one of inducement. A mistake of expression occurs when the 36 terms of the trust misstate the settlor’s intention, fail to include a 37 term that was intended to be included, or include a term that was 38 not intended to be excluded. A mistake in the inducement occurs 39 when the terms of the trust accurately reflect what the settlor 40 intended to be included or excluded but this intention was based on 41 a mistake of fact or law. See Restatement (Third) of Property: 42 Donative Transfers Section 12.1 cmt. i (Tentative Draft No. 1, 43 approved 1995). Mistakes of expression are frequently caused by1 [422] 138 1 scriveners’ errors while mistakes of inducement often trace to 2 errors of the settlor. 3 Reformation is different from resolving an ambiguity. 4 Resolving an ambiguity involves the interpretation of language 5 already in the instrument. Reformation, on the other hand, may 6 involve the addition of language not originally in the instrument, 7 or the deletion of language originally included by mistake, if 8 necessary to conform the instrument to the settlor’s intent. 9 Because reformation may involve the addition of language to the 10 instrument, or the deletion of language that may appear clear on its 11 face, reliance on extrinsic evidence is essential. To guard against 12 the possibility of unreliable or contrived evidence in such 13 circumstance, the higher standard of clear and convincing proof is 14 required. See Restatement (Third) of Property: Donative Transfers 15 Section 12.1 cmt. e (Tentative Draft No. 1, approved 1995). 16 In determining the settlor’s original intent, the court may 17 consider evidence relevant to the settlor’s intention even though it 18 contradicts an apparent plain meaning of the text. The objective of 19 the plain meaning rule, to protect against fraudulent testimony, is 20 satisfied by the requirement of clear and convincing proof. See 21 Restatement (Third) of Property: Donative Transfers Section 12.1 22 cmt. d and Reporter’s Notes (Tentative Draft No. 1, approved 23 1995). See also John H. Langbein & Lawrence W. Waggoner, 24 Reformation of Wills on the Ground of Mistake: Change of 25 Direction in American Law?, 130 U. Pa. L. Rev. 521 (1982). 26 For further discussion of the rule of this section and its 27 application to illustrative cases, see Restatement (Third) of 28 Property: Donative Transfers Section 12.1 cmts. and Reporter’s 29 Notes (Tentative Draft No. 1, approved 1995). 30 31 South Carolina Comment 32 33 There was no comparable South Carolina statutory provision 34 authorizing a court to reform an unambiguous trust to conform to 35 the settlor’s intent. 36 South Carolina Trust Code Section 62-7-415 would permit the 37 introduction of parol evidence to show the settlor’s intent and the 38 existence of a mistake of fact or law, provided that the evidence is 39 clear and convincing to protect against the possibility of unreliable 40 or fraudulent evidence. This section permits consideration of 41 evidence relevant to the settlor’s intention even when contradicted 42 by the plain meaning of the words in the instrument. 431 [422] 139 1 Section 62-7-416. Modification to achieve settlor’s tax 2 objectives. 3 4 To achieve the settlor’s tax objectives, the court may modify the 5 terms of a trust in a manner that is not contrary to the settlor’s 6 probable intention. The court may provide that the modification 7 has retroactive effect. 8 9 Comment 10 11 This section is copied from Restatement (Third) of Property: 12 Donative Transfers Section 12.2 (Tentative Draft No. 1, approved 13 1995). “Modification” under this section is to be distinguished 14 from the “reformation” authorized by Section 415. Reformation 15 under Section 415 is available when the terms of a trust fail to 16 reflect the donor’s original, particularized intention. The mistaken 17 terms are then reformed to conform to this specific intent. The 18 modification authorized here allows the terms of the trust to be 19 changed to meet the settlor’s tax-saving objective as long as the 20 resulting terms, particularly the dispositive provisions, are not 21 inconsistent with the settlor’s probable intent. The modification 22 allowed by this subsection is similar in concept to the cy pres 23 doctrine for charitable trusts (see Section 413), and the deviation 24 doctrine for unanticipated circumstances (see Section 412). 25 Whether a modification made by the court under this section 26 will be recognized under federal tax law is a matter of federal law. 27 Absent specific statutory or regulatory authority, binding 28 recognition is normally given only to modifications made prior to 29 the taxing event, for example, the death of the testator or settlor in 30 the case of the federal estate tax. See Rev. Rul. 73-142, 1973-1 31 C.B. 405. Among the specific modifications authorized by the 32 Internal Revenue Code or Service include the revision of 33 split-interest trusts to qualify for the charitable deduction, 34 modification of a trust for a noncitizen spouse to become eligible 35 as a qualified domestic trust, and the splitting of a trust to utilize 36 better the exemption from generation-skipping tax. 37 For further discussion of the rule of this section and the relevant 38 case law, see Restatement (Third) of Property: Donative Transfers 39 Section 12.2 cmts. and Reporter’s Notes (Tentative Draft No. 1, 40 approved 1995). 41 42 South Carolina Comment 431 [422] 140 1 There was no South Carolina statutory provision that correlates 2 with this Section. Former Section 62-7-211 of the South Carolina 3 Probate Code provided for division or consolidation of trusts, 4 provided that the consolidation or division was not inconsistent 5 with the intent of the trustor, the action would facilitate trust 6 administration, and the action would be in the best interests of all 7 beneficiaries and not materially impair their interests. See South 8 Carolina Trust Code Section 62-7-417. 9 South Carolina case law indicates that the courts will not allow a 10 beneficiary’s interest to be negated if the beneficiary objects, 11 regardless of the tax benefit desired. See Chiles v. Chiles, 270 12 S.C. 379, 242 S.E.2d 426 (S.C. 1978) (the Supreme Court 13 reversed, with respect to the one appellant only, the lower court’s 14 extinguishment of certain noncharitable beneficiaries’ interests to 15 vest a charitable contribution deduction for federal estate tax 16 purposes). 17 18 Section 62-7-417. Combination and division of trusts. 19 20 After notice to the qualified beneficiaries, a trustee may 21 combine two or more trusts into a single trust or divide a trust into 22 two or more separate trusts, if the result does not impair rights of 23 any beneficiary or adversely affect achievement of the purposes of 24 the trust. 25 26 Comment 27 28 This section, which authorizes the combination or division of 29 trusts, is subject to contrary provision in the terms of the trust. See 30 Section 105 and Article 4 General Comment. Many trust 31 instruments and standardized estate planning forms include 32 comprehensive provisions governing combination and division of 33 trusts. Except for the requirement that the qualified beneficiaries 34 receive advance notice of a proposed combination or division, this 35 section is similar to Restatement (Third) of Trusts Section 68 36 (Tentative Draft No. 3, approved 2001). 37 This section allows a trustee to combine two or more trusts even 38 though their terms are not identical. Typically the trusts to be 39 combined will have been created by different members of the same 40 family and will vary on only insignificant details, such as the 41 presence of different perpetuities savings periods. The more the 42 dispositive provisions of the trusts to be combined differ from each 43 other the more likely it is that a combination would impair some1 [422] 141 1 beneficiary’s interest, hence the less likely that the combination 2 can be approved. Combining trusts may prompt more efficient 3 trust administration and is sometimes an alternative to terminating 4 an uneconomic trust as authorized by Section 414. Administrative 5 economies promoted by combining trusts include a potential 6 reduction in trustees’ fees, particularly if the trustee charges a 7 minimum fee per trust, the ability to file one trust income tax 8 return instead of multiple returns, and the ability to invest a larger 9 pool of capital more effectively. Particularly if the terms of the 10 trust are identical, available administrative economies may suggest 11 that the trustee has a responsibility to pursue a combination. See 12 Section 805 (duty to incur only reasonable costs). 13 Division of trusts is often beneficial and, in certain 14 circumstances, almost routine. Division of trusts is frequently 15 undertaken due to a desire to obtain maximum advantage of 16 exemptions available under the federal generation-skipping tax. 17 While the terms of the trusts which result from such a division are 18 identical, the division will permit differing investment objectives 19 to be pursued and allow for discretionary distributions to be made 20 from one trust and not the other. Given the substantial tax benefits 21 often involved, a failure by the trustee to pursue a division might 22 in certain cases be a breach of fiduciary duty. The opposite could 23 also be true if the division is undertaken to increase fees or to fit 24 within the small trust termination provision. See Section 414. 25 This section authorizes a trustee to divide a trust even if the 26 trusts that result are dissimilar. Conflicts among beneficiaries, 27 including differing investment objectives, often invite such a 28 division, although as in the case with a proposed combination of 29 trusts, the more the terms of the divided trusts diverge from the 30 original plan, the less likely it is that the settlor’s purposes would 31 be achieved and that the division could be approved. 32 This section does not require that a combination or division be 33 approved either by the court or by the beneficiaries. Prudence may 34 dictate, however, that court approval under Section 410 be sought 35 and beneficiary consent obtained whenever the terms of the trusts 36 to be combined or the trusts that will result from a division differ 37 substantially one from the other. For the provisions relating to 38 beneficiary consent, or ratification of a transaction, or release of 39 trustee from liability, see Section 1009. 40 While the consent of the beneficiaries is not necessary before a 41 trustee may combine or divide trusts under this section, advance 42 notice to the qualified beneficiaries of the proposed combination or 43 division is required. This is consistent with Section 813, which1 [422] 142 1 requires that the trustee keep the beneficiaries reasonably informed 2 of trust administration, including the giving of advance notice to 3 the qualified beneficiaries of several specified actions that may 4 have a major impact on their interests. 5 Numerous States have enacted statutes authorizing division of 6 trusts, either by trustee action or upon court order. For a list of 7 these statutes, see Restatement (Third) Property: Donative 8 Transfers Section 12.2 Statutory Note (Tentative Draft No. 1, 9 approved 1995). Combination or division has also been authorized 10 by the courts in the absence of authorizing statute. See, e.g., In re 11 Will of Marcus, 552 N.Y.S. 2d 546 (Surr. Ct. 1990) (combination); 12 In re Heller Inter Vivos Trust, 613 N.Y.S. 2d 809 (Surr. Ct. 1994) 13 (division); and BankBoston v. Marlow, 701 N.E. 2d 304 (Mass. 14 1998) (division). 15 For a provision authorizing a trustee, in distributing the assets of 16 the divided trust, to make non-pro-rata distributions, see Section 17 816(22). 18 19 South Carolina Comment 20 21 This section expands former South Carolina Probate Code 22 Section 62-7-211, which allowed the division or consolidation of 23 trusts only with court approval when such action was not 24 authorized by the trust instrument. 25 26 Section 62-7-418. Estate and possession of trust estates shall 27 be in beneficiaries thereof. 28 29 (a) When any person shall be seized of any lands, tenements, 30 rents, reversions, remainders, or other hereditaments to the use, 31 confidence, or trust of any other person or of any body politic by 32 reason of any bargain, sale, feoffment, covenant, contract, 33 agreement, will, or otherwise, the person or body politic that shall 34 have such use, confidence, or trust, in fee simple, fee tail, for term 35 of life or for years or otherwise or any use, confidence, or trust in 36 remainder or reversion, shall be deemed and adjudged in lawful 37 seizin, estate and possession of and in such lands, tenements, rents, 38 reversions, remainders, and hereditaments, with their 39 appurtenances, to all intents, constructions, and purposes in law of 40 and in such like estates as they shall have in use, trust, or 41 confidence of or in them 42 (b) When several persons shall be jointly seized of any lands, 43 tenements, rents, reversions, remainders, or other hereditaments to1 [422] 143 1 the use, confidence, or trust of any of them that be so jointly 2 seized, such person or persons who shall have any such use, 3 confidence, or trust in any such lands, tenements, rents, reversions, 4 remainders, or hereditaments shall have such estate, possession, 5 and seizing of and in such lands, tenements, rents, reversions, 6 remainders, and other hereditaments only to him or them that shall 7 have any such use, confidence, or trust, in like nature, manner, 8 form, condition, and course as he or they had before in the use, 9 confidence, or trust of such lands, tenements, or hereditaments, 10 saving and reserving to all and singular persons and bodies politic, 11 their heirs and successors, other than such person or persons who 12 are seized of such lands, tenements, or hereditaments to any use, 13 confidence, or trust, all such right, title, entry, interest, possession, 14 rents, and action as they or any of them had or might have had 15 without this section and also saving to all and singular those 16 persons and their heirs who are seized to any use all such former 17 right, title, entry, interest, possession, rents, customs, services, and 18 action as they or any of them might have had to his or their own 19 proper use in or to any lands, tenements, rents, or hereditaments 20 whereof they are seized to any other use, anything contained in this 21 chapter to the contrary notwithstanding. 22 23 South Carolina Comment 24 25 There is no counterpart to this section in the Uniform Trust 26 Code. 27 South Carolina Trust Code Subsections 62-7-418(a) and (b) 28 retain and incorporate former South Carolina Probate Code 29 Sections 62-7-107 and 62-7-108. 30 31 Part 5 32 33 Creditor’s Claims; Spendthrift and 34 Discretionary Trusts 35 36 General Comment 37 38 This article addresses the validity of a spendthrift provision and 39 the rights of creditors, both of the settlor and beneficiaries, to reach 40 a trust to collect a debt. Sections 501 and 502 state the general 41 rules. To the extent that a trust is protected by a spendthrift 42 provision, a beneficiary’s creditor may not reach the beneficiary’s 43 interest until distribution is made by the trustee. To the extent not1 [422] 144 1 protected by a spendthrift provision, however, the creditor can 2 reach the beneficiary’s interest subject to the court’s power to limit 3 the relief. Section 503 lists the categories of creditors whose 4 claims are not subject to a spendthrift restriction. Sections 504 5 through 507 address special categories in which the rights of a 6 beneficiary’s creditors are the same whether or not the trust 7 contains a spendthrift provision. Section 504 deals with 8 discretionary trusts and trusts for which distributions are subject to 9 a standard. Section 505 covers creditor claims against a settlor, 10 whether the trust is revocable or irrevocable, and if revocable, 11 whether the claim is made during the settlor’s lifetime or incident 12 to the settlor’s death. Section 506 provides a creditor with a 13 remedy if a trustee fails to make a mandated distribution within a 14 reasonable time. Section 507 clarifies that although the trustee 15 holds legal title to trust property, that property is not subject to the 16 trustee’s personal debts. 17 The provisions of this article relating to the validity and effect of 18 a spendthrift provision and the rights of certain creditors and 19 assignees to reach the trust may not be modified by the terms of 20 the trust. See Section 105(b)(5). 21 This article does not supersede state exemption statutes nor an 22 enacting jurisdiction’s Uniform Fraudulent Transfers Act which, 23 when applicable, invalidates any type of gratuitous transfer, 24 including transfers into trust. 25 26 Section 62-7-501. Rights of beneficiary’s creditor or 27 assignee. 28 29 (a) Except as provided in subsection (b), the court may 30 authorize a creditor or assignee of the beneficiary to reach the 31 beneficiary’s interest by attachment of present or future 32 distributions to or for the benefit of the beneficiary or other means. 33 The court may limit the award to such relief as is appropriate under 34 the circumstances. 35 (b) This section shall not apply and a trustee shall have no 36 liability to any creditor of a beneficiary for any distributions made 37 to or for the benefit of the beneficiary to the extent a beneficiary’s 38 interest 39 (1) is protected by a spendthrift provision, or 40 (2) is a discretionary trust interest as referred to in S.C. Code 41 Section 62-7-504. 42 43 Comment1 [422] 145 1 2 Absent a valid spendthrift provision, a creditor may reach the 3 interest of a beneficiary the same as any other of the beneficiary’s 4 assets. This does not necessarily mean that the creditor can collect 5 all distributions made to the beneficiary. Other creditor law of the 6 State may limit the creditor to a specified percentage of a 7 distribution. See, e.g., Cal. Prob. Code Section 15306.5. This 8 section does not prescribe the procedures for reaching a 9 beneficiary’s interest or of priority among claimants, leaving those 10 issues to the enacting State’s laws on creditor rights. The section 11 does clarify, however, that an order obtained against the trustee, 12 whatever state procedure may have been used, may extend to 13 future distributions whether made directly to the beneficiary or to 14 others for the beneficiary’s benefit. By allowing an order to extend 15 to future payments, the need for the creditor periodically to return 16 to court will be reduced. 17 A creditor typically will pursue a claim by serving an order on 18 the trustee attaching the beneficiary’s interest. Assuming that the 19 validity of the order cannot be contested, the trustee will then pay 20 to the creditor instead of to the beneficiary any payments the 21 trustee would otherwise be required to make to the beneficiary, as 22 well as discretionary distributions the trustee decides to make. The 23 creditor may also, in theory, force a judicial sale of a beneficiary’s 24 interest. 25 Because proceedings to satisfy a claim are equitable in nature, 26 the second sentence of this section ratifies the court’s discretion to 27 limit the award as appropriate under the circumstances. In 28 exercising its discretion to limit relief, the court may appropriately 29 consider the support needs of a beneficiary and the beneficiary’s 30 family. See Restatement (Third) of Trusts Section 56 cmt. e 31 (Tentative Draft No. 2, approved 1999). 32 33 South Carolina Comment 34 35 There was no South Carolina statutory provision that correlates 36 with this Section. Also, the case law in South Carolina is uncertain 37 as to the effectiveness and application of the spendthrift provision 38 but appears to indicate that a spendthrift provision operates against 39 only income interests but not principal interests. See S. Alan 40 Medlin, The Law of Wills and Trusts, Vol. I, Estate Planning in 41 South Carolina, Section 508.2(a), p. 5-19 (2002). Older cases 42 seem to allow a cessor clause to prevent the voluntary or 43 involuntary alienation of the beneficiary’s interest. See S. Alan1 [422] 146 1 Medlin, supra. This Section avoids the confusion regarding the 2 effectiveness and application of the spendthrift provision and also 3 clarifies and broadens the laws in South Carolina so that a 4 spendthrift provision operates as a restraint against both income 5 and principal interests, except as otherwise provided in the 6 following sections of the SCTC. 7 Section 62-7-501 provides additional protection not only for 8 spendthrift interests, but also for interests in discretionary trusts as 9 referred to in S.C. Code Section 62-7-504. Discretionary trusts do 10 not have to rely on spendthrift language for a beneficiary’s present 11 or future interest in the trust to be exempt from creditor 12 attachment. 13 For a definition of discretionary trust, resort should be made to 14 the South Carolina common law. See generally Heath v. Bishop, 15 25 S.C. Eq. (4 Rich. Eq.) 446 (S.C. 1851); Collins v. Collins, 219 16 S.C. 1, 63 S.E.2d 811 (S.C. 1951); see also Sarlin v. Sarlin, 312 17 S.C. 27, 430 S.E.2d 530 (S.C. App. 1993); Page v. Page, 243 S.C. 18 312, 133 S.E.2d 829 (S.C. 1963). 19 20 Section 62-7-502. Spendthrift provision. 21 22 (a) A spendthrift provision is valid only if it restrains both 23 voluntary and involuntary transfer of a beneficiary’s interest. 24 (b) A term of a trust providing that the interest of a beneficiary 25 is held subject to a ‘spendthrift trust’, or words of similar import, is 26 sufficient to restrain both voluntary and involuntary transfer of the 27 beneficiary’s interest. 28 (c) A beneficiary may not transfer an interest in a trust in 29 violation of a valid spendthrift provision and, except as otherwise 30 provided in this article, a creditor or assignee of the beneficiary 31 may not reach the interest or a distribution by the trustee before its 32 receipt by the beneficiary. 33 34 Comment 35 36 Under this section, a settlor has the power to restrain the transfer 37 of a beneficiary’s interest, regardless of whether the beneficiary 38 has an interest in income, in principal, or in both. Unless one of 39 the exceptions under this article applies, a creditor of the 40 beneficiary is prohibited from attaching a protected interest and 41 may only attempt to collect directly from the beneficiary after 42 payment is made. This section is similar to Restatement (Third) of 43 Trusts Section 58 (Tentative Draft No. 2, approved 1999), and1 [422] 147 1 Restatement (Second) of Trusts Sections 152-153 (1959). For the 2 definition of spendthrift provision, see Section 103(15). 3 For a spendthrift provision to be effective under this Code, it 4 must prohibit both the voluntary and involuntary transfer of the 5 beneficiary’s interest, that is, a settlor may not allow a beneficiary 6 to assign while prohibiting a beneficiary’s creditor from collecting, 7 and vice versa. See Restatement (Third) of Trusts Section 58 cmt. 8 b (Tentative Draft No. 2, approved 1999). See also Restatement 9 (Second) of Trusts Section 152(2) (1959). A spendthrift provision 10 valid under this Code will also be recognized as valid in a federal 11 bankruptcy proceeding. See 11 U.S.C. Section 541(c)(2). 12 Subsection (b), which is derived from Texas Property Code 13 Section 112.035(b), allows a settlor to provide maximum 14 spendthrift protection simply by stating in the instrument that all 15 interests are held subject to a “spendthrift trust” or words of 16 similar effect. 17 A disclaimer, because it is a refusal to accept ownership of an 18 interest and not a transfer of an interest already owned, is not 19 affected by the presence or absence of a spendthrift provision. 20 Most disclaimer statutes expressly provide that the validity of a 21 disclaimer is not affected by a spendthrift protection. See, e.g., 22 Unif. Probate Code Section 2-801(a). Releases and exercises of 23 powers of appointment are also not affected because they are not 24 transfers of property. See Restatement (Third) of Trusts 25 Section 58 cmt. c (Tentative Draft No. 2, approved 1999). 26 A spendthrift provision is ineffective against a beneficial interest 27 retained by the settlor. See Restatement (Third) of Trusts 28 Section 58(2) (Tentative Draft No. 2, approved 1999). This is a 29 necessary corollary to Section 505(a)(2), which allows a creditor 30 or assignee of the settlor to reach the maximum amount that can be 31 distributed to or for the settlor’s benefit. This right to reach the 32 trust applies whether or not the trust contains a spendthrift 33 provision. 34 A valid spendthrift provision makes it impossible for a 35 beneficiary to make a legally binding transfer, but the trustee may 36 choose to honor the beneficiary’s purported assignment. The 37 trustee may recommence distributions to the beneficiary at 38 anytime. The beneficiary, not having made a binding transfer, can 39 withdraw the beneficiary’s direction but only as to future 40 payments. See Restatement (Third) of Trusts Section 58 cmt. d 41 (Tentative Draft No. 2, approved 1999); Restatement (Second) of 42 Trusts Section 152 cmt. i (1959). 431 [422] 148 1 South Carolina Comment 2 3 For discussion of the treatment of spendthrift provisions in 4 South Carolina, see the South Carolina Comment to SCTC Section 5 62-7-501. 6 7 Section 62-7-503. Exceptions to spendthrift provision. 8 9 (a) In this section, ‘child’ includes any person for whom an 10 order or judgment for child support has been entered in this or 11 another State. 12 (b) Even if a trust contains a spendthrift provision, a 13 beneficiary’s child who has a judgment or court order against the 14 beneficiary for support or maintenance may obtain from a court an 15 order attaching present or future distributions to or for the benefit 16 of the beneficiary. 17 (c) The exception in subsection (b) is unenforceable against a 18 special needs trust, supplemental needs trust, or similar trust 19 established for a disabled person if the applicability of such a 20 provision could invalidate such a trust’s exemption from 21 consideration as a countable resource for Medicaid or 22 Supplemental Security Income (SSI) purposes or if the 23 applicability of such a provision has the effect or potential effect of 24 rendering such disabled person ineligible for any program of 25 public benefit, including, but not limited to, Medicaid and SSI. 26 27 Comment 28 29 This section exempts the claims of certain categories of creditors 30 from the effects of a spendthrift restriction. 31 The exception in subsection (b) for judgments or orders to 32 support a beneficiary’s child or current or former spouse is in 33 accord with Restatement (Third) of Trusts Section 59(a) (Tentative 34 Draft No. 2, approved 1999), Restatement (Second) of Trusts 35 Section 157(a) (1959), and numerous state statutes. It is also 36 consistent with federal bankruptcy law, which exempts such 37 support orders from discharge. The effect of this exception is to 38 permit the claimant for unpaid support to attach present or future 39 distributions that would otherwise be made to the beneficiary. 40 Distributions subject to attachment include distributions required 41 by the express terms of the trust, such as mandatory payments of 42 income, and distributions the trustee has otherwise decided to 43 make, such as through the exercise of discretion. Subsection (b),1 [422] 149 1 unlike Section 504, does not authorize the spousal or child 2 claimant to compel a distribution from the trust. Section 504 3 authorizes a spouse or child claimant to compel a distribution to 4 the extent the trustee has abused a discretion or failed to comply 5 with a standard for distribution. 6 Subsection (b) refers both to “support” and “maintenance” in 7 order to accommodate differences among the States in terminology 8 employed. No difference in meaning between the two terms is 9 intended. 10 The definition of “child” in subsection (a) accommodates the 11 differing approaches States take to defining the class of individuals 12 eligible for child support, including such issues as whether support 13 can be awarded to stepchildren. However the State making the 14 award chooses to define “child” will be recognized under this 15 Code, whether the order sought to be enforced was entered in the 16 same or different State. 17 The exception in subsection (b) for a judgment creditor who has 18 provided services for the protection of a beneficiary’s interest in 19 the trust is in accord with Restatement (Third) of Trusts Section 20 59(b) (Tentative Draft No. 2, approved 1999), and Restatement 21 (Second) of Trusts Section 157(c) (1959). This exception allows a 22 beneficiary of modest means to overcome an obstacle preventing 23 the beneficiary’s obtaining services essential to the protection or 24 enforcement of the beneficiary’s rights under the trust. See 25 Restatement (Third) of Trusts Section 59 cmt. d (Tentative Draft 26 No. 2, approved 1999). 27 Subsection (c), which is similar to Restatement (Third) of 28 Trusts Section 59 cmt. a (Tentative Draft No. 2, approved 1999), 29 exempts certain governmental claims from a spendthrift restriction. 30 Federal preemption guarantees that certain federal claims, such as 31 claims by the Internal Revenue Service, may bypass a spendthrift 32 provision no matter what this Code might say. The case law and 33 relevant Internal Revenue Code provisions on the exception for 34 federal tax claims are collected in George G. Bogert & George T. 35 Bogert, The Law of Trusts and Trustees Section 224 (Rev. 2d ed. 36 1992); and 2A Austin W. Scott & William F. Fratcher, The Law 37 of Trusts Section 157.4 (4th ed. 1987). Regarding claims by state 38 governments, this subsection recognizes that States take a variety 39 of approaches with respect to collection, depending on whether the 40 claim is for unpaid taxes, for care provided at an institution, or for 41 other charges. Acknowledging this diversity, subsection (c) does 42 not prescribe a rule, but refers to other statutes of the State on1 [422] 150 1 whether particular claims are subject to or exempted from 2 spendthrift provisions. 3 Unlike Restatement (Third) of Trusts Section 59(2) (Tentative 4 Draft No. 2, approved 1999), and Restatement (Second) of Trusts 5 Section 157(b) (1959), this Code does not create an exception to 6 the spendthrift restriction for creditors who have furnished 7 necessary services or supplies to the beneficiary. Most of these 8 cases involve claims by governmental entities, which the drafters 9 concluded are better handled by the enactment of special 10 legislation as authorized by subsection (c). The drafters also 11 declined to create an exception for tort claimants. For a discussion 12 of the exception for tort claims, which has not generally been 13 recognized, see Restatement (Third) of Trusts Section 59 14 Reporter’s Notes to cmt. a (Tentative Draft No. 2, approved 1999). 15 For a discussion of other exceptions to a spendthrift restriction, 16 recognized in some States, see George G. Bogert & George T. 17 Bogert, The Law of Trusts and Trustees Section 224 (Rev. 2d ed. 18 1992); and 2A Austin W. Scott & William F. Fratcher, The Law of 19 Trusts Sections 157-157.5 (4th ed. 1987). 20 21 South Carolina Comment 22 23 South Carolina Trust Code Section 62-7-503(b) eliminates the 24 exceptions contained in Uniform Trust Code Section 503 for a 25 beneficiary’s spouse or former spouse who has a judgment or court 26 order against the beneficiary for support or maintenance as well as 27 a judgment creditor who has provided services for the protection of 28 a beneficiary’s interest in a spendthrift trust. South Carolina has 29 also eliminated the exception found in UTC Section 503(c) for a 30 claim made by the State of South Carolina or the United States to 31 the extent a state or federal law provides for any such claim. Thus, 32 under the SCTC, the only exception to a spendthrift trust will be 33 for a beneficiary’s child who has a judgment or court order against 34 the beneficiary for support or maintenance. South Carolina also 35 adds a new subsection (c), not found in the UTC, which makes 36 clear that the exception in subsection (b) for child support shall be 37 unenforceable against a special or supplemental needs trusts under 38 the circumstances described in subsection (c). 39 40 Section 62-7-504. Discretionary trusts; effect of standard. 411 [422] 151 1 (a) In this section, ‘child’ includes any person for whom an 2 order or judgment for child support has been entered in this or 3 another state. 4 (b) Except as otherwise provided in subsection (c), a creditor 5 of a beneficiary may not compel a distribution from a trust in 6 which the beneficiary has a discretionary trust interest, even if: 7 (1) the discretion is expressed in the form of a standard of 8 distribution; or 9 (2) the trustee has abused the discretion. 10 (c) To the extent a trustee has not complied with a standard of 11 distribution or has abused a discretion: 12 (1) a distribution may be ordered by the court to satisfy a 13 judgment or court order against the beneficiary for support or 14 maintenance of the beneficiary’s child; and 15 (2) the court shall direct the trustee to pay to the child such 16 amount as is equitable under the circumstances but not more than 17 the amount the trustee would have been required to distribute to or 18 for the benefit of the beneficiary had the trustee complied with the 19 standard or not abused the discretion. 20 (d) This section does not limit the right of a beneficiary to 21 maintain a judicial proceeding against a trustee for an abuse of 22 discretion or failure to comply with a standard for distribution; 23 provided, however, this right may not be exercised by a creditor of 24 the beneficiary. 25 (e) Whether or not a trust contains a spendthrift provision, a 26 creditor of a beneficiary may not compel a distribution from 27 insurance proceeds payable to the trustee as beneficiary to the 28 extent state law exempts such insurance proceeds from creditors’ 29 claims. 30 (f) A creditor of a beneficiary who is also a trustee or cotrustee 31 may not reach the trustee’s beneficial interest or otherwise compel 32 a distribution if the trustee’s discretion to make distributions for 33 the trustee’s own benefit is limited by an ascertainable standard. 34 35 Comment 36 37 This section addresses the ability of a beneficiary’s creditor to 38 reach the beneficiary’s discretionary trust interest, whether or not 39 the exercise of the trustee’s discretion is subject to a standard. 40 This section, similar to the Restatement, eliminates the distinction 41 between discretionary and support trusts, unifying the rules for all 42 trusts fitting within either of the former categories. See1 [422] 152 1 Restatement (Third) of Trusts Section 60 Reporter’s Notes to cmt. 2 a (Tentative Draft No. 2, approved 1999). 3 This section will have limited application. Pursuant to 4 Section 502, the effect of a valid spendthrift provision, where 5 applicable, is to prohibit a creditor from collecting on a 6 distribution prior to its receipt by the beneficiary. Only if the trust 7 is not protected by a spendthrift provision, or if the creditor falls 8 within one of the exceptions to spendthrift enforcement created by 9 Section 503, does this section become relevant. 10 For a discussion of the definition of “child” in subsection (a), 11 see Section 503 Comment. 12 Subsection (b), which establishes the general rule, forbids a 13 creditor from compelling a distribution from the trust, even if the 14 trustee has failed to comply with the standard of distribution or has 15 abused a discretion. Under subsection (d), the power to force a 16 distribution due to an abuse of discretion or failure to comply with 17 a standard belongs solely to the beneficiary. Under Section 814(a), 18 a trustee must always exercise a discretionary power in good faith 19 and with regard to the purposes of the trust and the interests of the 20 beneficiaries. 21 Subsection (c) creates an exception for support claims of a child, 22 spouse, or former spouse who has a judgment or order against a 23 beneficiary for support or maintenance. While a creditor of a 24 beneficiary generally may not assert that a trustee has abused a 25 discretion or failed to comply with a standard of distribution, such 26 a claim may be asserted by the beneficiary’s child, spouse, or 27 former spouse enforcing a judgment or court order against the 28 beneficiary for unpaid support or maintenance. The court must 29 direct the trustee to pay the child, spouse or former spouse such 30 amount as is equitable under the circumstances but not in excess of 31 the amount the trustee was otherwise required to distribute to or 32 for the benefit of the beneficiary. Before fixing this amount, the 33 court having jurisdiction over the trust should consider that in 34 setting the respective support award, the family court has already 35 considered the respective needs and assets of the family. The 36 Uniform Trust Code does not prescribe a particular procedural 37 method for enforcing a judgment or order against the trust, leaving 38 that matter to local collection law. 39 40 South Carolina Comment 41 42 South Carolina Trust Code Section 62-7-504 eliminates the 43 exceptions allowed under Uniform Trust Code Section 504 for1 [422] 153 1 judgments or court orders in favor of a beneficiary’s spouse or 2 former spouse. As with SCTC Section 62-7-503, the only 3 exception will be for a beneficiary’s child who has a judgment or 4 court order against the beneficiary for support or maintenance. 5 However, a child’s claim against a discretionary trust interest will 6 be limited to those cases where a trustee has not complied with a 7 standard of distribution or has abused a discretion. South 8 Carolina’s version of subsection (e), not found in the UTC, ensures 9 that even if there is no spendthrift provision, insurance proceeds 10 remain exempt from creditors’ claims pursuant to S.C. Code 11 Section 38-63-40 et seq. and other relevant state laws. 12 The South Carolina Trust Code adds to the UTC version the 13 proviso at the end of subsection (d), which prevents a beneficiary’s 14 creditor from enforcing on behalf of the beneficiary the 15 beneficiary’s right, to the extent it exists, to maintain a judicial 16 proceeding against a trustee for an abuse of discretion or failure to 17 comply with a standard of distribution. 18 19 Section 62-7-505. Creditor’s claim against settlor. 20 21 (a) Whether or not the terms of a trust contain a spendthrift 22 provision, the following rules apply: 23 (1) During the lifetime of the settlor, the property of a 24 revocable trust is subject to claims of the settlor’s creditors. 25 (2) With respect to an irrevocable trust, a creditor or 26 assignee of the settlor may reach the maximum amount that can be 27 distributed to or for the settlor’s benefit. If a trust has more than 28 one settlor, the amount the creditor or assignee of a particular 29 settlor may reach may not exceed the settlor’s interest in the 30 portion of the trust attributable to that settlor’s contribution. 31 (3) After the death of a settlor, and subject to the settlor’s 32 right to direct the source from which liabilities will be paid, the 33 property of a trust that was revocable at the settlor’s death is 34 subject to claims of the settlor’s creditors, costs of administration 35 of the settlor’s estate, the expenses of the settlor’s funeral and 36 disposal of remains, and statutory allowances to a surviving spouse 37 and children to the extent the settlor’s probate estate is inadequate 38 to satisfy those claims, costs, expenses, and allowances, unless 39 barred by S.C. Code Section 62-3-801 et seq. and except to the 40 extent state or federal law exempts any property of the trust from 41 such claims, costs, expenses, or allowances. 42 (b) For purposes of this section, a beneficiary who is a trustee 43 of a trust, but who is not the settlor of the trust, cannot be treated1 [422] 154 1 in the same manner as the settlor of a revocable trust if the 2 beneficiary-trustee’s power to make distributions to the 3 beneficiary-trustee is limited by an ascertainable standard related 4 to the beneficiary-trustee’s health, education, maintenance, and 5 support. 6 7 Comment 8 9 Subsection (a)(1) states what is now a well accepted conclusion, 10 that a revocable trust is subject to the claims of the settlor’s 11 creditors while the settlor is living. See Restatement (Third) of 12 Trusts Section 25 cmt. a (Tentative Draft No. 1, approved 1996). 13 Such claims were not allowed at common law, however. See 14 Restatement (Second) of Trusts Section 330 cmt. o (1959). 15 Because a settlor usually also retains a beneficial interest that a 16 creditor may reach under subsection (a)(2), the common law rule, 17 were it retained in this Code, would be of little significance. See 18 Restatement (Second) of Trusts Section 156(2) (1959). 19 Subsection (a)(2), which is based on Restatement (Third) of 20 Trusts Section 58(2) and cmt. e (Tentative Draft No. 2, approved 21 1999), and Restatement (Second) of Trusts Section 156 (1959), 22 follows traditional doctrine in providing that a settlor who is also a 23 beneficiary may not use the trust as a shield against the settlor’s 24 creditors. The drafters of the Uniform Trust Code concluded that 25 traditional doctrine reflects sound policy. Consequently, the 26 drafters rejected the approach taken in States like Alaska and 27 Delaware, both of which allow a settlor to retain a beneficial 28 interest immune from creditor claims. See Henry J. Lischer, Jr., 29 Domestic Asset Protection Trusts: Pallbearers to Liability, 35 Real 30 Prop. Prob. & Tr. J. 479 (2000); John E. Sullivan, III, Gutting the 31 Rule Against Self-Settled Trusts: How the Delaware Trust Law 32 Competes with Offshore Trusts, 23 Del. J. Corp. L. 423 (1998). 33 Under the Code, whether the trust contains a spendthrift provision 34 or not, a creditor of the settlor may reach the maximum amount 35 that the trustee could have paid to the settler-beneficiary. If the 36 trustee has discretion to distribute the entire income and principal 37 to the settlor, the effect of this subsection is to place the settlor’s 38 creditors in the same position as if the trust had not been created. 39 For the definition of “settlor,” see Section 103(14). 40 This section does not address possible rights against a settlor 41 who was insolvent at the time of the trust’s creation or was 42 rendered insolvent by the transfer of property to the trust. This 43 subject is instead left to the State’s law on fraudulent transfers. A1 [422] 155 1 transfer to the trust by an insolvent settlor might also constitute a 2 voidable preference under federal bankruptcy law. 3 Subsection (a)(3) recognizes that a revocable trust is usually 4 employed as a will substitute. As such, the trust assets, following 5 the death of the settlor, should be subject to the settlor’s debts and 6 other charges. However, in accordance with traditional doctrine, 7 the assets of the settlor’s probate estate must normally first be 8 exhausted before the assets of the revocable trust can be reached. 9 This section does not attempt to address the procedural issues 10 raised by the need first to exhaust the decedent’s probate estate 11 before reaching the assets of the revocable trust. Nor does this 12 section address the priority of creditor claims or liability of the 13 decedent’s other nonprobate assets for the decedent’s debts and 14 other charges. Subsection (a)(3), however, does ratify the typical 15 pourover will, revocable trust plan. As long as the rights of the 16 creditor or family member claiming a statutory allowance are not 17 impaired, the settlor is free to shift liability from the probate estate 18 to the revocable trust. Regarding other issues associated with 19 potential liability of nonprobate assets for unpaid claims, see 20 Section 6-102 of the Uniform Probate Code, which was added to 21 that Code in 1998. 22 Subsection (b)(1) treats a power of withdrawal as the equivalent 23 of a power of revocation because the two powers are functionally 24 identical. This is also the approach taken in Restatement (Third) 25 of Trusts Section 56 cmt. b (Tentative Draft No. 2, approved 26 1999). If the power is unlimited, the property subject to the power 27 will be fully subject to the claims of the power holder’s creditors, 28 the same as the power holder’s other assets. If the power holder 29 retains the power until death, the property subject to the power 30 may be liable for claims and statutory allowances to the extent the 31 power holder’s probate estate is insufficient to satisfy those claims 32 and allowances. For powers limited either in time or amount, such 33 as a right to withdraw a $10,000 annual exclusion contribution 34 within 30 days, this subsection would limit the creditor to the 35 $10,000 contribution and require the creditor to take action prior to 36 the expiration of the 30-day period. 37 Upon the lapse, release, or waiver of a power of withdrawal, the 38 property formerly subject to the power will normally be subject to 39 the claims of the power holder’s creditors and assignees the same 40 as if the power holder were the settlor of a now irrevocable trust. 41 Pursuant to subsection (a)(2), a creditor or assignee of the power 42 holder generally may reach the power holder’s entire beneficial 43 interest in the trust, whether or not distribution is subject to the1 [422] 156 1 trustee’s discretion. However, following the lead of Arizona 2 Revised Statutes Section 14-7705(g) and Texas Property Code 3 Section 112.035(e), subsection (b)(2) creates an exception for trust 4 property which was subject to a Crummey or five and five power. 5 Upon the lapse, release, or waiver of a power of withdrawal, the 6 holder is treated as the settlor of the trust only to the extent the 7 value of the property subject to the power at the time of the lapse, 8 release, or waiver exceeded the greater of the amounts specified in 9 IRC Sections 2041(b)(2) or 2514(e) [greater of 5% or $5,000], or 10 IRC Section 2503(b) [$10,000 in 2001]. 11 The Uniform Trust Code does not address creditor issues with 12 respect to property subject to a special power of appointment or a 13 testamentary general power of appointment. For creditor rights 14 against such interests, see Restatement (Property) Second: 15 Donative Transfers Sections13.1 -- 3.7 (1986). 16 17 South Carolina Comment 18 19 The South Carolina Trust Code does not include the UTC 20 version of subsections (b)(1) and (b)(2), and the UTC Comment 21 should be adjusted accordingly. 22 South Carolina adds subsection (b)(1), which is not the UTC 23 version of subsection 505(b)(1). The UTC version of Subsection 24 (b)(1) is not included in the SCTC. The UTC and the Restatement 25 (Third) of Trusts Section 60 cmt. g (Tentative Draft No. 2, 26 approved 1999) appear to take the position that a creditor may 27 attach a beneficiary’s interest merely because the beneficiary is the 28 sole trustee or cotrustee, even if the trustee/beneficiary (or 29 cotrustee/beneficiary) is limited by an ascertainable standard. 30 SCTC Section 62-5-505(b)(1) provides that neither a sole 31 trustee/beneficiary nor a cotrustee/beneficiary will be treated in the 32 same manner as the settlor of a revocable trust so long as the 33 trustee/beneficiary or cotrustee/beneficiary’s interest is subject to 34 the ascertainable standard described in that Subsection. 35 36 Section 62-7-506. Overdue distribution. 37 38 Whether or not a trust contains a spendthrift provision, a creditor 39 or assignee of a beneficiary may reach a mandatory distribution of 40 income or principal, including a distribution upon termination of 41 the trust, if the trustee has not made the distribution to the 42 beneficiary within a reasonable time after the designated 43 distribution date. For purposes of this section, a mandatory1 [422] 157 1 distribution is a distribution where the trustee has no discretion in 2 determining whether the distribution shall be made or the amount 3 or timing of such distribution. 4 5 Comment 6 7 The effect of a spendthrift provision is generally to insulate 8 totally a beneficiary’s interest until a distribution is made and 9 received by the beneficiary. See Section 502. But this section, 10 along with several other sections in this article, recognizes 11 exceptions to this general rule. Whether a trust contains a 12 spendthrift provision or not, a trustee should not be able to avoid 13 creditor claims against a beneficiary by refusing to make a 14 distribution required to be made by the express terms of the trust. 15 On the other hand, a spendthrift provision would become largely a 16 nullity were a beneficiary’s creditors able to attach all required 17 payments as soon as they became due. This section reflects a 18 compromise between these two competing principles. A creditor 19 can reach a mandatory distribution, including a distribution upon 20 termination, if the trustee has failed to make the payment within a 21 reasonable time after the designated distribution date. Following 22 this reasonable period, payments mandated by the express terms of 23 the trust are in effect being held by the trustee as agent for the 24 beneficiary and should be treated as part of the beneficiary’s 25 personal assets. 26 This section is similar to Restatement (Third) of Trusts Section 27 58 cmt. d (Tentative Draft No. 2, approved 1999). 28 29 2001 Amendment. By amendment in 2001, “designated 30 distribution date” was substituted for “required distribution date”. 31 The amendment conforms the language of this section to 32 terminology used elsewhere in the Code. 33 34 South Carolina Comment 35 36 South Carolina Trust Code Section 62-7-506 adds to the 37 Uniform Trust Code version of Section 506 a definition of 38 “mandatory distribution” to prevent the South Carolina section 39 from being interpreted to require distributions from discretionary 40 trusts as referred to in SCTC Section 62-7-504. Common 41 examples of mandatory distributions are found in qualified 42 terminable interest property trusts, charitable remainder trusts, and1 [422] 158 1 grantor retained trusts, when the trustee is required to make a 2 distribution annually of a sum certain. 3 4 Section 62-7-507. Personal obligations of trustee. 5 6 Trust property is not subject to personal obligations of the 7 trustee, even if the trustee becomes insolvent or bankrupt. 8 9 Comment 10 Because the beneficiaries of the trust hold the beneficial interest 11 in the trust property and the trustee holds only legal title without 12 the benefits of ownership, the creditors of the trustee have only a 13 personal claim against the trustee. See Restatement (Third) Section 14 5 cmt. k (Tentative Draft No.1, approved 1996); Restatement 15 (Second) of Trusts Section 12 cmt. a (1959). Similarly, a personal 16 creditor of the trustee who attaches trust property to satisfy the 17 debt does not acquire title as a bona fide purchaser even if the 18 creditor is unaware of the trust. See Restatement (Second) of 19 Trusts Section 308 (1959). The protection afforded by this section 20 is consistent with that provided by the Bankruptcy Code. Property 21 in which the trustee holds legal title as trustee is not part of the 22 trustee’s bankruptcy estate. 11 U.S.C. Section 541(d). 23 The exemption of the trust property from the personal 24 obligations of the trustee is the most significant feature of 25 Anglo-American trust law by comparison with the devices 26 available in civil law countries. A principal objective of the Hague 27 Convention on the Law Applicable to Trusts and on their 28 Recognition is to protect the Anglo-American trust with respect to 29 transactions in civil law countries. See Hague Convention art. 11. 30 See also Henry Hansmann & Ugo Mattei, The Functions of Trust 31 Law: A Comparative Legal and Economic Analysis, 73 N.Y.U. L. 32 Rev. 434 (1998); John H. Langbein, The Secret Life of the Trust: 33 The Trust as an Instrument of Commerce, 107 Yale L.J. 165, 34 179-80 (1997). 35 36 South Carolina Comment 37 38 Prior South Carolina law had no counterpart to this Section. 39 40 Part 6 41 42 Revocable Trusts 431 [422] 159 1 General Comment 2 3 This article deals with issues of significance not totally settled 4 under prior law. Because of the widespread use in recent years of 5 the revocable trust as an alternative to a will, this short article is 6 one of the more important articles of the Code. This article and the 7 other articles of the Code treat the revocable trust as the functional 8 equivalent of a will. Section 601 provides that the capacity 9 standard for wills applies in determining whether the settlor had 10 capacity to create a revocable trust. Section 602, after providing 11 that a trust is presumed revocable unless stated otherwise, 12 prescribes the procedure for revocation or amendment, whether the 13 trust contains one or several settlors. Section 603 provides that 14 while a trust is revocable and the settlor has capacity, the rights of 15 the beneficiaries are subject to the settlor’s control. Section 604 16 prescribes a statute of limitations on contest of revocable trusts. 17 Sections 601 and 604, because they address requirements 18 relating to creation and contest of trusts, are not subject to 19 alteration or restriction in the terms of the trust. See Section 105. 20 Sections 602 and 603, by contrast, are not so limited and are fully 21 subject to the settlor’s control. 22 23 Section 62-7-601. Capacity of settler of revocable trust. 24 25 The capacity required to create, amend, revoke, or add property 26 to a revocable trust, or to direct the actions of the trustee of a 27 revocable trust, is the same as that required to make a will. 28 29 Comment 30 31 This section is patterned after Restatement (Third) of Trusts 32 Section 11(1) (Tentative Draft No. 1, approved 1996). The 33 revocable trust is used primarily as a will substitute, with its key 34 provision being the determination of the persons to receive the 35 trust property upon the settlor’s death. To solidify the use of the 36 revocable trust as a device for transferring property at death, the 37 settlor usually also executes a pourover will. The use of a 38 pourover will assures that property not transferred to the trust 39 during life will be combined with the property the settlor did 40 manage to convey. Given this primary use of the revocable trust 41 as a device for disposing of property at death, the capacity standard 42 for wills rather than that for lifetime gifts should apply. The 43 application of the capacity standard for wills does not mean that1 [422] 160 1 the revocable trust must be executed with the formalities of a will. 2 There are no execution requirements under this Code for a trust not 3 created by will, and a trust not containing real property may be 4 created by an oral statement. See Section 407 and comment. 5 The Uniform Trust Code does not explicitly spell out the 6 standard of capacity necessary to create other types of trusts, 7 although Section 402 does require that the settlor have capacity. 8 This section includes a capacity standard for creation of a 9 revocable trust because of the uncertainty in the case law and the 10 importance of the issue in modern estate planning. No such 11 uncertainty exists with respect to the capacity standard for other 12 types of trusts. To create a testamentary trust, the settlor must 13 have the capacity to make a will. To create an irrevocable trust, 14 the settlor must have the capacity that would be needed to transfer 15 the property free of trust. See generally Restatement (Third) of 16 Trusts Section 11 (Tentative Draft No. 1, approved 1996); 17 Restatement (Third) of Property: Wills and Other Donative 18 Transfers Section 8.1 (Tentative Draft No. 3, approved 2001). 19 20 South Carolina Comment 21 22 South Carolina Probate Code Section 62-2-501 provides that a 23 person who is “of sound mind and who is not a minor as defined in 24 Section 62-2-201(24) may make a will.” Section 62-2-201(24) 25 defines a minor as a person under eighteen excluding persons 26 under eighteen who are married or emancipated by court decree. 27 The test for mental capacity is whether the person knows (1) his 28 estate, (2) the objects of his affections, and (3) to whom he wishes 29 to give his property. The capacity to understand as opposed to 30 actual knowledge or understanding is sufficient. It is a lower 31 standard than that required to sign a deed or contract. Weeks v. 32 Drawdy, 329 S.C. 251, 495 S.E.2d 454 (S.C. Ct.App. 1997); 33 McCollum v. Banks, et al., 213 S.C. 476, 50 S.E.2d 199 (S.C. 34 1948). 35 A higher degree of capacity is required to execute an irrevocable 36 trust. The settlor must have the mental capacity to understand the 37 nature of the trust and its probable consequences. Macauley, et al. 38 v. Wachovia Bank, et al., 351 S.C. 287, 569 S.E.2d 371 (S.C. 39 Ct.App. 2002). 40 There was no prior statutory counterpart to this Section. 41 As a practical matter, the relatively common use of pour over 42 wills in conjunction with minimally funded revocable trusts 43 indicates that the measure of capacity for execution of the trust is1 [422] 161 1 the same as that for a will. See Bowles v. Bradley, 219 S.C. 377, 2 461 S.E.2d 811 (S.C. 1995). 3 See SCTC Section 62-7-401, which requires a writing for a 4 self-trusteed declaration of trust. 5 6 Section 62-7-602. Revocation or amendment of revocable 7 trust. 8 9 (a) Unless the terms of a trust expressly provide that the trust is 10 irrevocable, the settlor may revoke or amend the trust. This 11 subsection does not apply to a trust created under an instrument 12 executed before the effective date of this article. 13 (b) If a revocable trust is created or funded by more than one 14 settlor: 15 (1) to the extent the trust consists of community property, 16 the trust may be revoked by either spouse acting alone but may be 17 amended only by joint action of both spouses; and 18 (2) to the extent the trust consists of property other than 19 community property, each settlor may revoke or amend the trust 20 with regard to the portion of the trust property attributable to that 21 settlor’s contribution; and 22 (3) upon the revocation or amendment of the trust by fewer 23 than all of the settlors, the trustee shall promptly notify the other 24 settlors of the revocation or amendment. 25 (c) The settlor may revoke or amend a revocable trust: 26 (1) by substantial compliance with a method provided in the 27 terms of the trust; or 28 (2) if the terms of the trust do not provide a method or the 29 method provided in the terms is not expressly made exclusive, by: 30 (A) a later will or codicil that expressly refers to the trust, 31 manifesting clear and convincing evidence of the settlor’s intent; 32 or 33 (B) by oral statement to the trustee if the trust was created 34 orally; or 35 (C) any other written method, other than a later will or 36 codicil, delivered to the trustee and manifesting clear and 37 convincing evidence of the settlor’s intent. 38 (d) Upon revocation of a revocable trust, the trustee shall 39 deliver the trust property as the settlor directs. 40 (e) A settlor’s powers with respect to revocation, amendment, 41 or distribution of trust property may be exercised by an agent 42 under a power of attorney only to the extent expressly authorized 43 by the terms of the trust or the power of attorney provided the1 [422] 162 1 exercise of the power does not alter the designation of 2 beneficiaries to receive the property on the settlor’s death under 3 the settlor’s existing estate plan. 4 (f) A conservator of the settlor or, if no conservator has been 5 appointed, a guardian of the settlor may exercise a settlor’s powers 6 with respect to revocation, amendment, or distribution of trust 7 property only with the approval of the court supervising the 8 conservatorship or guardianship and with regard to the 9 requirements of Section 62-5-408(3)(c). 10 (g) A trustee who does not know that a trust has been revoked 11 or amended is not liable to the settlor or settlor’s successors in 12 interest for distributions made and other actions taken on the 13 assumption that the trust had not been amended or revoked. 14 15 Comment 16 17 Subsection (a), which provides that a settlor may revoke or 18 modify a trust unless the terms of the trust expressly state that the 19 trust is irrevocable, changes the common law. Most states follow 20 the rule that a trust is presumed irrevocable absent evidence of 21 contrary intent. See Restatement (Second) of Trusts Section 330 22 (1959). California, Iowa, Montana, Oklahoma, and Texas presume 23 that a trust is revocable. The Uniform Trust Code endorses this 24 minority approach, but only for trusts created after its effective 25 date. This Code presumes revocability when the instrument is 26 silent because the instrument was likely drafted by a 27 nonprofessional, who intended the trust as a will substitute. The 28 most recent revision of the Restatement of Trusts similarly 29 reverses the former approach. A trust is presumed revocable if the 30 settlor has retained a beneficial interest. See Restatement (Third) 31 of Trusts Section 63 cmt. c (Tentative Draft No. 3, approved 32 2001). Because professional drafters habitually spell out whether 33 or not a trust is revocable, subsection (a) will have limited 34 application. 35 A power of revocation includes the power to amend. An 36 unrestricted power to amend may also include the power to revoke 37 a trust. See Restatement (Third) of Trusts Section 63 cmt. g 38 (Tentative Draft No. 3, approved 2001); Restatement (Second) of 39 Trusts Section 331 cmt. g & h (1959). 40 Subsection (b), which is similar to Restatement (Third) of Trusts 41 Section 63 cmt. k (Tentative Draft No. 3, approved 2001), 42 provides default rules for revocation or amendment of a trust 43 having several settlors. The settlor’s authority to revoke or modify1 [422] 163 1 the trust depends on whether the trust contains community 2 property. To the extent the trust contains community property, the 3 trust may be revoked by either spouse acting alone but may be 4 amended only by joint action of both spouses. The purpose of this 5 provision, and the reason for the use of joint trusts in community 6 property states, is to preserve the community character of property 7 transferred to the trust. While community property does not 8 prevail in a majority of states, contributions of community 9 property to trusts created in noncommunity property states does 10 occur. This is due to the mobility of settlors, and the fact that 11 community property retains its community character when a 12 couple move from a community to a noncommunity state. For this 13 reason, subsection (b), and its provision on contributions of 14 community property, should be enacted in all states, whether 15 community or noncommunity. 16 With respect to separate property contributed to the trust, or all 17 property of the trust if none of the trust property consists of 18 community property, subsection (b) provides that each settlor may 19 revoke or amend the trust as to the portion of the trust contributed 20 by that settlor. The inclusion of a rule for contributions of separate 21 property does not mean that the drafters of this Code concluded 22 that the use of joint trusts should be encouraged. The rule is 23 included because of the widespread use of joint trusts in 24 noncommunity property states in recent years. Due to the desire to 25 preserve the community character of trust property, joint trusts are 26 a necessity in community property states. Unless community 27 property will be contributed to the trust, no similarly important 28 reason exists for the creation of a joint trust in a noncommunity 29 property state. Joint trusts are often poorly drafted, confusing the 30 dispositive provisions of the respective settlors. Their use can also 31 lead to unintended tax consequences. See Melinda S. Merk, Joint 32 Revocable Trusts for Married Couples Domiciled in 33 Common-Law Property States, 32 Real Prop. Prob. & Tr. J. 345 34 (1997). 35 Subsection (b) does not address the many technical issues that 36 can arise in determining the settlors’ proportionate contribution to 37 a joint trust. Most problematic are contributions of jointly-owned 38 property. In the case of joint tenancies in real estate, each spouse 39 would presumably be treated as having made an equal contribution 40 because of the right to sever the interest and convert it into a 41 tenancy in common. This is in contrast to joint accounts in 42 financial institutions, ownership of which in most states is based 43 not on fractional interest but on actual dollar contribution. See,1 [422] 164 1 e.g., Unif. Probate Code Section 6-211. Most difficult may be 2 determining a contribution rule for entireties property. In 3 Holdener v. Fieser, 971 S.W. 2d 946 (Mo. Ct. App. 1998), the 4 court held that a surviving spouse could revoke the trust with 5 respect to the entire interest but did not express a view as to 6 revocation rights while both spouses were living. 7 Subsection (b)(3) requires that the other settlor or settlors be 8 notified if a joint trust is revoked by less than all of the settlors. 9 Notifying the other settlor or settlors of the revocation or 10 amendment will place them in a better position to protect their 11 interests. If the revocation or amendment by less than all of the 12 settlors breaches an implied agreement not to revoke or amend the 13 trust, those harmed by the action can sue for breach of contract. If 14 the trustee fails to notify the other settlor or settlors of the 15 revocation or amendment, the parties aggrieved by the trustee’s 16 failure can sue the trustee for breach of trust. 17 Subsection (c), which is similar to Restatement (Third) of Trusts 18 Section 63 cmt. h & i (Tentative Draft No. 3, approved 2001), 19 specifies the method of revocation and amendment. Revocation of 20 a trust differs fundamentally from revocation of a will. Revocation 21 of a will, because a will is not effective until death, cannot affect 22 an existing fiduciary relationship. With a trust, however, because 23 a revocation will terminate an already existing fiduciary 24 relationship, there is a need to protect a trustee who might act 25 without knowledge that the trust has been revoked. There is also a 26 need to protect trustees against the risk that they will misperceive 27 the settlor’s intent and mistakenly assume that an informal 28 document or communication constitutes a revocation when that 29 was not in fact the settlor’s intent. To protect trustees against these 30 risks, drafters habitually insert provisions providing that a 31 revocable trust may be revoked only by delivery to the trustee of a 32 formal revoking document. Some courts require strict compliance 33 with the stated formalities. Other courts, recognizing that the 34 formalities were inserted primarily for the trustee’s and not the 35 settlor’s benefit, will accept other methods of revocation as long as 36 the settlor’s intent is clear. See Restatement (Third) of Trusts 37 Section 63 Reporter’s Notes to cmt. h-j (Tentative Draft No. 3, 38 approved 2001). 39 This Code tries to effectuate the settlor’s intent to the maximum 40 extent possible while at the same time protecting a trustee against 41 inadvertent liability. While notice to the trustee of a revocation is 42 good practice, this section does not make the giving of such notice 43 a prerequisite to a trust’s revocation. To protect a trustee who has1 [422] 165 1 not been notified of a revocation or amendment, subsection (g) 2 provides that a trustee who does not know that a trust has been 3 revoked or amended is not liable to the settlor or settlor’s 4 successors in interest for distributions made and other actions 5 taken on the assumption that the trust, as unamended, was still in 6 effect. However, to honor the settlor’s intent, subsection (c) 7 generally honors a settlor’s clear expression of intent even if 8 inconsistent with stated formalities in the terms of the trust. 9 Under subsection (c), the settlor may revoke or amend a 10 revocable trust by substantial compliance with the method 11 specified in the terms of the trust or by a later will or codicil or any 12 other method manifesting clear and convincing evidence of the 13 settlor’s intent. Only if the method specified in the terms of the 14 trust is made exclusive is use of the other methods prohibited. 15 Even then, a failure to comply with a technical requirement, such 16 as required notarization, may be excused as long as compliance 17 with the method specified in the terms of the trust is otherwise 18 substantial. 19 While revocation of a trust will ordinarily continue to be 20 accomplished by signing and delivering a written document to the 21 trustee, other methods, such as a physical act or an oral statement 22 coupled with a withdrawal of the property, might also demonstrate 23 the necessary intent. These less formal methods, because they 24 provide less reliable indicia of intent, will often be insufficient, 25 however. The method specified in the terms of the trust is a 26 reliable safe harbor and should be followed whenever possible. 27 Revocation or amendment by will is mentioned in subsection (c) 28 not to encourage the practice but to make clear that it is not 29 precluded by omission. See Restatement (Third) of Property: Will 30 and Other Donative Transfers Section 7.2 cmt. e (Tentative Draft 31 No. 3, approved 2001), which validates revocation or amendment 32 of will substitutes by later will. Situations do arise, particularly in 33 death-bed cases, where revocation by will may be the only 34 practicable method. In such cases, a will, a solemn document 35 executed with a high level of formality, may be the most reliable 36 method for expressing intent. A revocation in a will ordinarily 37 becomes effective only upon probate of the will following the 38 testator’s death. For the cases, see Restatement (Third) of Trusts 39 Section 63 Reporter’s Notes to cmt. h-i (Tentative Draft No. 3, 40 approved 2001). 41 A residuary clause in a will disposing of the estate differently 42 than the trust is alone insufficient to revoke or amend a trust. The 43 provision in the will must either be express or the will must1 [422] 166 1 dispose of specific assets contrary to the terms of the trust. The 2 substantial body of law on revocation of Totten trusts by will 3 offers helpful guidance. The authority is collected in William H. 4 Danne, Jr., Revocation of Tentative (“Totten”) Trust of Savings 5 Bank Account by Inter Vivos Declaration or Will, 46 A.L.R. 3d 6 487 (1972). 7 Subsection (c) does not require that a trustee concur in the 8 revocation or amendment of a trust. Such a concurrence would be 9 necessary only if required by the terms of the trust. If the trustee 10 concludes that an amendment unacceptably changes the trustee’s 11 duties, the trustee may resign as provided in Section 705. 12 Subsection (d), providing that upon revocation the trust property 13 is to be distributed as the settlor directs, codifies a provision 14 commonly included in revocable trust instruments. 15 A settlor’s power to revoke is not terminated by the settlor’s 16 incapacity. The power to revoke may instead be exercised by an 17 agent under a power of attorney as authorized in subsection (e), by 18 a conservator or guardian as authorized in subsection (f), or by the 19 settlor personally if the settlor regains capacity. 20 Subsection (e), which is similar to Restatement (Third) of Trusts 21 Section 63 cmt. l (Tentative Draft No. 3, approved 2001), 22 authorizes an agent under a power of attorney to revoke or modify 23 a revocable trust only to the extent the terms of the trust or power 24 of attorney expressly so permit. An express provision is required 25 because most settlors usually intend that the revocable trust, and 26 not the power of attorney, to function as the settlor’s principal 27 property management device. The power of attorney is usually 28 intended as a backup for assets not transferred to the revocable 29 trust or to address specific topics, such as the power to sign tax 30 returns or apply for government benefits, which may be beyond 31 the authority of a trustee or are not customarily granted to a 32 trustee. 33 Subsection (f) addresses the authority of a conservator or 34 guardian to revoke or amend a revocable trust. Under the Uniform 35 Trust Code, a “conservator” is appointed by the court to manage 36 the ward’s party, a “guardian” to make decisions with respect to 37 the ward’s personal affairs. See Section 103. Consequently, 38 subsection (f) authorizes a guardian to exercise a settlor’s power to 39 revoke or amend a trust only if a conservator has not been 40 appointed. 41 Many state conservatorship statutes authorize a conservator to 42 exercise the settlor’s power of revocation with the prior approval 43 of the court supervising the conservatorship. See, e.g., Unif.1 [422] 167 1 Probate Code Section 411(a)(4). Subsection (f) ratifies this 2 practice. Under the Code, a conservator may exercise a settlor’s 3 power of revocation, amendment, or right to withdraw trust 4 property upon approval of the court supervising the 5 conservatorship. Because a settlor often creates a revocable trust 6 for the very purpose of avoiding conservatorship, this power 7 should be exercised by the court reluctantly. Settlors concerned 8 about revocation by a conservator may wish to deny a conservator 9 a power to revoke. However, while such a provision in the terms 10 of the trust is entitled to considerable weight, the court may 11 override the restriction if it concludes that the action is necessary 12 in the interests of justice. See Section 105(b)(13). 13 Steps a conservator can take to stem possible abuse is not 14 limited to petitioning to revoke the trust. The conservator could 15 petition for removal of the trustee under Section 706. The 16 conservator, acting on the settlor-beneficiary’s behalf, could also 17 bring an action to enforce the trust according to its terms. Pursuant 18 to Section 303, a conservator may act on behalf of the beneficiary 19 whose estate the conservator controls whenever a consent or other 20 action by the beneficiary is required or may be given under the 21 Code. 22 If a conservator has not been appointed, subsection (f) 23 authorizes a guardian to exercise a settlor’s power to revoke or 24 amend the trust upon approval of the court supervising the 25 guardianship. The court supervising the guardianship will need to 26 determine whether it can grant a guardian authority to revoke a 27 revocable trust under local law or whether it will be necessary to 28 appoint a conservator for that purpose. 29 30 2001 Amendment. By amendment in 2001, revocation by 31 “executing a later will or codicil” in subsection (c)(2)(A) was 32 changed to revocation by a “later will or codicil” to avoid an 33 implication that the trust is revoked immediately upon execution of 34 the will or codicil and not at the testator’s death. 35 36 2003 Amendment. The amendment, which adds a new 37 subsection (b)(3), requires that if a joint trust that is revoked or 38 amended by fewer than all of its settlors, that the trustee must give 39 prompt notice of the change to the other settlors. This new 40 subsection is a substitute for Section 603(b), which was deleted by 41 a 2003 amendment. For a discussion, see Section 603 comment. 42 43 South Carolina Comment1 [422] 168 1 2 South Carolina Trust Code Section 62-7-602(a) is a departure 3 from former South Carolina law, which presumed that a trust was 4 irrevocable unless a power of revocation was validly reserved and 5 that, if a particular method of revocation was specified, it must be 6 strictly followed. Where the right to revoke was reserved and no 7 particular mode was specified, any mode sufficiently showing an 8 intention to revoke was effective. See Peoples National Bank of 9 Greenville v. Peden et al., 229 S.C. 167, 92 S.E.2d 163 (S.C. 10 1956), citing to 4 Bogert on Trusts and Trustees Section 996 and 11 54 Am. Jur. Section 77 on Trusts. Likewise, a settlor had to 12 expressly reserve the right to modify a trust. First Carolinas Joint 13 Stock Land Bank v. Deschamps, et al., 171 S.C. 466, 172 S.E. 622 14 (S.C. 1934). 15 The South Carolina Supreme Court has noted that there are 16 some exceptions to the general rule that a trust cannot be revoked 17 or modified unless such a power is expressly reserved in the trust 18 instrument, such as mistake. Chiles v. Chiles, et al., 20 S.C. 379, 19 242 S.E.2d 426 (S.C. 1978), citing to the Restatement 2d of Trusts 20 Section 330(2). 21 There was no South Carolina case law or statutory counterpart 22 to SCTC Subsection 62-7-602(b). 23 As to SCTC Section 62-7-602(c), although South Carolina law 24 required strict compliance with the method of revocation provided 25 by the terms of the trust, the courts would recognize a valid 26 revocation as long as it was clear that the settlor had exercised 27 every right within his power to revoke the trust and if notice 28 requirements which were strictly for the benefit of the trustee were 29 waived by the trustee. Peoples National Bank of Greenville v. 30 Peden et al., 229 S.C. 167, 92 S.E.2d 163 (S.C. 1956). SCTC 31 subsection (c)(2) differs from the UTC version by requiring a 32 writing to revoke or amend a trust unless the trust was created 33 orally, and the UTC Comment should be adjusted accordingly. 34 Under prior South Carolina case law, if the power to revoke was 35 not expressly reserved in a trust, the terms of a later will could not 36 control the disposition of property under a previously executed 37 trust document. Bonney v. Granger, et al., 292 S.C. 308, 356 38 S.E.2d 138 (S.C. Ct.App. 1987). If the right to revoke was 39 reserved and no particular method of revocation was specified, a 40 revocable trust could be revoked by a testamentary devise of the 41 corpus of the trust. Whether a will impliedly revoked a revocable 42 trust was a question of intention. Peoples National Bank of 43 Greenville v. Peden et al., 229 S.C. 167, 92 S.E.2d 163 (S.C.1 [422] 169 1 1956), citing to 54 Am.Jur. Section 77. A residuary clause was 2 insufficient to revoke or amend a trust. First Carolinas Joint Stock 3 Land Bank v. Deschamps, et al., 171 S.C. 466, 172 S.E. 622 (S.C. 4 1934). 5 See SCTC Section 62-7-401, which requires a writing for the 6 creation of self-trusteed declarations of trust. 7 As to Section 62-7-602(d), prior South Carolina case law 8 required a trustee upon termination of a trust to distribute the 9 assets to the beneficiaries or to their nominee. Beaty Trust Co. v. 10 S. C. Tax Com., 278 S.C. 113, 292 S.E.2d 788 (S.C. 1982). There 11 was no prior South Carolina law that addressed the responsibility 12 of the trustee in regard to a revocable trust. 13 Prior South Carolina law had no provision for the revocation, 14 amendment or distribution of trust property by an agent acting 15 under a power of attorney, such as in Section 62-7-602(e). SCTC 16 subsection (e) adds to the UTC version the prohibition against an 17 agent altering the settlor’s existing estate plan, and the UTC 18 Comment should be adjusted accordingly. 19 As to Section 62-7-602(f), in South Carolina, the probate court, 20 acting through a conservator, exercises control over the estate and 21 affairs of an incapacitated person in regard to trusts. Acting 22 through the conservator, the court may create, amend or fund, but 23 not revoke (unless amendment could be construed so broadly as to 24 constitute a right to revoke), a revocable trust. In exercising these 25 powers, the court must consider the estate plan and the terms of 26 any revocable trust of which the incapacitated person is settlor. 27 The court has no power to make a will for the incapacitated person. 28 S.C. Code Section 62-5-408. 29 There was no prior statutory counterpart to Section 62-7-602(g). 30 31 Section 62-7-603. Settlor’s powers. 32 33 While a trust is revocable, rights of the beneficiaries are subject 34 to the control of, and the duties of the trustee are owed exclusively 35 to, the settlor. 36 37 Comment 38 39 This section has the effect of postponing enforcement of the 40 rights of the beneficiaries of a revocable trust until the death or 41 incapacity of the settlor or other person holding the power to 42 revoke the trust. This section thus recognizes that the settlor of a1 [422] 170 1 revocable trust is in control of the trust and should have the right to 2 enforce the trust. 3 Pursuant to this section, the duty under Section 813 to inform 4 and report to beneficiaries is owed to the settlor of a revocable 5 trust as long as the settlor has capacity. 6 If the settlor loses capacity, subsection (a) no longer applies, 7 with the consequence that the rights of the beneficiaries are no 8 longer subject to the settlor’s control. The beneficiaries are 9 entitled to request information concerning the trust and the trustee 10 must provide the beneficiaries with annual trustee reports and 11 whatever other information may be required under Section 813. 12 However, because this section may be freely overridden in the 13 terms of the trust, a settlor is free to deny the beneficiaries these 14 rights, even to the point of directing the trustee not to inform them 15 of the existence of the trust. Also, should an incapacitated settlor 16 later regain capacity, the beneficiaries’ rights will again be subject 17 to the settlor’s control. The cessation of the settlor’s control upon 18 the settlor’s incapacity or death does not mean that the 19 beneficiaries may reopen transactions the settlor approved while 20 having capacity. 21 Typically, the settlor of a revocable trust will also be the sole or 22 primary beneficiary of the trust. Upon the settlor’s incapacity, any 23 right of action the settlor-trustee may have against the trustee for 24 breach of fiduciary duty will pass to the settlor’s agent or 25 conservator. 26 Subsection (c) makes clear that a holder of a power of 27 withdrawal has the same powers over the trust as the settlor of a 28 revocable trust. Equal treatment is warranted due to the holder’s 29 equivalent power to control the trust. For the definition of power 30 of withdrawal, see Section 103(10). 31 32 2001 Amendment. By a 2001 amendment, former subsection 33 (b) was deleted. Former subsection (b) provided: “While a trust is 34 revocable and the settlor does not have capacity to revoke the trust, 35 rights of the beneficiaries are held by the beneficiaries.” No 36 substantive change was intended by this amendment. Former 37 subsection (b) was superfluous. Rights of the beneficiaries are 38 always held by the beneficiaries unless taken away by some other 39 provision. Subsection (a) grants these rights to the settlor of a 40 revocable trust while the settlor has capacity. Upon a settlor’s loss 41 of capacity, these rights are held by the beneficiaries with or 42 without former subsection (b). 431 [422] 171 1 2003 Amendment. The purpose of former subsection (b), 2 which was deleted in 2003, was to make certain that upon 3 revocation of amendment of a joint trust by fewer than all of its 4 settlors, that the trustee would notify the nonparticipating settlor or 5 settlors. The subsection, which provided that “If a revocable trust 6 has more than one settlor, the duties of the trustee are owed to all 7 of the settlors having capacity to revoke the trust,” imposed 8 additional duties upon a trustee and unnecessarily raised 9 interpretative questions as to its scope. The drafter’s original 10 intent is restored, and in a much clearer form, by repealing former 11 subsection (b), and by amending Section 602 to add a subsection 12 (b)(3) that states explicitly what former subsection (b) was trying 13 to achieve. 14 15 South Carolina Comment 16 17 Prior South Carolina law primarily addressed the trustee’s duty 18 of loyalty to the beneficiaries of the trust. See, e.g., Ramage v. 19 Ramage, 283 S.C. 239, 322 S.E.2d 22 (S.C. Ct.App. 1984). SCTC 20 Section 62-7-603 omits the language found in the UTC 2004 21 Amendments expressly providing that a trust is revocable only 22 while the settler has the capacity to revoke. 23 SCTC Section 62-7-603 does not include UTC subsection 603 24 (b), and the UTC Comment should be adjusted accordingly. 25 26 Section 62-7-604. Limitation on action contesting validity of 27 revocable trust; distribution of trust property. 28 29 (a) A person must commence a judicial proceeding to contest 30 the validity of a trust that was revocable at the settlor’s death 31 within the earlier of: 32 (1) one year after the settlor’s death; or 33 (2) 60 days after the trustee sent the person a copy of the 34 trust instrument and a notice informing the person of the trust’s 35 existence, of the trustee’s name and address, and of the time 36 allowed for commencing a proceeding. 37 (b) Upon the death of the settlor of a trust that was revocable at 38 the settlor’s death, the trustee may proceed to distribute the trust 39 property in accordance with the terms of the trust. The trustee is 40 not subject to liability for doing so unless: 41 (1) the trustee knows of a pending judicial proceeding 42 contesting the validity of the trust; or1 [422] 172 1 (2) a potential contestant has notified the trustee of a 2 possible judicial proceeding to contest the trust and a judicial 3 proceeding is commenced within 60 days after the contestant sent 4 the notification. 5 (c) A beneficiary of a trust that is determined to have been 6 invalid is liable to return any distribution received. 7 8 Comment 9 10 This section provides finality to the question of when a contest 11 of a revocable trust may be brought. The section is designed to 12 allow an adequate time in which to bring a contest while at the 13 same time permitting the expeditious distribution of the trust 14 property following the settlor’s death. 15 A trust can be contested on a variety of grounds. For example, 16 the contestant may allege that no trust was created due to lack of 17 intent to create a trust or lack of capacity (see Section 402), that 18 undue influence, duress, or fraud was involved in the trust’s 19 creation (see Section 406), or that the trust had been revoked or 20 modified (see Section 602). A “contest” is an action to invalidate 21 all or part of the terms of the trust or of property transfers to the 22 trustee. An action against a beneficiary or other person for 23 intentional interference with an inheritance or gift, not being a 24 contest, is not subject to this section. For the law on intentional 25 interference, see Restatement (Second) of Torts Section 774B 26 (1979). Nor does this section preclude an action to determine the 27 validity of a trust that is brought during the settlor’s lifetime, such 28 as a petition for a declaratory judgment, if such action is 29 authorized by other law. See Section 106 (Uniform Trust Code 30 supplemented by common law of trusts and principles of equity). 31 This section applies only to a revocable trust that becomes 32 irrevocable by reason of the settlor’s death. A trust that became 33 irrevocable by reason of the settlor’s lifetime release of the power 34 to revoke is outside its scope. A revocable trust does not become 35 irrevocable upon a settlor’s loss of capacity. Pursuant to Section 36 602, the power to revoke may be exercised by the settlor’s agent, 37 conservator, or guardian, or personally by the settlor if the settlor 38 regains capacity. 39 Subsection (a) specifies a time limit on when a contest can be 40 brought. A contest is barred upon the first to occur of two possible 41 events. The maximum possible time for bringing a contest is three 42 years from the settlor’s death. This should provide potential 43 contestants with ample time in which to determine whether they1 [422] 173 1 have an interest that will be affected by the trust, even if formal 2 notice of the trust is lacking. The three-year period is derived from 3 Section 3-108 of the Uniform Probate Code. Three years is the 4 maximum limit under the UPC for contesting a nonprobated will. 5 Enacting jurisdictions prescribing shorter or longer time limits for 6 contest of a nonprobated will should substitute their own time 7 limit. To facilitate this process, the “three-year” period has been 8 placed in brackets. 9 A trustee who wishes to shorten the contest period may do so by 10 giving notice. Drawing from California Probate Code 11 Section 16061.7, subsection (a)(2) bars a contest by a potential 12 contestant 120 days after the date the trustee sent that person a 13 copy of the trust instrument and informed the person of the trust’s 14 existence, of the trustee’s name and address, and of the time 15 allowed for commencing a contest. The reference to “120” days is 16 placed in brackets to suggest to the enacting jurisdiction that it 17 substitute its statutory time period for contesting a will following 18 notice of probate. The 120 day period in subsection (a)(2) is 19 subordinate to the three-year bar in subsection (a)(1). A contest is 20 automatically barred three years after the settlor’s death even if 21 notice is sent by the trustee less than 120 days prior to the end of 22 that period. 23 Because only a small minority of trusts are actually contested, 24 trustees should not be restrained from making distributions 25 because of concern about possible liability should a contest later be 26 filed. Absent a protective statute, a trustee is ordinarily absolutely 27 liable for misdelivery of the trust assets, even if the trustee 28 reasonably believed that the distribution was proper. See 29 Restatement (Second) of Trusts Section 226 (1959). Subsection 30 (b) addresses liability concerns by allowing the trustee, upon the 31 settlor’s death, to proceed expeditiously to distribute the trust 32 property. The trustee may distribute the trust property in 33 accordance with the terms of the trust until and unless the trustee 34 receives notice of a pending judicial proceeding contesting the 35 validity of the trust, or until notified by a potential contestant of a 36 possible contest, followed by its filing within 60 days. 37 Even though a distribution in compliance with subsection (b) 38 discharges the trustee from potential liability, subsection (c) makes 39 the beneficiaries of what later turns out to have been an invalid 40 trust liable to return any distribution received. Issues as to whether 41 the distribution must be returned with interest, or with income 42 earned or profit made are not addressed in this section but are left 43 to the law of restitution.1 [422] 174 1 For purposes of notices under this section, the substitute 2 representation principles of Article 3 are applicable. The notice by 3 the trustee under subsection (a)(2) or by a potential contestant 4 under subsection (b)(2) must be given in a manner reasonably 5 suitable under the circumstances and likely to result in its receipt. 6 See Section 109(a). 7 This section does not address possible liability for the debts of 8 the deceased settlor or a trustee’s possible liability to creditors for 9 distributing trust assets. For possible liability of the trust, see 10 Section 505(a)(3) and Comment. Whether a trustee can be held 11 personally liable for creditor claims following distribution of trust 12 assets is addressed in Uniform Probate Code Section 6-102, which 13 was added to that Code in 1998. 14 15 South Carolina Comment 16 17 There was no statutory limitations period to contest the validity 18 of a trust under prior South Carolina law. 19 For statutory limitations periods applicable to wills, see South 20 Carolina Probate Code Section 62-3-108. 21 For statutory limitations periods applicable to claims of 22 beneficiaries against the trustee, see SCTC Section 62-7-1005. 23 24 Section 62-7-605. Effect of Penalty Clause for Contest. 25 26 A provision in a revocable trust purporting to penalize any 27 interested person for contesting the validity of the trust or 28 instituting other proceedings relating to the trust is unenforceable 29 if probable cause exists for instituting proceedings. 30 31 South Carolina Comment 32 33 The Uniform Trust Code does not contain a similar provision. 34 This Section is analogous to South Code Probate Code Section 35 62-3-905, which is applicable to wills. 36 37 Section 62-7-606. Anti-Lapse Provision in Trust. 38 (A) Unless the trust expressly provides otherwise, if the 39 beneficiary under a revocable trust, who is a great-grandparent or a 40 lineal descendant of a great-grandparent of the settlor, is dead at 41 the time of execution of the trust, fails to survive the settlor, or is 42 treated as if he predeceased the settlor, the issue of the deceased 43 beneficiary who survived the settlor take in place of the deceased1 [422] 175 1 beneficiary and if they are all of the same degree of kinship to the 2 beneficiary they take equally, but if of unequal degree then those 3 of more remote degree take by representation. One who would 4 have been a beneficiary under a class gift if he had survived the 5 settlor is treated as a beneficiary for purposes of this section 6 whether his death occurred before or after the execution of the 7 trust. 8 (B) Except as provided in subsection (A), if the disposition of 9 any real or personal property under a revocable trust fails for any 10 reason, this property becomes a part of the residue of the trust. 11 (C) Except as provided in subsection (A), if the residue under a 12 revocable trust is distributed to two or more persons and the share 13 of one of the residuary beneficiaries fails for any reason, his share 14 passes to the other residuary beneficiary or to other residuary 15 beneficiaries in proportion to their interests in the residue. 16 17 South Carolina Comment 18 19 This Section retains and incorporates South Carolina Probate 20 Code Section 62-7-113 (2002) (except for the deletion of the 21 words “inter vivos” when used to describe the trust and the 22 addition of the introductory “Unless the trust expressly provides 23 otherwise”). 24 25 Section 62-7-607. Divorce or annulment as revoking 26 revocable trust. 27 28 If after executing a revocable trust the settlor is divorced or his 29 marriage annulled or his spouse is a party to a valid proceeding 30 concluded by an order purporting to terminate all marital property 31 rights or confirming equitable distribution between the spouses, 32 the divorce or annulment or order revokes any disposition or 33 appointment of property including beneficial interests made by 34 such trust to the spouse, any provision conferring a general or 35 special power of appointment on the spouse, and any nomination 36 of the spouse as trustee, unless the trust expressly provides 37 otherwise. Property prevented from passing to a spouse because of 38 revocation by divorce or annulment or order passes as if the spouse 39 failed to survive the settlor, and other provisions conferring some 40 power or office on this spouse are interpreted as if the spouse 41 failed to survive the settlor. If provisions are revoked solely by 42 this section, they are revived by the settlor’s remarriage to the 43 former spouse. For purposes of this section, divorce or annulment1 [422] 176 1 or order means any divorce or annulment or order which would 2 exclude the spouse as a surviving spouse within the meaning of 3 subsections (a) and (b) of Section 62-2-802. A decree of separate 4 maintenance which does not terminate the status of husband and 5 wife is not a divorce for purposes of this section. No change of 6 marital or parental circumstances other than as described in this 7 section revokes a revocable trust. 8 9 South Carolina Comment 10 11 This Section retains and incorporates South Carolina Probate 12 Code Section 62-7-114 (2002) (except for the deletion of the 13 words “inter vivos” when used to describe the trust). 14 15 Part 7 16 17 Office of Trustee 18 19 General Comment 20 21 This article contains a series of default rules dealing with the 22 office of trustee. Sections 701 and 702 address the process for 23 getting a trustee into office, including the procedures for indicating 24 an acceptance and whether bond will be required. Section 703 25 addresses cotrustees, permitting the cotrustees to act by majority 26 action and specifying the extent to which one trustee may delegate 27 to another. Sections 704 through 707 address changes in the office 28 of trustee, specifying the circumstances when a vacancy must be 29 filled, the procedure for resignation, the grounds for removal, and 30 the process for appointing a successor. Sections 708 and 709 31 prescribe the standards for determining trustee compensation and 32 reimbursement for expenses advanced. 33 Except for the court’s authority to order bond, all of the 34 provisions of this article are subject to modification in the terms of 35 the trust. See Section 105. 36 37 Section 62-7-701. Accepting or declining trusteeship. 38 39 (a) Except as otherwise provided in subsection (c), a person 40 designated as trustee accepts the trusteeship: 41 (1) by substantially complying with a method of acceptance 42 provided in the terms of the trust; or1 [422] 177 1 (2) if the terms of the trust do not provide a method or the 2 method provided in the terms is not expressly made exclusive, by 3 accepting delivery of the trust property, exercising powers or 4 performing duties as trustee, or otherwise indicating acceptance of 5 the trusteeship. 6 (b) A person designated as trustee who has not yet accepted the 7 trusteeship may reject the trusteeship. A designated trustee who 8 does not accept the trusteeship within a reasonable time after 9 knowing of the designation is deemed to have rejected the 10 trusteeship. 11 (c) A person designated as trustee, without accepting the 12 trusteeship, may: 13 (1) act to preserve the trust property if, within a reasonable 14 time after acting, the person sends a rejection of the trusteeship to 15 the settlor or, if the settlor is dead or lacks capacity, to a qualified 16 beneficiary; and 17 (2) inspect or investigate trust property to determine 18 potential liability under environmental or other law or for any 19 other purpose. 20 21 Comment 22 23 This section, which specifies the requirements for a valid 24 acceptance of the trusteeship, implicates many of the same issues 25 that arise in determining whether a trust has been revoked. 26 Consequently, the two provisions track each other closely. 27 Compare Section 701(a), with Section 602(c) (procedure for 28 revoking or modifying trust). Procedures specified in the terms of 29 the trust are recognized, but only substantial, not literal compliance 30 is required. A failure to meet technical requirements, such as 31 notarization of the trustee’s signature, does not result in a failure to 32 accept. Ordinarily, the trustee will indicate acceptance by signing 33 the trust instrument or signing a separate written instrument. 34 However, this section validates any other method demonstrating 35 the necessary intent, such as by knowingly exercising trustee 36 powers, unless the terms of the trust make the specified method 37 exclusive. This section also does not preclude an acceptance by 38 estoppel. For general background on issues relating to trustee 39 acceptance and rejection, see Restatement (Third) of Trusts 40 Section 35 (Tentative Draft No. 2, approved 1999); Restatement 41 (Second) of Trusts Section 102 (1959). Consistent with 42 Section 201(b), which emphasizes that continuing judicial1 [422] 178 1 supervision of a trust is the rare exception, not the rule, the 2 Uniform Trust Code does not require that a trustee qualify in court. 3 To avoid the inaction that can result if the person designated as 4 trustee fails to communicate a decision either to accept or to reject 5 the trusteeship, subsection (b) provides that a failure to accept 6 within a reasonable time constitutes a rejection of the trusteeship. 7 What will constitute a reasonable time depends on the facts and 8 circumstances of the particular case. A major consideration is 9 possible harm that might occur if a vacancy in a trusteeship is not 10 filled in a timely manner. A trustee’s rejection normally precludes 11 a later acceptance but does not cause the trust to fail. See 12 Restatement (Third) of Trusts Section 35 cmt. c (Tentative Draft 13 No. 2, approved 1999). Regarding the filling of a vacancy in the 14 event of a rejection, see Section 704. 15 A person designated as trustee who decides not to accept the 16 trusteeship need not provide a formal rejection, but a clear and 17 early communication is recommended. The appropriate recipient 18 of the rejection depends upon the circumstances. Ordinarily, it 19 would be appropriate to communicate the rejection to the person 20 who informed the designee of the proposed trusteeship. If judicial 21 proceedings involving the trust are pending, the rejection could be 22 filed with the court. In the case of a person named as trustee of a 23 revocable trust, it would be appropriate to communicate the 24 rejection to the settlor. In any event, it would be best to inform a 25 beneficiary with a significant interest in the trust because that 26 beneficiary might be more motivated than others to seek 27 appointment of a new trustee. 28 Subsection (c)(1) makes clear that a nominated trustee may act 29 expeditiously to protect the trust property without being considered 30 to have accepted the trusteeship. However, upon conclusion of the 31 intervention, the nominated trustee must send a rejection of office 32 to the settlor, if living and competent, otherwise to a qualified 33 beneficiary. 34 Because of the potential liability that can inhere in trusteeship, 35 subsection (c)(2) allows a person designated as trustee to inspect 36 the trust property without accepting the trusteeship. The condition 37 of real property is a particular concern, including possible tort 38 liability for the condition of the premises or liability for violation 39 of state or federal environmental laws such as CERCLA, 42 U.S.C. 40 Section 9607. For a provision limiting a trustee’s personal liability 41 for obligations arising from ownership or control of trust property, 42 see Section 1010(b). 431 [422] 179 1 South Carolina Comment 2 3 South Carolina has no prior statutory counterpart. Generally, at 4 common law, “in an express trust, a trustee must agree to serve as 5 trustee because of the attendant duties and potential liability.” S. 6 Alan Medlin, The Law of Wills and Trusts, Vol. 1, Estate Planning 7 in South Carolina (2002) at Section 502, citing Anderson v. Earle, 8 9 S.C 460 (S.C. 1878). 9 10 Section 62-7-702. Trustee’s bond. 11 12 (a) A trustee shall provide bond to secure the performance of 13 the trustee’s duties if: 14 (1) the terms of the governing instrument require the trustee 15 to provide bond; 16 (2) a beneficiary requests the trustee to provide bond and the 17 court finds the request to be reasonable; or 18 (3) the court finds that it is necessary for the trustee to 19 provide bond in order to protect the interests of the beneficiaries 20 who are not able to protect themselves and whose interests 21 otherwise are not adequately represented. 22 However, in no event shall bond be required of a trustee, 23 including a trustee appointed by the court, if the governing 24 instrument directs otherwise. On petition of the trustee or other 25 interested person, the court may excuse a requirement of bond, 26 reduce the amount of the bond, release the surety, or permit the 27 substitution of another bond with the same or different sureties. 28 (b) If bond is required, it shall be filed in the court in the place 29 in which the trust has its principal place of administration in 30 amounts and with sureties and liabilities consistent with the 31 requirements of South Carolina Code Sections 62-3-604 relating to 32 bonds of personal representatives. 33 34 Comment 35 36 This section contains most but not all of the Code’s provisions 37 on cotrustees. Other provisions relevant to cotrustees include 38 Sections 704 (vacancy in trusteeship need not be filled if cotrustee 39 remains in office), 705 (notice of resignation must be given to 40 cotrustee), 706 (lack of cooperation among cotrustees as ground 41 for removal), 707 (obligations of resigning or removed trustee), 42 813 (reporting requirements upon vacancy in trusteeship), and 43 1013 (authority of cotrustees to authenticate documents.1 [422] 180 1 Cotrustees are appointed for a variety of reasons. Having 2 multiple decision-makers serves as a safeguard against eccentricity 3 or misconduct. Cotrustees are often appointed to gain the 4 advantage of differing skills, perhaps a financial institution for its 5 permanence and professional skills, and a family member to 6 maintain a personal connection with the beneficiaries. On other 7 occasions, cotrustees are appointed to make certain that all family 8 lines are represented in the trust’s management. 9 Cotrusteeship should not be called for without careful reflection. 10 Division of responsibility among cotrustees is often confused, the 11 accountability of any individual trustee is uncertain, obtaining 12 consent of all trustees can be burdensome, and unless an odd 13 number of trustees is named deadlocks requiring court resolution 14 can occur. Potential problems can be reduced by addressing 15 division of responsibilities in the terms of the trust. Like the other 16 sections of this article, this section is freely subject to modification 17 in the terms of the trust. See Section 105. 18 Much of this section is based on comparable provisions of the 19 Restatement of Trusts, although with extensive modifications. 20 Reference should also be made to ERISA Section 405 (29 U.S.C. 21 Section 1105), which in recent years has been the statutory base 22 for the most significant case law on the powers and duties of 23 cotrustees. 24 Subsection (a) is in accord with Restatement (Third) of Trusts 25 Section 39 (Tentative Draft No. 2, approved 1999), which rejects 26 the common law rule, followed in earlier Restatements, requiring 27 unanimity among the trustees of a private trust. See Restatement 28 (Second) of Trusts Section 194 (1959). This section is consistent 29 with the prior Restatement rule applicable to charitable trusts, 30 which allowed for action by a majority of trustees. See 31 Restatement (Second) of Trusts Section 383 (1959). 32 Under subsection (b), a majority of the remaining trustees may 33 act for the trust when a vacancy occurs in a cotrusteeship. Section 34 704 provides that a vacancy in a cotrusteeship need be filled only 35 if there is no trustee remaining in office. 36 Pursuant to subsection (c), a cotrustee must participate in the 37 performance of a trustee function unless the cotrustee has properly 38 delegated performance to another cotrustee, or the cotrustee is 39 unable to participate due to temporary incapacity or 40 disqualification under other law. Other laws under which a 41 cotrustee might be disqualified include federal securities law and 42 the ERISA prohibited transactions rules. Subsection (d) authorizes 43 a cotrustee to assume some or all of the functions of another1 [422] 181 1 trustee who is unavailable to perform duties as provided in 2 subsection (c). 3 Subsection (e) addresses the extent to which a trustee may 4 delegate the performance of functions to a cotrustee. The standard 5 differs from the standard for delegation to an agent as provided in 6 Section 807 because the two situations are different. Section 807, 7 which is identical to Section 9 of the Uniform Prudent Investor 8 Act, recognizes that many trustees are not professionals. 9 Consequently, trustees should be encouraged to delegate functions 10 they are not competent to perform. Subsection (e) is premised on 11 the assumption that the settlor selected cotrustees for a specific 12 reason and that this reason ought to control the scope of a 13 permitted delegation to a cotrustee. Subsection (e) prohibits a 14 trustee from delegating to another trustee functions the settlor 15 reasonably expected the trustees to perform jointly. The exact 16 extent to which a trustee may delegate functions to another trustee 17 in a particular case will vary depending on the reasons the settlor 18 decided to appoint cotrustees. The better practice is to address the 19 division of functions in the terms of the trust, as allowed by 20 Section 105. Subsection (e) is based on language derived from 21 Restatement (Second) of Trusts Section 171 (1959). This section 22 of the Restatement Second, which applied to delegations to both 23 agents and cotrustees, was superseded, as to delegation to agents, 24 by Restatement (Third) of Trusts: Prudent Investor Rule Section 25 171 (1992). 26 By permitting the trustees to act by a majority, this section 27 contemplates that there may be a trustee or trustees who might 28 dissent. Trustees who dissent from the acts of a cotrustee are in 29 general protected from liability. Subsection (f) protects trustees 30 who refused to join in the action. Subsection (h) protects a 31 dissenting trustee who joined the action at the direction of the 32 majority, such as to satisfy a demand of the other side to a 33 transaction, if the trustee expressed the dissent to a cotrustee at or 34 before the time of the action in question. However, the protections 35 provided by subsections (f) and (h) no longer apply if the action 36 constitutes a serious breach of trust. In that event, subsection (g) 37 may impose liability against a dissenting trustee for failing to take 38 reasonable steps to rectify the improper conduct. The 39 responsibility to take action against a breaching cotrustee codifies 40 the substance of Sections 184 and 224 of the Restatement (Second) 41 of Trusts (1959). 42 43 South Carolina Comment1 [422] 182 1 2 South Carolina Trust Code Section 62-7-702 differs 3 significantly from the Uniform Trust Code version of Section 702. 4 SCTC Section 62-7-702 is in accord with former South Carolina 5 Probate Code Section 62-7-304 by providing that a trustee will not 6 normally be required to post bond. 7 8 Section 62-7-703. Trustees. 9 10 (a) Cotrustees who are unable to reach a unanimous decision 11 may act by majority decision. 12 (b) If a vacancy occurs in a cotrusteeship, the remaining 13 cotrustees may act for the trust. 14 (c) A cotrustee must participate in the performance of a 15 trustee’s function unless the cotrustee is unavailable to perform the 16 function because of absence, illness, disqualification under other 17 law, or other temporary incapacity or the cotrustee has properly 18 delegated the performance of the function to another trustee. 19 (d) If a cotrustee is unavailable to perform duties because of 20 absence, illness, disqualification under other law, or other 21 temporary incapacity, and prompt action is necessary to achieve 22 the purposes of the trust or to avoid injury to the trust property, the 23 remaining cotrustee or a majority of the remaining cotrustees may 24 act for the trust. 25 (e) A trustee may not delegate to a cotrustee the performance 26 of a function the settlor reasonably expected the trustees to 27 perform jointly. Unless a delegation was irrevocable, a trustee 28 may revoke a delegation previously made. 29 (f) Except as otherwise provided in subsection (g), a trustee 30 who does not join in an action of another trustee is not liable for 31 the action. 32 (g) Each trustee shall exercise reasonable care to: 33 (1) prevent a cotrustee from committing a serious breach of 34 trust; and 35 (2) compel a cotrustee to redress a serious breach of trust. 36 (h) A dissenting trustee who joins in an action at the direction 37 of the majority of the trustees and who notified any cotrustee of the 38 dissent at or before the time of the action is not liable for the action 39 unless the action is a serious breach of trust. 40 41 Comment 421 [422] 183 1 This section contains most but not all of the Code’s provisions 2 on cotrustees. Other provisions relevant to cotrustees include 3 Sections 704 (vacancy in trusteeship need not be filled if cotrustee 4 remains in office), 705 (notice of resignation must be given to 5 cotrustee), 706 (lack of cooperation among cotrustees as ground 6 for removal), 707 (obligations of resigning or removed trustee), 7 813 (reporting requirements upon vacancy in trusteeship), and 8 1013 (authority of cotrustees to authenticate documents. 9 Cotrustees are appointed for a variety of reasons. Having 10 multiple decision-makers serves as a safeguard against eccentricity 11 or misconduct. Cotrustees are often appointed to gain the 12 advantage of differing skills, perhaps a financial institution for its 13 permanence and professional skills, and a family member to 14 maintain a personal connection with the beneficiaries. On other 15 occasions, cotrustees are appointed to make certain that all family 16 lines are represented in the trust’s management. 17 Cotrusteeship should not be called for without careful reflection. 18 Division of responsibility among cotrustees is often confused, the 19 accountability of any individual trustee is uncertain, obtaining 20 consent of all trustees can be burdensome, and unless an odd 21 number of trustees is named deadlocks requiring court resolution 22 can occur. Potential problems can be reduced by addressing 23 division of responsibilities in the terms of the trust. Like the other 24 sections of this article, this section is freely subject to modification 25 in the terms of the trust. See Section 105. 26 Much of this section is based on comparable provisions of the 27 Restatement of Trusts, although with extensive modifications. 28 Reference should also be made to ERISA Section 405 (29 U.S.C. 29 Section 1105), which in recent years has been the statutory base 30 for the most significant case law on the powers and duties of 31 cotrustees. 32 Subsection (a) is in accord with Restatement (Third) of Trusts 33 Section 39 (Tentative Draft No.2, approved 1999), which rejects 34 the common law rule, followed in earlier Restatements, requiring 35 unanimity among the trustees of a private trust. See Restatement 36 (Second) of Trusts Section 194 (1959). This section is consistent 37 with the prior Restatement rule applicable to charitable trusts, 38 which allowed for action by a majority of trustees. See 39 Restatement (Second) of Trusts Section 383 (1959). 40 Under subsection (b), a majority of the remaining trustees may 41 act for the trust when a vacancy occurs in a cotrusteeship. Section 42 704 provides that a vacancy in a cotrusteeship need be filled only 43 if there is no trustee remaining in office.1 [422] 184 1 Pursuant to subsection (c), a cotrustee must participate in the 2 performance of a trustee function unless the cotrustee has properly 3 delegated performance to another cotrustee, or the cotrustee is 4 unable to participate due to temporary incapacity or 5 disqualification under other law. Other laws under which a 6 cotrustee might be disqualified include federal securities law and 7 the ERISA prohibited transactions rules. Subsection (d) authorizes 8 a cotrustee to assume some or all of the functions of another 9 trustee who is unavailable to perform duties as provided in 10 subsection (c). 11 Subsection (e) addresses the extent to which a trustee may 12 delegate the performance of functions to a cotrustee. The standard 13 differs from the standard for delegation to an agent as provided in 14 Section 807 because the two situations are different. Section 807, 15 which is identical to Section 9 of the Uniform Prudent Investor 16 Act, recognizes that many trustees are not professionals. 17 Consequently, trustees should be encouraged to delegate functions 18 they are not competent to perform. Subsection (e) is premised on 19 the assumption that the settlor selected cotrustees for a specific 20 reason and that this reason ought to control the scope of a 21 permitted delegation to a cotrustee. Subsection (e) prohibits a 22 trustee from delegating to another trustee functions the settlor 23 reasonably expected the trustees to perform jointly. The exact 24 extent to which a trustee may delegate functions to another trustee 25 in a particular case will vary depending on the reasons the settlor 26 decided to appoint cotrustees. The better practice is to address the 27 division of functions in the terms of the trust, as allowed by 28 Section 105. Subsection (e) is based on language derived from 29 Restatement (Second) of Trusts Section 171 (1959). This section 30 of the Restatement Second, which applied to delegations to both 31 agents and cotrustees, was superseded, as to delegation to agents, 32 by Restatement (Third) of Trusts: Prudent Investor Rule Section 33 171 (1992). 34 By permitting the trustees to act by a majority, this section 35 contemplates that there may be a trustee or trustees who might 36 dissent. Trustees who dissent from the acts of a cotrustee are in 37 general protected from liability. Subsection (f) protects trustees 38 who refused to join in the action. Subsection (h) protects a 39 dissenting trustee who joined the action at the direction of the 40 majority, such as to satisfy a demand of the other side to a 41 transaction, if the trustee expressed the dissent to a cotrustee at or 42 before the time of the action in question. However, the protections 43 provided by subsections (f) and (h) no longer apply if the action1 [422] 185 1 constitutes a serious breach of trust. In that event, subsection (g) 2 may impose liability against a dissenting trustee for failing to take 3 reasonable steps to rectify the improper conduct. The 4 responsibility to take action against a breaching cotrustee codifies 5 the substance of Sections 184 and 224 of the Restatement (Second) 6 of Trusts (1959). 7 8 South Carolina Comment 9 10 This Section provides for majority vote by cotrustees on 11 decisions that cannot be reached unanimously. 12 The safeguard for a dissenting cotrustee is sprinkled throughout 13 subsections (f), (g) and (h). Subsection (f) provides for a limitation 14 on liability for a non-joining cotrustee, but that limitation on 15 liability is tempered in subsection (g) by providing that a trustee 16 must exercise “reasonable care”. Under subsection (g), a trustee 17 may not passively dissent to an action by a cotrustee. Subsection 18 (h) protects a dissenting cotrustee who joins in an action at the 19 direction of the majority and notifies any cotrustee of his dissent. 20 Subsection (h) does not require the dissent to be in writing. 21 Further, under subsections (g) and (h) together, a cotrustee can not 22 dissent and thereafter remain passive for actions by the majority of 23 cotrustees amounting to a “serious breach of trust.” The dissenting 24 trustee must exercise “reasonable care” to correct the conduct of 25 the cotrustee(s). 26 Subsections (b) and (d) provide for the proper administration of 27 the trust in the event a cotrustee is unavailable or temporarily 28 incapacitated. 29 Subsection (c) compels a cotrustee to participate in the trustee’s 30 function or delegate such a duty unless excused by “absence, 31 illness, disqualification under the law, or other temporary 32 incapacity.” 33 34 Section 62-7-704. Vacancy in trusteeship; appointment of 35 successor. 36 37 (a) A vacancy in a trusteeship occurs if: 38 (1) a person designated as trustee rejects the trusteeship; 39 (2) a person designated as trustee cannot be identified or 40 does not exist; 41 (3) a trustee resigns; 42 (4) a trustee is disqualified or removed; 43 (5) a trustee dies; or1 [422] 186 1 (6) a guardian or conservator is appointed for an individual 2 serving as trustee. 3 (b) If one or more cotrustees remain in office, a vacancy in a 4 trusteeship need not be filled. A vacancy in a trusteeship must be 5 filled if the trust has no remaining trustee. 6 (c) A vacancy in a trusteeship of a noncharitable trust that is 7 required to be filled must be filled in the following order of 8 priority: 9 (1) by a person designated in the terms of the trust to act as 10 successor trustee; 11 (2) by a person appointed by unanimous agreement of the 12 qualified beneficiaries; or 13 (3) by a person appointed by the court. 14 (d) A vacancy in a trusteeship of a charitable trust that is 15 required to be filled must be filled in the following order of 16 priority: 17 (1) by a person designated in the terms of the trust to act as 18 successor trustee; 19 (2) by a person selected by the charitable organizations 20 expressly designated to receive distributions under the terms of the 21 trust if the Attorney General concurs in the selection; or 22 (3) by a person appointed by the court. 23 (e) Whether or not a vacancy in a trusteeship exists or is 24 required to be filled, the court may appoint an additional trustee or 25 special fiduciary whenever the court considers the appointment 26 necessary for the administration of the trust. The procedure for 27 such appointment and the notice requirement shall be the same as 28 set forth for special administrators under South Carolina Code 29 Section 62-3-614. 30 31 Comment 32 33 This section lists the ways in which a trusteeship becomes 34 vacant and the rules on filling the vacancy. See also Sections 701 35 (accepting or declining trusteeship), 705 (resignation), and 706 36 (removal). Good drafting practice suggests that the terms of the 37 trust deal expressly with the problem of vacancies, naming 38 successors and specifying the procedure for filling vacancies. This 39 section applies only if the terms of the trust fail to specify a 40 procedure. 41 The disqualification of a trustee referred to in subsection (a)(4) 42 would include a financial institution whose right to engage in trust 43 business has been revoked or removed. Such disqualification1 [422] 187 1 might also occur if the trust’s principal place of administration is 2 transferred to a jurisdiction in which the trustee, whether an 3 individual or institution, is not qualified to act. 4 Subsection (b) provides that a vacancy in the cotrusteeship must 5 be filled only if the trust has no remaining trustee. If a vacancy in 6 the cotrusteeship is not filled, Section 703 authorizes the remaining 7 cotrustees to continue to administer the trust. However, as 8 provided in subsection (e), the court, exercising its inherent equity 9 authority, may always appoint additional trustees if the 10 appointment would promote better administration of the trust. See 11 Restatement (Third) of Trusts Section 34 cmt. a (Tentative Draft 12 No. 2, approved 1999); Restatement (Second) of Trusts Section 13 108 cmt. a (1959). 14 Subsection (c) provides a procedure for filling a vacancy in the 15 trusteeship of a noncharitable trust. Absent an effective provision 16 in the terms of the trust, subsection (c)(2) permits a vacancy in the 17 trusteeship to be filled, without the need for court approval, by a 18 person selected by unanimous agreement of the qualified 19 beneficiaries. An effective provision in the terms of the trust for 20 the designation of a successor trustee includes a procedure under 21 which the successor trustee is selected by a person designated in 22 those terms. Pursuant to Section 705(a)(1), the qualified 23 beneficiaries may also receive the trustee’s resignation. If a trustee 24 resigns following notice as provided in Section 705, the trust may 25 be transferred to a successor appointed pursuant to subsection (c) 26 (2) of this section, all without court involvement. A nonqualified 27 beneficiary who is displeased with the choice of the qualified 28 beneficiaries may petition the court for removal of the trustee 29 under Section 706. 30 If the qualified beneficiaries fail to make an appointment, 31 subsection (c)(3) authorizes the court to fill the vacancy. In 32 making the appointment, the court should consider the objectives 33 and probable intention of the settlor, the promotion of the proper 34 administration of the trust, and the interests and wishes of the 35 beneficiaries. See Restatement (Third) of Trusts Section 34 cmt. f 36 (Tentative Draft No. 2, approved 1999); Restatement (Second) of 37 Trusts Section 108 cmt. d (1959). 38 Subsection (d) specifies a procedure for filling a vacancy in the 39 trusteeship of a charitable trust. Absent an effective designation in 40 the terms of the trust, a successor trustee may be selected by the 41 charitable organizations expressly designated to receive 42 distributions in the terms of the trust but only if the attorney 43 general concurs in the selection. If the attorney general does not1 [422] 188 1 concur in the selection, however, or if the trust does not designate 2 a charitable organization to receive distributions, the vacancy may 3 be filled only by the court. 4 In the case of a revocable trust, the appointment of a successor 5 will normally be made directly by the settlor. As to the duties of a 6 successor trustee with respect to the actions of a predecessor, see 7 Section 812. 8 9 2001 Amendment. Subsection (d), which creates a procedure 10 for the filling of a vacancy in the trusteeship of a charitable trust, 11 was added by a 2001 amendment. 12 13 South Carolina Comment 14 15 This Section provides a definition for a vacancy in a trusteeship 16 and the procedure for appointment of a successor trustee if no 17 provisions for dealing with these matters are set forth in the trust. 18 Subsection (a) provides a list of matters causing a vacancy in 19 trusteeship. Subsection (b) grants authority to the remaining 20 trustee(s) for the administration of the trust following a vacancy. 21 Subsection (c) provides a procedure for filling a vacancy in 22 trusteeship if such a vacancy is required to be filled. Vacancies in 23 this context could arise when the sole remaining trustee no longer 24 is available to serve or the trust requires cotrustees and only one is 25 named in the trust. Subsection (c) provides priority of succession 26 of trustees in a non-charitable trust and subsection (d) provides for 27 priority of succession in a charitable trust. These sections provide a 28 method for the vacancy to be filled without court approval. 29 Subsection (d) includes the language added by the 2004 30 Amendments to the UTC, dealing with the concurrence of the 31 Attorney General. 32 Subsection (e) provides for a court appointed special trustee or 33 “special fiduciary” if necessary for the “administration of the 34 trust.” The provisions of subsection (e) are unqualified and provide 35 “whether or not a vacancy in a trusteeship exists or is required to 36 be filled” the court has authority to appoint such an additional 37 trustee. Such a trustee would have the authority provided by the 38 court in its order of appointment. If the order of appointment 39 contains no limitations, the additional trustee would succeed to the 40 full powers of a trustee under the trust. 41 42 Section 62-7-705. Resignation of trustee. 431 [422] 189 1 (a) A trustee may resign: 2 (1) upon at least 30 days notice in writing to the qualified 3 beneficiaries, the settlor, if living, and all cotrustees; or 4 (2) with the approval of the court. 5 (b) In approving a resignation, the court may issue orders and 6 impose conditions reasonably necessary for the protection of the 7 trust property. 8 (c) Any liability of a resigning trustee or of any sureties on the 9 trustee’s bond for acts or omissions of the trustee is not discharged 10 or affected by the trustee’s resignation. 11 12 Comment 13 14 This section rejects the common law rule that a trustee may 15 resign only with permission of the court, and goes further than the 16 Restatements, which allow a trustee to resign with the consent of 17 the beneficiaries. See Restatement (Third) of Trusts Section 36 18 (Tentative Draft No. 2, approved 1999); Restatement (Second) of 19 Trusts Section 106 (1959). Concluding that the default rule ought 20 to approximate standard drafting practice, the drafting committee 21 provided in subsection (a) that a trustee may resign by giving 22 notice to the qualified beneficiaries, a living settlor, and any 23 cotrustee. A resigning trustee may also follow the traditional 24 method and resign with approval of the court. 25 Restatement (Third) of Trusts Section 36 cmt. d (Tentative Draft 26 No. 2, approved 1999), and Restatement (Second) of Trusts 27 Section 106 cmt. b (1959), provide, similar to subsection (c), that a 28 resignation does not release the resigning trustee from potential 29 liabilities for acts or omissions while in office. The act of 30 resignation can give rise to liability if the trustee resigns for the 31 purpose of facilitating a breach of trust by a cotrustee. See Ream 32 v. Frey, 107 F.3d 147 (3rd Cir. 1997). 33 Regarding the residual responsibilities of a resigning trustee 34 until the trust property is delivered to a successor trustee, see 35 Section 707. 36 In the case of a revocable trust, because the rights of the 37 qualified beneficiaries are subject to the settlor’s control (see 38 Section 603), resignation of the trustee is accomplished by giving 39 notice to the settlor instead of the beneficiaries. 40 41 2001 Amendment. By a 2001 amendment, subsection (a)(1) 42 was amended to require that notice of a trustee’s resignation be 43 given to a living settlor. Previously, notice to a living settlor was1 [422] 190 1 required for a revocable but not irrevocable trust. Notice to the 2 settlor of a revocable trust was required because the rights of the 3 qualified beneficiaries, including the right to receive a trustee’s 4 resignation, are subject to the settlor’s exclusive control. See 5 Section 603. 6 7 South Carolina Comment 8 9 Section 62-7-705(a)(1) adds to the Uniform Trust Code version 10 of Section 705 the words “in writing” after “notice” for 11 clarification, as a writing is the reasonable and customary choice 12 for notification. 13 This Section incorporates some of the provisions of former 14 South Carolina Probate Code Section 62-7-705, except that this 15 Section introduces a thirty (30) day written notice provision for 16 resignation. The former South Carolina statute allowed the 17 Trustee to resign if the document so provided, all beneficiaries 18 consented, or the court approved the resignation. Subsection (c) 19 makes clear that a mere resignation does not terminate a trustee’s 20 liability. 21 22 Section 62-7-706. Removal of trustee. 23 24 (a) For the reasons set forth in subsection (b), the settlor, a 25 cotrustee, or a beneficiary may request the court to remove a 26 trustee, or a trustee may be removed by the court on its own 27 initiative. 28 (b) The court may remove a trustee if: 29 (1) the trustee has committed a serious breach of trust; 30 (2) lack of cooperation among cotrustees substantially 31 impairs the administration of the trust; 32 (3) because of unfitness, unwillingness, or persistent failure 33 of the trustee to administer the trust effectively, the court 34 determines that removal of the trustee best serves the interests of 35 the beneficiaries; or 36 (4) there has been a substantial change of circumstances or 37 removal is requested by all of the qualified beneficiaries, the court 38 finds that removal of the trustee best serves the interests of all of 39 the beneficiaries and is not inconsistent with a material purpose of 40 the trust, and a suitable cotrustee or successor trustee is available. 41 (c) Pending a final decision on a request to remove a trustee, or 42 in lieu of or in addition to removing a trustee, the court may order 43 such appropriate relief under Section 62-7-1001(b) as may be1 [422] 191 1 necessary to protect the trust property or the interests of the 2 beneficiaries. 3 4 Comment 5 6 Subsection (a), contrary to the common law, grants the settlor of 7 an irrevocable trust the right to petition for removal of a trustee. 8 The right to petition for removal does not give the settlor of an 9 irrevocable trust any other rights, such as the right to an annual 10 report or to receive other information concerning administration of 11 the trust. The right of a beneficiary to petition for removal does 12 not apply to a revocable trust while the settlor has capacity. 13 Pursuant to Section 603(a), while a trust is revocable and the 14 settlor has capacity, the rights of the beneficiaries are subject to the 15 settlor’s exclusive control. 16 Trustee removal may be regulated by the terms of the trust. See 17 Section 105. In fashioning a removal provision for an irrevocable 18 trust, the drafter should be cognizant of the danger that the trust 19 may be included in the settlor’s federal gross estate if the settlor 20 retains the power to be appointed as trustee or to appoint someone 21 who is not independent. See Rev. Rul. 95-58, 1995-2 C.B. 191. 22 Subsection (b) lists the grounds for removal of the trustee. The 23 grounds for removal are similar to those found in Restatement 24 (Third) of Trusts Section 37 cmt. a (Tentative Draft No. 2, 25 approved 1999). A trustee may be removed for untoward action, 26 such as for a serious breach of trust, but the section is not so 27 limited. A trustee may also be removed under a variety of 28 circumstances in which the court concludes that the trustee is not 29 best serving the interests of the beneficiaries. The term “interests 30 of the beneficiaries” means the beneficial interests as provided in 31 the terms of the trust, not as defined by the beneficiaries. See 32 Section 103(7). Removal for conduct detrimental to the interests 33 of the beneficiaries is a well-established standard for removal of a 34 trustee. See Restatement (Third) of Trusts Section 37 cmt. d 35 (Tentative Draft No. 2, approved 1999); Restatement (Second) of 36 Trusts Section 107 cmt. a (1959). 37 Subsection (b)(1), consistent with Restatement (Third) of Trusts 38 Section 37 cmt. a and g (Tentative Draft No. 2, approved 1999), 39 makes clear that not every breach of trust justifies removal of the 40 trustee. The breach must be “serious.” A serious breach of trust 41 may consist of a single act that causes significant harm or involves 42 flagrant misconduct. A serious breach of trust may also consist of 43 a series of smaller breaches, none of which individually justify1 [422] 192 1 removal when considered alone, but which do so when considered 2 together. A particularly appropriate circumstance justifying 3 removal of the trustee is a serious breach of the trustee’s duty to 4 keep the beneficiaries reasonably informed of the administration of 5 the trust or to comply with a beneficiary’s request for information 6 as required by Section 813. Failure to comply with this duty may 7 make it impossible for the beneficiaries to protect their interests. It 8 may also mask more serious violations by the trustee. 9 The lack of cooperation among trustees justifying removal under 10 subsection (b)(2) need not involve a breach of trust. The key 11 factor is whether the administration of the trust is significantly 12 impaired by the trustees’ failure to agree. Removal is particularly 13 appropriate if the naming of an even number of trustees, combined 14 with their failure to agree, has resulted in deadlock requiring court 15 resolution. The court may remove one or more or all of the 16 trustees. If a cotrustee remains in office following the removal, 17 under Section 704 appointment of a successor trustee is not 18 required. 19 Subsection (b)(2) deals only with lack of cooperation among 20 cotrustees, not with friction between the trustee and beneficiaries. 21 Friction between the trustee and beneficiaries is ordinarily not a 22 basis for removal. However, removal might be justified if a 23 communications breakdown is caused by the trustee or appears to 24 be incurable. See Restatement (Third) of Trusts Section 37 cmt. a 25 (Tentative Draft No. 2, approved 1999). 26 Subsection (b)(3) authorizes removal for a variety of grounds, 27 including unfitness, unwillingness, or persistent failure to 28 administer the trust effectively. Removal in any of these cases is 29 allowed only if it best serves the interests of the beneficiaries. For 30 the definition of “interests of the beneficiaries,” see 31 Section 103(7). “Unfitness” may include not only mental 32 incapacity but also lack of basic ability to administer the trust. 33 Before removing a trustee for unfitness the court should consider 34 the extent to which the problem might be cured by a delegation of 35 functions the trustee is personally incapable of performing. 36 “Unwillingness” includes not only cases where the trustee refuses 37 to act but also a pattern of indifference to some or all of the 38 beneficiaries. See Restatement (Third) of Trusts Section 37 cmt. a 39 (Tentative Draft No. 2, approved 1999). A “persistent failure to 40 administer the trust effectively” might include a long-term pattern 41 of mediocre performance, such as consistently poor investment 42 results when compared to comparable trusts.1 [422] 193 1 It has traditionally been more difficult to remove a trustee 2 named by the settlor than a trustee named by the court, particularly 3 if the settlor at the time of the appointment was aware of the 4 trustee’s failings. See Restatement (Third) of Trusts Section 37 5 cmt. f (Tentative Draft No. 2, approved 1999); Restatement 6 (Second) of Trusts Section 107 cmt. f-g (1959). Because of the 7 discretion normally granted to a trustee, the settlor’s confidence in 8 the judgment of the particular person whom the settlor selected to 9 act as trustee is entitled to considerable weight. This deference to 10 the settlor’s choice can weaken or dissolve if a substantial change 11 in the trustee’s circumstances occurs. To honor a settlor’s 12 reasonable expectations, subsection (b)(4) lists a substantial 13 change of circumstances as a possible basis for removal of the 14 trustee. Changed circumstances justifying removal of a trustee 15 might include a substantial change in the character of the service 16 or location of the trustee. A corporate reorganization of an 17 institutional trustee is not itself a change of circumstances if it does 18 not affect the service provided the individual trust account. Before 19 removing a trustee on account of changed circumstances, the court 20 must also conclude that removal is not inconsistent with a material 21 purpose of the trust, that it will best serve the interests of the 22 beneficiaries, and that a suitable cotrustee or successor trustee is 23 available. 24 Subsection (b)(4) also contains a specific but more limited 25 application of Section 411. Section 411 allows the beneficiaries 26 by unanimous agreement to compel modification of a trust if the 27 court concludes that the particular modification is not inconsistent 28 with a material purpose of the trust. Subsection (b)(4) of this 29 section similarly allows the qualified beneficiaries to request 30 removal of the trustee if the designation of the trustee was not a 31 material purpose of the trust. Before removing the trustee the 32 court must also find that removal will best serve the interests of the 33 beneficiaries and that a suitable cotrustee or successor trustee is 34 available. 35 Subsection (c) authorizes the court to intervene pending a final 36 decision on a request to remove a trustee. Among the relief that 37 the court may order under Section 1001(b) is an injunction 38 prohibiting the trustee from performing certain acts and the 39 appointment of a special fiduciary to perform some or all of the 40 trustee’s functions. Pursuant to Section 1004, the court may also 41 award attorney’s fees as justice and equity may require. 42 43 South Carolina Comment1 [422] 194 1 2 This section sets forth the grounds for removal of a Trustee. 3 For clarification, Section 62-7-706(a) adds to the Uniform Trust 4 Code version the words “for the reasons set forth in subsection 5 (b).” The UTC Comment makes clear that a beneficiary’s rights 6 under a revocable trust are subject to those of the settlor. 7 “Serious breach of trust” is defined in SCTC Subsection 8 62-7-103(24). 9 10 Section 62-7-707. Delivery of property by former trustee. 11 12 (a) Unless a cotrustee remains in office or the court otherwise 13 orders, and until the trust property is delivered to a successor 14 trustee or other person entitled to it, a trustee who has resigned or 15 been removed has the duties of a trustee and the powers necessary 16 to protect the trust property. 17 (b) A trustee who has resigned or been removed shall proceed 18 expeditiously to deliver the trust property within the trustee’s 19 possession to the cotrustee, successor trustee, or other person 20 entitled to it. 21 22 Comment 23 24 This section addresses the continuing authority and duty of a 25 resigning or removed trustee. Subject to the power of the court to 26 make other arrangements or unless a cotrustee remains in office, a 27 resigning or removed trustee has continuing authority until the 28 trust property is delivered to a successor. If a cotrustee remains in 29 office, there is no reason to grant a resigning or removed trustee 30 any continuing authority, and none is granted under this section. 31 In addition, if a cotrustee remains in office, the former trustee need 32 not submit a final trustee’s report. See Section 813(c). 33 There is ample authority in the Uniform Trust Code for the 34 appointment of a special fiduciary, an appointment which can 35 avoid the need for a resigning or removed trustee to exercise 36 residual powers until a successor can take office. See Sections 37 704(e) (court may appoint additional trustee or special fiduciary 38 whenever court considers appointment necessary for 39 administration of trust), 705(b) (in approving resignation, court 40 may impose conditions necessary for protection of trust property), 41 706(c) (pending decision on petition for removal, court may order 42 appropriate relief), and 1001(b)(5) (to remedy breach of trust,1 [422] 195 1 court may appoint special fiduciary as necessary to protect trust 2 property or interests of beneficiary). 3 If the former trustee has died, the Uniform Trust Code does not 4 require that the trustee’s personal representative windup the 5 deceased trustee’s administration. Nor is a trustee’s conservator or 6 guardian required to complete the former trustee’s administration 7 if the trustee’s authority terminated due to an adjudication of 8 incapacity. However, to limit the former trustee’s liability, the 9 personal representative, conservator or guardian may submit a 10 trustee’s report on the former trustee’s behalf as authorized by 11 Section 813(c). Otherwise, the former trustee remains liable for 12 actions taken during the trustee’s term of office until liability is 13 otherwise barred. 14 15 South Carolina Comment 16 17 This Section is comparable to South Carolina Probate Code 18 Sections 62-3-608 through 62-3-611 concerning the termination of 19 a personal representative. 20 21 Section 62-7-708. Compensation of trustee. 22 23 (a) If the terms of a trust do not specify the trustee’s 24 compensation, a trustee is entitled to compensation that is 25 reasonable under the circumstances. 26 (b) If the terms of a trust specify the trustee’s compensation, 27 the trustee is entitled to be compensated as specified, but the court 28 may allow more or less compensation if: 29 (1) the duties of the trustee are substantially different from 30 those contemplated when the trust was created; or 31 (2) the compensation specified by the terms of the trust 32 would be unreasonably low or high. 33 34 Comment 35 36 Subsection (a) establishes a standard of reasonable 37 compensation. Relevant factors in determining this compensation, 38 as specified in the Restatement, include the custom of the 39 community; the trustee’s skill, experience, and facilities; the time 40 devoted to trust duties; the amount and character of the trust 41 property; the degree of difficulty, responsibility and risk assumed 42 in administering the trust, including in making discretionary 43 distributions; the nature and costs of services rendered by others;1 [422] 196 1 and the quality of the trustee’s performance. See Restatement 2 (Third) of Trusts Section 38 cmt. c (Tentative Draft No. 2, 3 approved 1999); Restatement (Second) of Trusts Section 242 4 cmt. b (1959). 5 In setting compensation, the services actually performed and 6 responsibilities assumed by the trustee should be closely 7 examined. A downward adjustment of fees may be appropriate if a 8 trustee has delegated significant duties to agents, such as the 9 delegation of investment authority to outside managers. See 10 Section 807 (delegation by trustee). On the other hand, a trustee 11 with special skills, such as those of a real estate agent, may be 12 entitled to extra compensation for performing services that would 13 ordinarily be delegated. See Restatement (Third) of Trusts 14 Section 38 cmt. d (Tentative Draft No. 2, approved 1999); 15 Restatement (Second) of Trusts Section 242 cmt. d (1959). 16 Because “trustee” as defined in Section 103(19) includes not 17 only an individual trustee but also cotrustees, each trustee, 18 including a cotrustee, is entitled to reasonable compensation under 19 the circumstances. The fact that a trust has more than one trustee 20 does not mean that the trustees together are entitled to more 21 compensation than had either acted alone. Nor does the 22 appointment of more than one trustee mean that the trustees are 23 eligible to receive the compensation in equal shares. The total 24 amount of the compensation to be paid and how it will be divided 25 depend on the totality of the circumstances. Factors to be 26 considered include the settlor’s reasons for naming more than one 27 trustee and the level of responsibility assumed and exact services 28 performed by each trustee. Often the fees of cotrustees will be in 29 the aggregate higher than the fees for a single trustee because of 30 the duty of each trustee to participate in administration and not 31 delegate to a cotrustee duties the settlor expected the trustees to 32 perform jointly. See Restatement (Third) of Trusts Section 38 33 cmt. i (Tentative Draft No. 2, approved 1999). The trust may 34 benefit in such cases from the enhanced quality of 35 decision-making resulting from the collective deliberations of the 36 trustees. 37 Financial institution trustees normally base their fees on 38 published fee schedules. Published fee schedules are subject to the 39 same standard of reasonableness under the Uniform Trust Code as 40 are other methods for computing fees. The courts have generally 41 upheld published fee schedules but this is not automatic. Among 42 the more litigated topics is the issue of termination fees. 43 Termination fees are charged upon termination of the trust and1 [422] 197 1 sometimes upon transfer of the trust to a successor trustee. Factors 2 relevant to whether the fee is appropriate include the actual work 3 performed; whether a termination fee was authorized in the terms 4 of the trust; whether the fee schedule specified the circumstances 5 in which a termination fee would be charged; whether the trustee’s 6 overall fees for administering the trust from the date of the trust’s 7 creation, including the termination fee, were reasonable; and the 8 general practice in the community regarding termination fees. 9 Because significantly less work is normally involved, termination 10 fees are less appropriate upon transfer to a successor trustee than 11 upon termination of the trust. For representative cases, see 12 Cleveland Trust Co. v. Wilmington Trust Co., 258 A.2d 58 (Del. 13 1969); In re Trusts Under Will of Dwan, 371 N.W. 2d 641 (Minn. 14 Ct. App. 1985); Mercer v. Merchants National Bank, 298 A.2d 15 736 (N.H. 1972); In re Estate of Payson, 562 N.Y.S. 2d 329 (Surr. 16 Ct. 1990); In re Indenture Agreement of Lawson, 607 A. 2d 803 17 (Pa. Super. Ct. 1992); In re Estate of Ischy, 415 A.2d 37 (Pa. 18 1980); Memphis Memorial Park v. Planters National Bank, 1986 19 Tenn. App. LEXIS 2978 (May 7, 1986); In re Trust of 20 Sensenbrenner, 252 N.W. 2d 47 (Wis. 1977). 21 This Code does not take a specific position on whether dual fees 22 may be charged when a trustee hires its own law firm to represent 23 the trust. The trend is to authorize dual compensation as long as 24 the overall fees are reasonable. For a discussion, see Ronald C. 25 Link, Developments Regarding the Professional Responsibility of 26 the Estate Administration Lawyer: The Effect of the Model Rules 27 of Professional Conduct, 26 Real Prop. Prob. & Tr. J. 1, 22-38 28 (1991). 29 Subsection (b) permits the terms of the trust to override the 30 reasonable compensation standard, subject to the court’s inherent 31 equity power to make adjustments downward or upward in 32 appropriate circumstances. Compensation provisions should be 33 drafted with care. Common questions include whether a provision 34 in the terms of the trust setting the amount of the trustee’s 35 compensation is binding on a successor trustee, whether a 36 dispositive provision for the trustee in the terms of the trust is in 37 addition to or in lieu of the trustee’s regular compensation, and 38 whether a dispositive provision for the trustee is conditional on the 39 person performing services as trustee. See Restatement (Third) of 40 Trusts Section 38 cmt. a (Tentative Draft No. 2, approved 1999); 41 Restatement (Second) of Trusts Section 242 cmt. f (1959). 42 Compensation may be set by agreement. A trustee may enter 43 into an agreement with the beneficiaries for lesser or increased1 [422] 198 1 compensation, although an agreement increasing compensation is 2 not binding on a nonconsenting beneficiary. See Section 111(d) 3 (matters that may be the resolved by nonjudicial settlement). See 4 also Restatement (Third) of Trusts Section 38 cmt. f (Tentative 5 Draft No. 2, approved 1999); Restatement (Second) of Trusts 6 Section 242 cmt. i (1959). A trustee may also agree to waive 7 compensation and should do so prior to rendering significant 8 services if concerned about possible gift and income taxation of 9 the compensation accrued prior to the waiver. See Rev. Rul. 10 66-167, 1966-1 C.B. 20. See also Restatement (Third) of Trusts 11 Section 38 cmt. g (Tentative Draft No. 2, approved 1999); 12 Restatement (Second) of Trusts Section 242 cmt. j (1959). 13 Section 816(15) grants the trustee authority to fix and pay its 14 compensation without the necessity of prior court review, subject 15 to the right of a beneficiary to object to the compensation in a later 16 judicial proceeding. Allowing the trustee to pay its compensation 17 without prior court approval promotes efficient trust administration 18 but does place a significant burden on a beneficiary who believes 19 the compensation is unreasonable. To provide a beneficiary with 20 time to take action, and because of the importance of trustee’s fees 21 to the beneficiaries’ interests, Section 813(b)(4) requires a trustee 22 to provide the qualified beneficiaries with advance notice of any 23 change in the method or rate of the trustee’s compensation. 24 Failure to provide such advance notice constitutes a breach of 25 trust, which, if sufficiently serious, would justify the trustee’s 26 removal under Section 706. 27 Under Sections 501-502 of the Uniform Principal and Income 28 Act (1997), one-half of a trustee’s regular compensation is charged 29 to income and the other half to principal. Chargeable to principal 30 are fees for acceptance, distribution, or termination of the trust, 31 and fees charged on disbursements made to prepare property for 32 sale. 33 34 South Carolina Comment 35 36 This section incorporates and clarifies the provisions of current 37 South Carolina law for determination of trustee fees. Former 38 South Carolina Probate Code Section 62-7-205 required the trustee 39 to return the excess part of any fee determined to be unreasonable 40 by the court. 41 42 Section 62-7-709. Reimbursement of expenses. 431 [422] 199 1 (a) A trustee is entitled to be reimbursed out of the trust 2 property, with interest at the legal rate as appropriate, for: 3 (1) expenses that were properly incurred in the 4 administration of the trust; and 5 (2) to the extent necessary to prevent unjust enrichment of 6 the trust, expenses that were not properly incurred in the 7 administration of the trust. 8 (b) An advance by the trustee of money for the protection of 9 the trust gives rise to a lien against trust property to secure 10 reimbursement with reasonable interest. 11 12 Comment 13 14 A trustee has the authority to expend trust funds as necessary in 15 the administration of the trust, including expenses incurred in the 16 hiring of agents. See Sections 807 (delegation by trustee) and 17 816(15) (trustee to pay expenses of administration from trust). 18 Subsection (a)(1) clarifies that a trustee is entitled to 19 reimbursement from the trust for incurring expenses within the 20 trustee’s authority. The trustee may also withhold appropriate 21 reimbursement for expenses before making distributions to the 22 beneficiaries. See Restatement (Third) of Trusts Section 38 cmt. b 23 (Tentative Draft No. 2, approved 1999); Restatement (Second) of 24 Trusts Section 244 cmt. b (1959). A trustee is ordinarily not 25 entitled to reimbursement for incurring unauthorized expenses. 26 Such expenses are normally the personal responsibility of the 27 trustee. 28 As provided in subsection (a)(2), a trustee is entitled to 29 reimbursement for unauthorized expenses only if the unauthorized 30 expenditures benefitted the trust. The purpose of this provision, 31 which is derived from Restatement (Second) of Trusts Section 245 32 (1959), is not to ratify the unauthorized conduct of the trustee, but 33 to prevent unjust enrichment of the trust. Given this purpose, a 34 court, on appropriate grounds, may delay or even deny 35 reimbursement for expenses which benefitted the trust. 36 Appropriate grounds include: (1) whether the trustee acted in bad 37 faith in incurring the expense; (2) whether the trustee knew that the 38 expense was inappropriate; (3) whether the trustee reasonably 39 believed the expense was necessary for the preservation of the trust 40 estate; (4) whether the expense has resulted in a benefit; and (5) 41 whether indemnity can be allowed without defeating or impairing 42 the purposes of the trust. See Restatement (Second) of Trusts 43 Section 245 cmt. g (1959).1 [422] 200 1 Subsection (b) implements Section 802(h)(5), which creates an 2 exception to the duty of loyalty for advances by the trustee for the 3 protection of the trust if the transaction is fair to the beneficiaries. 4 Reimbursement under this section may include attorney’s fees 5 and expenses incurred by the trustee in defending an action. 6 However, a trustee is not ordinarily entitled to attorney’s fees and 7 expenses if it is determined that the trustee breached the trust. See 8 3A Austin W. Scott & William F. Fratcher, The Law of Trusts 9 Section 245 (4th ed. 1988). 10 11 South Carolina Comment 12 13 Former South Carolina Probate Code Section 62-7-704(18) 14 empowered the trustee “to advance money for the protection of the 15 trust, and for all expenses, losses, and liability sustained in the 16 administration of the trust or because of the holding or ownership 17 of any trust assets, for which advances with any interest the trustee 18 has a lien on the trust assets as against the beneficiary . . . .” 19 20 Part 8 21 22 Duties and Powers of Trustee 23 24 General Comment 25 26 This article states the fundamental duties of a trustee and lists 27 the trustee’s powers. The duties listed are not new, but how the 28 particular duties are formulated and applied has changed over the 29 years. This article was drafted where possible to conform with the 30 1994 Uniform Prudent Investor Act, which has been enacted in 31 approximately two thirds of the States. The Uniform Prudent 32 Investor Act prescribes a trustee’s responsibilities with respect to 33 the management and investment of trust property. The Uniform 34 Trust Code also addresses a trustee’s duties with respect to 35 distribution to beneficiaries. 36 Because of the widespread adoption of the Uniform Prudent 37 Investor Act, it was decided not to disassemble and fully integrate 38 the Prudent Investor Act into the Uniform Trust Code. Instead, 39 States enacting the Uniform Trust Code are encouraged to recodify 40 their version of the Prudent Investor Act by reenacting it as 41 Article 9 of this Code rather than leaving it elsewhere in their 42 statutes. Where the Uniform Trust Code and Uniform Prudent 43 Investor Act overlap, States should enact the provisions of this1 [422] 201 1 article and not enact the duplicative provisions of the Prudent 2 Investor Act. Sections of this article which overlap with the 3 Prudent Investor Act are Sections 802 (duty of loyalty), 803 4 (impartiality), 805 (costs of administration), 806 (trustee’s skills), 5 and 807 (delegation). For more complete instructions on how to 6 enact the Uniform Prudent Investor Act as part of this Code, see 7 the General Comment to Article 9. 8 All of the provisions of this article may be overridden in the 9 terms of the trust except for certain aspects of the trustee’s duty to 10 keep the beneficiaries informed of administration (see 11 Section 105(b)(8)-(9)), and the trustee’s fundamental obligation to 12 act in good faith, in accordance with the purposes of the trust, and 13 for the benefit of the beneficiaries (see Section 105(b)(2)-(3)). 14 15 Section 62-7-801. Duty to administer trust. 17 18 Upon acceptance of a trusteeship, the trustee shall administer the 19 trust in good faith, in accordance with its terms and purposes and 20 the interests of the beneficiaries, and in accordance with this 21 article. 22 23 Comment 24 25 This section confirms that a primary duty of a trustee is to 26 follow the terms and purposes of the trust and to do so in good 27 faith. Only if the terms of a trust are silent or for some reason 28 invalid on a particular issue does this Code govern the trustee’s 29 duties. This section also confirms that a trustee does not have a 30 duty to act until the trustee has accepted the trusteeship. For the 31 procedure for accepting a trusteeship, see Section 701. 32 In administering the trust, the trustee must not only comply with 33 this section but also with the other duties specified in this article, 34 particularly the obligation not to place the interests of others above 35 those of the beneficiaries (Section 802), the duty to act with 36 prudence (Section 804), and the duty to keep the qualified 37 beneficiaries reasonably informed about the administration of the 38 trust (Section 813). 39 While a trustee generally must administer a trust in accordance 40 with its terms and purposes, the purposes and particular terms of 41 the trust can on occasion conflict. If such a conflict occurs 42 because of circumstances not anticipated by the settlor, it may be 43 appropriate for the trustee to petition under Section 412 to modify 44 or terminate the trust. Pursuant to Section 404, the trustee is not1 [422] 202 1 required to perform a duty prescribed by the terms of the trust if 2 performance would be impossible, illegal or contrary to public 3 policy. 4 For background on the trustee’s duty to administer the trust, see 5 Restatement (Second) of Trusts Sections 164-169 (1959). 6 7 South Carolina Comment 8 9 This section describes a trustee’s broad and general duty of good 10 faith and establishes that a nominated or proposed trustee owes no 11 duty to the beneficiary unless and until the trusteeship is accepted. 12 See former South Carolina Probate Code Section 62-7-301 (a 13 trustee has a general duty to administer the trust expeditiously for 14 the benefit of the beneficiaries) and Section 62-7-305 (a trustee is 15 under a continuing duty to administer the trust according to the 16 objectives of the trustor); Sarlin v. Sarlin, 312 S.C. 27, 430 S.E.2d 17 530 (S.C. Ct. App. 1993) (a trustee’s discretion must be exercised 18 in good faith, consistent with the primary purpose(s) of the trust). 19 There was no prior South Carolina case law regarding the 20 principle that there is no duty owed to beneficiaries without 21 acceptance of the trust by the proposed trustee; however, there is 22 general common law to that effect. Restatement, Second, Trusts 23 Section169. 24 25 Section 62-7-802. Duty of loyalty. 26 27 (a) A trustee shall administer the trust solely in the interests of 28 the beneficiaries. 29 (b) Subject to the rights of persons dealing with or assisting the 30 trustee as provided in Section 62-7-1012, a sale, encumbrance, or 31 other transaction involving the investment or management of trust 32 property entered into by the trustee for the trustee’s own personal 33 account or which is otherwise affected by a conflict between the 34 trustee’s fiduciary and personal interests is voidable by a 35 beneficiary affected by the transaction unless: 36 (1) the transaction was authorized by the terms of the trust; 37 (2) the transaction was approved by the court; 38 (3) the beneficiary did not commence a judicial proceeding 39 within the time allowed by Section 62-7-1005; 40 (4) the beneficiary consented to the trustee’s conduct, 41 ratified the transaction, or released the trustee in compliance with 42 Section 62-7-1009; or1 [422] 203 1 (5) the transaction involves a contract entered into or claim 2 acquired by the trustee before the person became or contemplated 3 becoming trustee. 4 (c) A sale, encumbrance, or other transaction involving the 5 investment or management of trust property is presumed to be 6 affected by a conflict between personal and fiduciary interests if it 7 is entered into by the trustee with: 8 (1) the trustee’s spouse; 9 (2) the trustee’s descendants, siblings, parents, or their 10 spouses; 11 (3) an agent or attorney of the trustee; 12 (4) a corporation or other person or enterprise in which the 13 trustee has such a substantial interest that it might affect the 14 trustee’s best judgment; and 15 (5) a corporation or other person or enterprise which has 16 such a substantial interest in the trustee that it might affect the 17 trustee’s best judgment. 18 (d) A transaction between a trustee and a beneficiary that does 19 not concern trust property but that occurs during the existence of 20 the trust or while the trustee retains significant influence over the 21 beneficiary and from which the trustee obtains an advantage is 22 voidable by the beneficiary unless the trustee establishes that the 23 transaction was fair to the beneficiary. 24 (e) A transaction not concerning trust property in which the 25 trustee engages in the trustee’s individual capacity involves a 26 conflict between personal and fiduciary interests if the transaction 27 concerns an opportunity properly belonging to the trust. 28 (f) An investment by a trustee in securities of an investment 29 company or investment trust to which the trustee, or its affiliate, 30 provides services in a capacity other than as trustee is not 31 presumed to be affected by a conflict between personal and 32 fiduciary interests if the investment otherwise complies with the 33 prudent investor rule of Part 9. The trustee may be compensated 34 by the investment company or investment trust for providing those 35 services out of fees charged to the trust if the trustee at least 36 annually notifies the persons entitled under Section 62-7-813 to 37 receive a copy of the trustee’s annual report of the rate and method 38 by which the compensation was determined. 39 (g) In voting shares of stock or in exercising powers of control 40 over similar interests in other forms of enterprise, the trustee shall 41 act in the best interests of the beneficiaries. If the trust is the sole 42 owner of a corporation or other form of enterprise, the trustee shall1 [422] 204 1 elect or appoint directors or other managers who will manage the 2 corporation or enterprise in the best interests of the beneficiaries. 3 (h) This section does not preclude the following transactions, if 4 fair to the beneficiaries: 5 (1) an agreement between a trustee and a beneficiary relating 6 to the appointment or compensation of the trustee; 7 (2) payment of reasonable compensation to the trustee; 8 (3) a transaction between a trust and another trust, 9 decedent’s estate, or conservatorship of which the trustee is a 10 fiduciary or in which a beneficiary has an interest; 11 (4) a deposit of trust money in a regulated financial-service 12 institution operated by the trustee; or 13 (5) an advance by the trustee of money for the protection of 14 the trust. 15 (i)The court may appoint a special fiduciary to make a decision 16 with respect to any proposed transaction that might violate this 17 section if entered into by the trustee. 18 19 Comment 20 21 This section addresses the duty of loyalty, perhaps the most 22 fundamental duty of the trustee. Subsection (a) states the general 23 principle, which is copied from Restatement (Second) of Trusts 24 Section 170(1) (1959). A trustee owes a duty of loyalty to the 25 beneficiaries, a principle which is sometimes expressed as the 26 obligation of the trustee not to place the trustee’s own interests 27 over those of the beneficiaries. Most but not all violations of the 28 duty of loyalty concern transactions involving the trust property, 29 but breaches of the duty can take other forms. For a discussion of 30 the different types of violations, see George G. Bogert & 31 George T. Bogert, The Law of Trusts and Trustees Section 543 32 (Rev. 2d ed. 1993); and 2A Austin W. Scott & William F. 33 Fratcher, The Law of Trusts Sections 170-170.24 (4th ed. 1987). 34 The “interests of the beneficiaries” to which the trustee must be 35 loyal are the beneficial interests as provided in the terms of the 36 trust. See Section 103(7). 37 The duty of loyalty applies to both charitable and noncharitable 38 trusts, even though the beneficiaries of charitable trusts are 39 indefinite. In the case of a charitable trust, the trustee must 40 administer the trust solely in the interests of effectuating the trust’s 41 charitable purposes. See Restatement (Second) of Trusts 42 Section 379 cmt. a (1959).1 [422] 205 1 Duty of loyalty issues often arise in connection with the settlor’s 2 designation of the trustee. For example, it is not uncommon that 3 the trustee will also be a beneficiary. Or the settlor will name a 4 friend or family member who is an officer of a company in which 5 the settlor owns stock. In such cases, settlors should be advised to 6 consider addressing in the terms of the trust how such conflicts are 7 to be handled. Section 105 authorizes a settlor to override an 8 otherwise applicable duty of loyalty in the terms of the trust. 9 Sometimes the override is implied. The grant to a trustee of 10 authority to make a discretionary distribution to a class of 11 beneficiaries that includes the trustee implicitly authorizes the 12 trustee to make distributions for the trustee’s own benefit. 13 Subsection (b) states the general rule with respect to transactions 14 involving trust property that are affected by a conflict of interest. 15 A transaction affected by a conflict between the trustee’s fiduciary 16 and personal interests is voidable by a beneficiary who is affected 17 by the transaction. Subsection (b) carries out the “no further 18 inquiry” rule by making transactions involving trust property 19 entered into by a trustee for the trustee’s own personal account 20 voidable without further proof. Such transactions are irrebuttably 21 presumed to be affected by a conflict between personal and 22 fiduciary interests. It is immaterial whether the trustee acts in 23 good faith or pays a fair consideration. See Restatement (Second) 24 of Trusts Section 170 cmt. b (1959). 25 The rule is less severe with respect to transactions involving 26 trust property entered into with persons who have close business or 27 personal ties with the trustee. Under subsection (c), a transaction 28 between a trustee and certain relatives and business associates is 29 presumptively voidable, not void. Also presumptively voidable 30 are transactions with corporations or other enterprises in which the 31 trustee, or a person who owns a significant interest in the trustee, 32 has an interest that might affect the trustee’s best judgment. The 33 presumption is rebutted if the trustee establishes that the 34 transaction was not affected by a conflict between personal and 35 fiduciary interests. Among the factors tending to rebut the 36 presumption are whether the consideration was fair and whether 37 the other terms of the transaction are similar to those that would be 38 transacted with an independent party. 39 Even where the presumption under subsection (c) does not 40 apply, a transaction may still be voided by a beneficiary if the 41 beneficiary proves that a conflict between personal and fiduciary 42 interests existed and that the transaction was affected by the 43 conflict. The right of a beneficiary to void a transaction affected1 [422] 206 1 by a conflict of interest is optional. If the transaction proves 2 profitable to the trust and unprofitable to the trustee, the 3 beneficiary will likely allow the transaction to stand. For a 4 comparable provision regulating fiduciary investments by national 5 banks, see 12 C.F.R. Section 9.12(a). 6 As provided in subsection (b), no breach of the duty of loyalty 7 occurs if the transaction was authorized by the terms of the trust or 8 approved by the court, or if the beneficiary failed to commence a 9 judicial proceeding within the time allowed or chose to ratify the 10 transaction, either prior to or subsequent to its occurrence. In 11 determining whether a beneficiary has consented to a transaction, 12 the principles of representation from Article 3 may be applied. 13 Subsection (b)(5), which is derived from Section 3-713(1) of the 14 Uniform Probate Code, allows a trustee to implement a contract or 15 pursue a claim that the trustee entered into or acquired before the 16 person became or contemplated becoming trustee. While this 17 subsection allows the transaction to proceed without automatically 18 being voidable by a beneficiary, the transaction is not necessarily 19 free from scrutiny. In implementing the contract or pursuing the 20 claim, the trustee must still complete the transaction in a way that 21 avoids a conflict between the trustee’s fiduciary and personal 22 interests. Because avoiding such a conflict will frequently be 23 difficult, the trustee should consider petitioning the court to 24 appoint a special fiduciary, as authorized by subsection (i), to work 25 out the details and complete the transaction. 26 Subsection (d) creates a presumption that a transaction between 27 a trustee and a beneficiary not involving trust property is an abuse 28 by the trustee of a confidential relationship with the beneficiary. 29 This subsection has limited scope. If the trust has terminated, 30 there must be proof that the trustee’s influence with the beneficiary 31 remained. Furthermore, whether or not the trust has terminated, 32 there must be proof that the trustee obtained an advantage from the 33 relationship. The fact the trustee profited is insufficient to show an 34 abuse if a third party would have similarly profited in an arm’s 35 length transaction. Subsection (d) is based on Cal. Prob. Code 36 Section l6004(c). See also 2A Austin W. Scott & William F. 37 Fratcher Section 170.25 (4th ed. 1987), which states the same 38 principle in a slightly different form: “Where he deals directly with 39 the beneficiaries, the transaction may stand, but only if the trustee 40 makes full disclosure and takes no advantage of his position and 41 the transaction is in all respects fair and reasonable.” 42 Subsection (e), which allows a beneficiary to void a transaction 43 entered into by the trustee that involved an opportunity belonging1 [422] 207 1 to the trust, is based on Restatement (Second) of Trusts 2 Section 170 cmt. k (1959). While normally associated with 3 corporations and with their directors and officers, what is usually 4 referred to as the corporate opportunity doctrine also applies to 5 other types of fiduciary. The doctrine prohibits the trustee’s 6 pursuit of certain business activities, such as entering into a 7 business in direct competition with a business owned by the trust, 8 or the purchasing of an investment that the facts suggest the trustee 9 was expected to purchase for the trust. For discussion of the 10 corporate opportunity doctrine, see Kenneth B. Davis, Jr., 11 Corporate Opportunity and Comparative Advantage, 84 Iowa L. 12 Rev. 211 (1999); and Richard A. Epstein, Contract and Trust in 13 Corporate Law: The Case of Corporate Opportunity, 21 Del. J. 14 Corp. L. 5 (1996). See also Principles of Corporate Governance: 15 Analysis and Recommendations Section 5.05 (American Law Inst. 16 1994). 17 Subsection (f) creates an exception to the no further inquiry rule 18 for trustee investment in mutual funds. This exception applies 19 even though the mutual fund company pays the financial-service 20 institution trustee a fee for providing investment advice and other 21 services, such as custody, transfer agent, and distribution, that 22 would otherwise be provided by agents of the fund. Mutual funds 23 offer several advantages for fiduciary investing. By comparison 24 with common trust funds, mutual fund shares may be distributed 25 in-kind when trust interests terminate, avoiding liquidation and the 26 associated recognition of gain for tax purposes. Mutual funds 27 commonly offer daily pricing, which gives trustees and 28 beneficiaries better information about performance. Because 29 mutual funds can combine fiduciary and nonfiduciary accounts, 30 they can achieve larger size, which can enhance diversification and 31 produce economies of scale that can lower investment costs. 32 Mutual fund investment also has a number of potential 33 disadvantages. It adds another layer of expense to the trust, and it 34 causes the trustee to lose control over the nature and timing of 35 transactions in the fund. Trustee investment in mutual funds 36 sponsored by the trustee, its affiliate, or from which the trustee 37 receives extra fees has given rise to litigation implicating the 38 trustee’s duty of loyalty, the duty to invest with prudence, and the 39 right to receive only reasonable compensation. Because financial 40 institution trustees ordinarily provide advisory services to and 41 receive compensation from the very funds in which they invest 42 trust assets, the contention is made that investing the assets of 43 individual trusts in these funds is imprudent and motivated by the1 [422] 208 1 effort to generate additional fee income. Because the financial 2 institution trustee often will also charge its regular fee for 3 administering the trust, the contention is made that the financial 4 institution trustee’s total compensation, both direct and indirect, is 5 excessive. 6 Subsection (f) attempts to retain the advantages of mutual funds 7 while at the same time making clear that such investments are 8 subject to traditional fiduciary responsibilities. Nearly all of the 9 States have enacted statutes authorizing trustees to invest in funds 10 from which the trustee might derive additional compensation. 11 Portions of subsection (f) are based on these statutes. 12 Subsection (f) makes clear that such dual investment-fee 13 arrangements are not automatically presumed to involve a conflict 14 between the trustee’s personal and fiduciary interests, but 15 subsection (f) does not otherwise waive or lessen a trustee’s 16 fiduciary obligations. The trustee, in deciding whether to invest in 17 a mutual fund, must not place its own interests ahead of those of 18 the beneficiaries. The investment decision must also comply with 19 the enacting jurisdiction’s prudent investor rule. 20 To obtain the protection afforded by subsection (f), the trustee 21 must disclose at least annually to the beneficiaries entitled to 22 receive a copy of the trustee’s annual report the rate and method by 23 which the additional compensation was determined. Furthermore, 24 the selection of a mutual fund, and the resulting delegation of 25 certain of the trustee’s functions, may be taken into account under 26 Section 708 in setting the trustee’s regular compensation. See also 27 Uniform Prudent Investor Act Sections 7 and 9 and Comments; 28 Restatement (Third) of Trusts: Prudent Investor Rule Section 227 29 cmt. m (1992). 30 Subsection (f) applies whether the services to the fund are 31 provided directly by the trustee or by an affiliate. While the term 32 “affiliate” is not used in subsection (c), the individuals and entities 33 listed there are examples of affiliates. The term is also used in the 34 regulations under ERISA. An “affiliate” of a fiduciary includes 35 (1) any person who directly or indirectly, through one or more 36 intermediaries, controls, is controlled by, or is under common 37 control with the fiduciary; (2) any officer, director, partner, 38 employee, or relative of the fiduciary, and any corporation or 39 partnership of which the fiduciary is an officer, director or partner. 40 See 29 C.F.R. Section 2510.3-21(e). 41 Subsection (g) addresses an overlap between trust and corporate 42 law. It is based on Restatement of Trusts (Second) Section 193 43 cmt. a (1959), which provides that “[i]t is the duty of the trustee in1 [422] 209 1 voting shares of stock to use proper care to promote the interest of 2 the beneficiary,” and that the fiduciary responsibility of a trustee in 3 voting a control block “is heavier than where he holds only a small 4 fraction of the shares.” Similarly, the Department of Labor 5 construes ERISA’s duty of loyalty to make share voting a fiduciary 6 function. See 29 C.F.R. Section 2509.94-2. When the trust owns 7 the entirety of the shares of a corporation, the corporate assets are 8 in effect trust assets that the trustee determines to hold in corporate 9 form. The trustee may not use the corporate form to escape the 10 fiduciary duties of trust law. Thus, for example, a trustee whose 11 duty of impartiality would require the trustee to make current 12 distributions for the support of current beneficiaries may not evade 13 that duty by holding assets in corporate form and pleading the 14 discretion of corporate directors to determine dividend policy. 15 Rather, the trustee must vote for corporate directors who will 16 follow a dividend policy consistent with the trustee’s trust-law 17 duty of impartiality. 18 Subsection (h) contains several exceptions to the general duty of 19 loyalty, which apply if the transaction was fair to the beneficiaries. 20 Subsection (h)(1)-(2) clarify that a trustee is free to contract about 21 the terms of appointment and rate of compensation. Consistent 22 with Restatement (Second) of Trusts Section 170 cmt. r (1959), 23 subsection (h)(3) authorizes a trustee to engage in a transaction 24 involving another trust of which the trustee is also trustee, a 25 transaction with a decedent’s estate or a conservatorship estate of 26 which the trustee is personal representative or conservator, or a 27 transaction with another trust or other fiduciary relationship in 28 which a beneficiary of the trust has an interest. The authority of a 29 trustee to deposit funds in a financial institution operated by the 30 trustee, as provided in subsection (h)(4), is recognized in 31 Restatement (Second) of Trusts Section 170 cmt. m (1959). The 32 power to deposit funds in its own institution does not negate the 33 trustee’s responsibility to invest prudently, including the obligation 34 to earn a reasonable rate of interest on deposits. Subsection (h)(5) 35 authorizes a trustee to advance money for the protection of the 36 trust. Such advances usually are of small amounts and are made in 37 emergencies or as a matter of convenience. Pursuant to 38 Section 709(b), the trustee has a lien against the trust property for 39 any advances made. 40 41 South Carolina Comment 421 [422] 210 1 Section 62-7-802(a) sets forth the Trustee’s particular duty of 2 loyalty owed to beneficiaries. See former South Carolina Probate 3 Code Section 62-7-301, which states that a trustee has a general 4 duty to administer the trust “for the benefit of the 5 beneficiaries . . . .” South Carolina case law provided similarly. 6 See McNeil v. Morrow, 30 S.C. Eq. (9 Rich.Cas.) 172 (S.C. 1832); 7 Cartee v. Lesley, 290 S.C. 333, 350 S.E.2d 388 (S.C. 1986); Yates 8 v. Yates, 292 S.C. 49, 354 S.E.2d 800 (S.C. Ct. App. 1987). 9 Section 62-7-802(b) states the general rule governing trust 10 property transactions affected by the trustee’s conflict of interest. 11 Such a transaction is voidable by a beneficiary unless one of the 12 stated exceptions is shown to apply. 13 Regarding the general power of a beneficiary to void a conflict 14 of interest transaction, see former SCPC Section 62-7-706, which 15 implied such a power. In the analogous situation of a personal 16 representative’s conflict of interest transaction, SCPC Section 17 62-3-713 provides that any transaction affected by “a substantial 18 conflict of interest” is voidable unless (1) the decedent’s will or 19 contract expressly authorized the transaction, or (2) the transaction 20 is approved by the court after notice. 21 In general, transactions involving trustee self dealing (selling 22 trust property to trustee individually or buying property, as trustee, 23 from himself individually) are voidable by beneficiaries without 24 regard to good faith and fair consideration. Coleman Karesh, 25 Trusts, 46 (1977), citing Zimmerman v. Harmon, 25 S.C. Eq. (4 26 Rich. Eq.)165 (S.C.1851) and McCants v. Bee, 6 S.C. Eq. (1 27 McCord Eq.) 383 (S.C. 18). Also, see Restatement, Second, 28 Trusts Section 170, comments b. and h. on subsection (1). 29 In subsection (b)(1), the first exception to the “voidable” rule 30 provides that a beneficiary may not automatically void a conflict of 31 interest transaction if the transaction is authorized by the terms of 32 the trust. Former SCPC Section 62-7-706 implicitly provided for 33 that exception. If the transaction was authorized by the trust 34 agreement, it could be assumed that the court would approve the 35 transaction. There is no prior South Carolina case law directly on 36 point regarding authorization in the trust agreement for the conflict 37 of interest transaction. However, there is general common law to 38 that effect. The most commonly recognized exception to the duty 39 of loyalty rule is where the settlor expressly or impliedly approved 40 of the conflict of interest position or transaction. George Gleason 41 Bogert and George Taylor Bogert, The Law of Trusts and 42 Trustees, Section 543 (Rev. 2d ed. 1993) (where the testator/settlor 43 created the conflict situation when his will or trust was drawn, by1 [422] 211 1 naming a particular person as personal representative/trustee who, 2 after the opening of the estate/trust, would be exposed to a conflict 3 between personal and representational interests, there is an implied 4 exemption from the duty of loyalty, absent fraud or bad faith on 5 the party of the fiduciary.) 6 Subsection (b)(2) provides the second exception to the 7 “voidable” rule: a beneficiary may not automatically void a 8 conflict of interest transaction if the transaction is approved by the 9 court. Former SCPC Section 62-7-706 provided that conflict of 10 interest transactions could be approved by the court. Prior South 11 Carolina case law provided similarly. Sollee v. Croft, 28 S.C. Eq. 12 (7 Rich. Eq.) (S.C. 1854) (the court may permit a conflict of 13 interest transaction.) Also, see Restatement, Second, Trusts 14 Section 170, comment f. on subsection (1); Honeywell v. 15 Dominick, 223 S.C. 365, 75 S.E.2d 59 (S.C. 1953) 16 (notwithstanding the general rule prohibiting a trustee from buying 17 trust property at his own sale, the court may approve such a 18 transaction upon finding a justifiable exception). 19 Subsection (b)(3), the third exception to the “voidable” rule, 20 provides that a beneficiary’s right to void a conflict of interest 21 transaction is subject to the limitation periods in SCTC Section 22 62-7-1005. Former SCPC Section 62-7-307 provided that claims 23 against a trustee for breach of trust could be commenced within 24 one year after receipt of final account disclosing the matter (actual 25 disclosure) and in no event more than three years after a 26 beneficiary’s receipt of a final account or statement, regardless of 27 disclosure (constructive disclosure). See Moyer v. M.S. Bailey & 28 Son, 347 S.C. 353, 555 S.E.2d 406 (S.C. Ct. App. 2001) (applying 29 the provisions of former SCPC Section 62-7-307). See also 30 Rembert v. Gressette, 318 S.C. 519, 458 S.E.2d 552 (S.C. Ct. App. 31 1995) (beneficiaries may lose claims against trustees due to 32 laches). 33 Subsection (b)(4) contains the fourth exception to the “voidable” 34 rule, providing that the transaction is not voidable by the 35 beneficiary if the beneficiary consents to, ratifies, or releases the 36 trustee with regard to the transaction as set forth in SCTC Section 37 62-7-1009. Former SCPC Section 62-7-307 implied that 38 beneficiaries could consent to a breach; see also SCPC Section 39 62-3-713, governing personal representatives, which provides that 40 a beneficiary’s right to void a conflict transaction may be lost by 41 consent. See Byrd v. King, 245 S.C. 247, 140 S.E.2d 158 (S.C. 42 1965), applying Restatement, Second, Trusts Section 216, holding 43 that a beneficiary may not hold the trustee liable for breach of trust1 [422] 212 1 if the beneficiary consented to the trustee’s act or omission. The 2 comments to Restatement Section 216 set forth numerous 3 fact-sensitive applications of the rule. 4 Subsection (b)(5), the fifth exception to the “voidable” rule, 5 provides that a transaction contracted for prior to the person 6 becoming trustee or before he contemplated becoming trustee is 7 not automatically voidable by a beneficiary. There was no prior 8 SC statutory or case law counterpart. 9 Whereas Section 62-7-802(b) applies an irrebuttable 10 presumption to void certain conflict of interest transactions, 11 Section 62-7-802(c) applies a rebuttable presumption of 12 voidability for transactions involving trust property entered into 13 with persons who have close business or personal ties with the 14 trustee. There was no prior South Carolina statutory counterpart. 15 See Scottish - American Mtg. Co. v. Clowney, 70 S.C. 229, 49 S.E. 16 569 (S.C. 1904) (sale of trust property by trustee to trustee’s 17 spouse is voidable at the option of the beneficiary). Restatement, 18 Second, Trusts Section 170 provides that a transaction with the 19 trustee’s spouse can be set aside as though it was made with the 20 trustee himself. Id., comment, e. to subsection (4). A transaction 21 with a non-spouse person who “is related to the trustee” makes the 22 transaction suspicious but not ipso facto improper. Id. 23 SCTC subsection (c)(4) substitutes certain language for that in 24 the UTC version and adds subsection (c)(5), not found in UTC 25 Section 802, to clarify that the “interest,” either “of” or “in” the 26 trustee, must be “substantial” in order that such “interest” “might 27 affect the best judgment of the trustee”. This is consistent with 28 Scott on Trusts, Secs. 170.10 – 13 and the corresponding sections 29 of the Restatement of Trusts. 30 Subsection (d) addresses transactions between the trustee and a 31 beneficiary that do not involve trust property. Subsection (d) 32 creates a presumption that the trustee abused the confidential 33 relationship, thereby requiring the trustee to rebut the presumption 34 with evidence that the transaction was fair to the beneficiary. There 35 was no South Carolina statutory counterpart. See Guinyard v. 36 Atkins, 282 S.C. 61, 317 S.E.2d 137 (S.C. Ct. App. 1984) 37 (transactions between a trustee and beneficiaries may be sustained 38 where there is clear affirmative proof of fair consideration, perfect 39 candor, and absence of advantage.) Guinyard involved a trust 40 property transaction, but arguably would also apply to a non-trust 41 property transaction between trustee and beneficiary. Restatement, 42 Second, Trusts Section 170(2) permits transactions of the type1 [422] 213 1 described in subsection (d) only if the trustee satisfies the 2 heightened standard of fairness and full disclosure. 3 Subsection (e) allows a beneficiary to void a transaction 4 involving nontrust property entered into by the trustee personally if 5 the transaction constituted an opportunity belonging to the trust. 6 There was no South Carolina statutory or case law counterpart. 7 See, however, Restatement, Second, Trusts Section 170, comment 8 k. to subsection (1). 9 Subsection (f) creates an exception to the no-further-inquiry rule 10 for trustee investments in mutual funds, and allows trustees to take 11 additional compensation for services provided to the investment 12 company, subject to a duty of disclosure and subject to the duties 13 imposed by the Prudent Investor Act. See Part 9. There was no 14 prior South Carolina case law counterpart. Subsection (f) includes 15 the word “otherwise” found in the 2004 Amendments to UTC 16 Section 802. 17 Subsection (g) makes share voting or other exercise of entity 18 control by a trustee a fiduciary function. Former SCPC Section 19 62-7-704(c)(3), (13), (14), (15), and (26) provides for trustee 20 powers with respect to entity control. The exercise of said powers 21 was subject to the prudent man rule and had to be exercised in the 22 best interest of the beneficiary and consistent with the purposes of 23 the trust. See Weston v. Weston, 210 S.C. 1, 41 S.E.2d 372 (S.C. 24 1947) (it is the duty of the trustee in voting shares of corporate 25 stock to act in the best interests of the beneficiary). 26 Subsection (h) sets forth exceptions to the duty of loyalty, which 27 apply if the transaction was fair to the beneficiary. 28 Subsection (h)(1) and (2) provides that a trustee is free to 29 contract with the beneficiary about the terms of appointment and 30 compensation. Subsection (h)(3) permits transactions involving 31 the trust with other fiduciary estates in which the trustee is also the 32 fiduciary or in which the beneficiary of the trust has an interest. 33 Subsection (h)(4) permits the trustee to deposit trust assets in a 34 financial institution operated by the trustee. Subsection (h)(5) 35 permits the trustee to advance money for the protection of the trust. 36 There was no prior South Carolina statute on the subject of a 37 trustee’s ability to contract with a beneficiary about terms of 38 appointment and compensation. Former SCPC Section 62-7-205 39 permitted a trustee to fix his own fees (if not governed by the trust 40 instrument) subject to the right of the beneficiary to object. 41 Former SCPC Section 62-7-704(c)(4) permitted transactions of the 42 type described in subsection (h)(3). Former SCPC Section 43 67-7-704(6) permitted transactions of the type described in1 [422] 214 1 subsection (h)(4). Former SCPC Section 67-7-704(c)(18) 2 permitted transactions of the type described in subsection (h)(5). 3 There was no South Carolina case law counterpart. 4 Subsection (i) confirms that the court may appoint a special 5 fiduciary to act with respect to any transaction that might violate 6 the duty of loyalty if entered into by the trustee. There was no 7 South Carolina statutory or case law counterpart. 8 9 Section 62-7-803. Impartiality. 10 11 If a trust has two or more beneficiaries, the trustee shall act 12 impartially in investing, managing, and distributing the trust 13 property, giving due regard to the beneficiaries’ respective 14 interests. 15 16 Comment 17 18 The duty of impartiality is an important aspect of the duty of 19 loyalty. This section is identical to Section 6 of the Uniform 20 Prudent Investor Act, except that this section also applies to all 21 aspects of trust administration and to decisions by a trustee with 22 respect to distributions. The Prudent Investor Act is limited to 23 duties with respect to the investment and management of trust 24 property. The differing beneficial interests for which the trustee 25 must act impartially include those of the current beneficiaries 26 versus those of beneficiaries holding interests in the remainder; 27 and among those currently eligible to receive distributions. In 28 fulfilling the duty to act impartially, the trustee should be 29 particularly sensitive to allocation of receipts and disbursements 30 between income and principal and should consider, in an 31 appropriate case, a reallocation of income to the principal account 32 and vice versa, if allowable under local law. For an example of 33 such authority, see Uniform Principal and Income Act Section 104 34 (1997). 35 The duty to act impartially does not mean that the trustee must 36 treat the beneficiaries equally. Rather, the trustee must treat the 37 beneficiaries equitably in light of the purposes end terms of the 38 trust. A settlor who prefers that the trustee, when making 39 decisions, generally favor the interests of one beneficiary over 40 those of others should provide appropriate guidance in the terms of 41 the trust. See Restatement (Second) of Section 183 cmt. a (1959). 42 43 South Carolina Comment1 [422] 215 1 2 Former SCPC Section 62-7-302(F)(2), retained and incorporated 3 in Part 9, provided similarly. Former SCPC Sections 62-7-301 and 4 62-7-305 set forth the general duties of administering the trust for 5 the benefit of the beneficiaries and according to the objectives of 6 the settlor. In Johnson v. Thornton, 264 S.C. 252, 214 S.E.2d 124 7 (S.C. 1975), the court recognized the existence of a trustee’s duty 8 to deal impartially with two or more beneficiaries. See also 9 Restatement, Second, Trusts Section 183. 10 11 Section 62-7-804. Prudent administration. 12 13 14 A trustee shall administer the trust as a prudent person would, 15 by considering the purposes, terms, distributional requirements, 16 and other circumstances of the trust. In satisfying this standard, 17 the trustee shall exercise reasonable care, skill, and caution. 18 19 Comment 20 21 The duty to administer a trust with prudence is a fundamental 22 duty of the trustee. This duty does not depend on whether the 23 trustee receives compensation. The duty may be altered by the 24 terms of the trust. See Section 105. This section is similar to 25 Section 2(a) of the Uniform Prudent Investor Act and Restatement 26 (Third) of Trusts: Prudent Investor Rule Section 227 (1992). 27 The language of this section diverges from the language of the 28 previous Restatement. The prior Restatement can be read as 29 applying the same standard - “man of ordinary prudence would 30 exercise in dealing with his own property” - regardless of the type 31 or purposes of the trust. See Restatement (Second) of Trusts 32 Section 174 cmt. a (1959). This section appropriately bases the 33 standard on the purposes and other circumstances of the particular 34 trust. 35 A settlor who wishes to modify the standard of care specified in 36 this section is free to do so, but there is a limit. Section 1008 37 prohibits a settlor from exculpating a trustee from liability for 38 breach of trust committed in bad faith or with reckless indifference 39 to the purposes of the trust or to the interests of the beneficiaries. 40 41 South Carolina Comments 421 [422] 216 1 Former SCPC Section 62-7-702(2) defined a prudent man as a 2 trustee whose exercise of judgment and care complies with the 3 requirements of former Section 62-7-302, which is retained and 4 incorporated in Part 9. 5 6 Section 62-7-805. Costs of administration. 7 8 In administering a trust, the trustee may incur only costs that are 9 reasonable in relation to the trust property, the purposes of the 10 trust, and the skills of the trustee. 11 12 Comment 13 14 This section is similar to Section 7 of the Uniform Prudent 15 Investor Act and is consistent with the rules concerning costs in 16 Restatement (Third) of Trusts: Prudent Investor Rule 17 Section 227(c)(3) (1992). For related rules concerning 18 compensation and reimbursement of trustees, see Sections 708 and 19 709. The duty not to incur unreasonable costs applies when a 20 trustee decides whether and how to delegate to agents, as well as to 21 other aspects of trust administration. In deciding whether and how 22 to delegate, the trustee must be alert to balancing projected 23 benefits against the likely costs. To protect the beneficiary against 24 excessive costs, the trustee should also be alert to adjusting 25 compensation for functions which the trustee has delegated to 26 others. The obligation to incur only necessary or appropriate costs 27 of administration has long been part of the law of trusts. See 28 Restatement (Second) of Trusts Section 188 (1959). 29 30 South Carolina Comment 31 32 Former SCPC Section 62-7-302(F)(3), retained and incorporated 33 in Part 9, provided similarly. 34 35 Section 62-7-806. Trustee’s skills. 36 37 A trustee who has special skills or expertise, or is named trustee 38 in reliance upon the trustee’s representation that the trustee has 39 special skills or expertise, shall use those special skills or 40 expertise. 41 42 Comment 431 [422] 217 1 This section is similar to Section 7-302 of the Uniform Probate 2 Code, Restatement (Second) of Trusts Section 174 (1959), and 3 Section 2(f) of the Uniform Prudent Investor Act. 4 5 South Carolina Comment 6 7 Former SCPC Section 62-7-302(C)(6), retained and 8 incorporated in Part 9, provided similarly. 9 10 Section 62-7-807. Delegation by trustee. 11 12 (a) A trustee may delegate duties and powers that a prudent 13 trustee of comparable skills could properly delegate under the 14 circumstances. The trustee shall exercise reasonable care, skill, 15 and caution in: 16 (1) selecting an agent; 17 (2) establishing the scope and terms of the delegation, 18 consistent with the purposes and terms of the trust; and 19 (3) periodically reviewing the agent’s actions in order to 20 monitor the agent’s performance and compliance with the terms of 21 the delegation. 22 (b) In performing a delegated function, an agent owes a duty to 23 the trust to exercise reasonable care to comply with the terms of 24 the delegation. 25 (c) A trustee who complies with subsection (a) is not liable to 26 the beneficiaries or to the trust for an action of the agent to whom 27 the function was delegated. 28 (d) By accepting a delegation of powers or duties from the 29 trustee of a trust that is subject to the law of this State, an agent 30 submits to the jurisdiction of the courts of this State. 31 32 Comment 33 34 This section permits trustees to delegate various aspects of trust 35 administration to agents, subject to the standards of the section. 36 The language is derived from Section 9 of the Uniform Prudent 37 Investor Act. See also John H. Langbein, Reversing the 38 Nondelegation Rule of Trust Investment Law, 59 Mo. L. Rev. 105 39 (1994) (discussing prior law). 40 This section encourages and protects the trustee in making 41 delegations appropriate to the facts and circumstances of the 42 particular trust. Whether a particular function is delegable is based 43 on whether it is a function that a prudent trustee might delegate1 [422] 218 1 under similar circumstances. For example, delegating some 2 administrative and reporting duties might be prudent for a family 3 trustee but unnecessary for a corporate trustee. 4 This section applies only to delegation to agents, not to 5 delegation to a cotrustee. For the provision regulating delegation 6 to a cotrustee, see Section 703(e). 7 South Carolina Comment 8 9 Former SCPC Section 62-7-302(H)(1), retained and 10 incorporated in Part 9, provided similarly. 11 12 Section 62-7-808. Powers to direct. 13 14 (a) While a trust is revocable, the trustee may follow a 15 direction of the settlor that is contrary to the terms of the trust. 16 (b) If the terms of a trust confer upon a person other than the 17 settlor of a revocable trust power to direct certain actions of the 18 trustee, the trustee shall act in accordance with an exercise of the 19 power unless the attempted exercise is manifestly contrary to the 20 terms of the trust or the trustee knows the attempted exercise 21 would constitute a serious breach of a fiduciary duty that the 22 person holding the power owes to the beneficiaries of the trust. 23 (c) The terms of a trust may confer upon a trustee or other 24 person a power to direct the modification or termination of the 25 trust. 26 (d) A person, other than a beneficiary, who holds a power to 27 direct is presumptively a fiduciary who, as such, is required to act 28 in good faith with regard to the purposes of the trust and the 29 interests of the beneficiaries. The holder of a power to direct is 30 liable for any loss that results from breach of a fiduciary duty. 31 32 Comment 33 34 Subsection (a) is an application of Section 603(a), which 35 provides that a revocable trust is subject to the settlor’s exclusive 36 control as long as the settlor has capacity. Because of the settlor’s 37 degree of control, subsection (a) of this section authorizes a trustee 38 to rely on a direction from the settlor even if it is contrary to the 39 terms of the trust. The direction of the settlor might be regarded as 40 an amendment of the trust. Subsection (a) has limited application 41 upon a settlor’s incapacity. An agent, conservator, or guardian 42 has, authority to give the trustee instructions contrary to the terms 43 of the trust only if the agent, conservator, or guardian succeeds to1 [422] 219 1 the settlor’s powers with respect to revocation, amendment, or 2 distribution as provided in Section 602(e). 3 Subsections (b)-(d) ratify the use of trust protectors and 4 advisers. Subsections (b) and (d) are based in part on Restatement 5 (Second) of Trusts Section 185 (1959). Subsection (c) is similar to 6 Restatement (Third) of Trusts Section 64(2) (Tentative Draft 7 No. 3, approved 2001). “Advisers” have long been used for 8 certain trustee functions, such as the power to direct investments or 9 manage a closely-held business. “Trust protector,” a term largely 10 associated with offshore trust practice, is more recent and usually 11 connotes the grant of greater powers, sometimes including the 12 power to amend or terminate the trust. Subsection (c) ratifies the 13 recent trend to grant third persons such broader powers. 14 A power to direct must be distinguished from a veto power. A 15 power to direct involves action initiated and within the control of a 16 third party. The trustee usually has no responsibility other than to 17 carry out the direction when made. But if a third party holds a 18 veto power, the trustee is responsible for initiating the decision, 19 subject to the third party’s approval. A trustee who administers a 20 trust subject to a veto power occupies a position akin to that of a 21 cotrustee and is responsible for taking appropriate action if the 22 third party’s refusal to consent would result in a serious breach of 23 trust. See Restatement (Second) of Trusts Section 185 cmt. g 24 (1959); Section 703(g) (duties of cotrustees). 25 Frequently, the person holding the power is directing the 26 investment of the holder’s own beneficial interest. Such 27 self-directed accounts are particularly prevalent among trusts 28 holding interests in employee benefit plans or individual retirement 29 accounts. See ERISA Section 404(c) (29 U.S.C. Section 1104(c)). 30 But for the type of donative trust which is the primary focus of this 31 Code, the holder of the power to direct is frequently acting on 32 behalf of others. In that event and as provided in subsection (d), 33 the holder is presumptively acting in a fiduciary capacity with 34 respect to the powers granted and can be held liable if the holder’s 35 conduct constitutes a breach of trust, whether through action or 36 inaction. Like a trustee, liability cannot be imposed if the holder 37 has not accepted the grant of the power either expressly or 38 informally through exercise of the power. See Section 701. 39 Powers to direct are most effective when the trustee is not 40 deterred from exercising the power by fear of possible liability. 41 On the other hand, the trustee does have overall responsibility for 42 seeing that the terms of the trust are honored. For this reason, 43 subsection (b) imposes only minimal oversight responsibility on1 [422] 220 1 the trustee. A trustee must generally act in accordance with the 2 direction. A trustee may refuse the direction only if the attempted 3 exercise would be manifestly contrary to the terms of the trust or 4 the trustee knows the attempted exercise would constitute a serious 5 breach of a fiduciary duty owed by the holder of the power to the 6 beneficiaries of the trust. 7 The provisions of this section may be altered in the terms of the 8 trust. See Section 105. A settlor can provide that the trustee must 9 accept the decision of the power holder without question. Or a 10 settlor could provide that the holder of the power is not to be held 11 to the standards of a fiduciary. A common technique for assuring 12 that a settlor continues to be taxed on all of the income of an 13 irrevocable trust is for the settlor to retain a nonfiduciary power of 14 administration. See I.R.C. Section 675(4). 15 16 South Carolina Comment 17 18 There was no prior South Carolina statutory or case law 19 counterpart. 20 21 Section 62-7-809. Control and protection of trust property. 22 23 A trustee shall take reasonable steps to take control of and 24 protect the trust property. 25 26 Comment 27 28 This section codifies the substance of Sections 175 and 176 of 29 the Restatement (Second) of Trusts (1959). The duty to take 30 control of and safeguard trust property is an aspect of the trustee’s 31 duty of prudent administration as provided in Section 804. See 32 also Sections 816(1) (power to collect trust property), 816(11) 33 (power to insure trust property), and 816(12) (power to abandon 34 trust property). The duty to take control normally means that the 35 trustee must take physical possession of tangible personal property 36 and securities belonging to the trust, and must secure payment of 37 any choses in action. See Restatement (Second) of Trusts 38 Section 175 cmt. a, c & d (1959). This section, like the other 39 sections in this article, is subject to alteration by the terms of the 40 trust. See Section 105. For example, the settlor may provide that 41 the spouse may occupy the settlor’s former residence rent free, in 42 which event the spouse’s occupancy would prevent the trustee 43 from taking possession.1 [422] 221 1 2 South Carolina Comment 3 4 There was no prior South Carolina statutory or case law 5 counterpart. 6 7 Section 62-7-810. Recordkeeping and identification of trust 8 property. 9 10 (a) A trustee shall keep adequate records of the administration 11 of the trust. 12 (b) A trustee shall keep trust property separate from the 13 trustee’s own property. 14 (c) Except as otherwise provided in subsection (d), a trustee 15 shall cause the trust property to be designated so that the interest of 16 the trust, to the extent feasible, appears in records maintained by a 17 party other than a trustee or beneficiary. 18 (d) If the trustee maintains records clearly indicating the 19 respective interests, a trustee may invest as a whole the property of 20 two or more separate trusts. 21 22 Comment 23 24 The duty to keep adequate records stated in subsection (a) is 25 implicit in the duty to act with prudence (Section 804) and the duty 26 to report to beneficiaries (Section 813). For an application, see 27 Green v. Lombard, 343 A. 2d 905, 911 (Md. Ct. Spec. App. 1975). 28 See also Restatement (Second) of Trusts Sections 172, 174 (1959). 29 The duty to earmark trust assets and the duty of a trustee not to 30 mingle the assets of the trust with the trustee’s own are closely 31 related. Subsection (b), which addresses the duty not to mingle, is 32 derived from Section 179 of the Restatement (Second) of Trusts 33 (1959). Subsection (c) makes the requirement that assets be 34 earmarked more precise than that articulated in Restatement 35 (Second) Section 179 by requiring that the interest of the trust 36 must appear in the records of a third party, such as a bank, 37 brokerage firm, or transfer agent. Because of the serious risk of 38 mistake or misappropriation even if disclosure is made to the 39 beneficiaries, showing the interest of the trust solely in the 40 trustee’s own internal records is insufficient. Section 816(7)(B), 41 which allows a trustee to hold securities in nominee form, is not 42 inconsistent with this requirement. While securities held in 43 nominee form are not specifically registered in the name of the1 [422] 222 1 trustee, they are properly earmarked because the trustee’s holdings 2 are indicated in the records maintained by an independent party, 3 such as in an account at a brokerage firm. 4 Earmarking is not practical for all types of assets. With respect 5 to assets not subject to registration, such as tangible personal 6 property and bearer bonds, arranging for the trust’s ownership 7 interest to be reflected on the records of a third-party custodian 8 would not be feasible. For this reason, subsection (c) waives 9 separate record keeping for these types of assets. Under 10 subsection (b), however, the duty of the trustee not to mingle these 11 or any other trust assets with the trustee’s own remains absolute. 12 Subsection (d), following the lead of a number of state statutes, 13 allows a trustee to use the property of two or more trusts to make 14 joint investments, even though under traditional principles a joint 15 investment would violate the duty to earmark. A joint investment 16 frequently is more economical than attempting to invest the funds 17 of each trust separately. Also, the risk of misappropriation or 18 mistake is less when the trust property is invested jointly with the 19 property of another trust than when pooled with the property of the 20 trustee or other person. 21 22 South Carolina Comment 23 24 There was no prior South Carolina statutory or case law 25 counterpart. 26 This Section is related to Section 62-7-813, which requires the 27 trustee to keep the beneficiaries reasonably informed about the 28 administration of the trust. 29 Subsection (c) allows the trustee to maintain assets in nominee 30 name rather than holding individual assets in the name of the 31 trustee. 32 Subsection (d) allows a trustee to use the property of two or 33 more trusts to make joint investments. This allows the use of 34 common trust funds or mutual funds which can be an economical 35 method of managing assets of the trust. 36 37 Section 62-7-811. Enforcement and defense of claims. 38 39 A trustee shall take reasonable steps to enforce claims of the 40 trust and to defend claims against the trust. 41 42 Comment 431 [422] 223 1 This section codifies the substance of Sections 177 and 178 of 2 the Restatement (Second) of Trusts (1959). It may not be 3 reasonable to enforce a claim depending upon the likelihood of 4 recovery and the cost of suit and enforcement. It might also be 5 reasonable to settle an action or suffer a default rather than to 6 defend an action. See also Section 816(14) (power to pay, contest, 7 settle, or release claims). 8 9 South Carolina Comment 10 11 This section does not impose any new duties upon trustees. It 12 has been held in South Carolina that a trustee who fails to collect 13 upon a debt owed the trust, or to make an effort to do so, is liable 14 to the trust. Neely v. Peoples Bank of Anderson, 133 S.C. 43, 130 15 S.E. 550 (S.C. 1925). See also former SCPC Section 62-7-704(c) 16 (19), which provided that a trustee had the power to pay or contest 17 claims, settle claims by or against the trust, and to release claims 18 owned by the trust, which is similar to SCTC Section 19 62-7-816(14). 20 21 Section 62-7-812. Exercise of powers by joint trustees; 22 successor trustees; liability. 23 24 Unless directed otherwise by the court or by the trust instrument, 25 a successor trustee appointed by the court or by the trust 26 instrument succeeds to all the powers, duties, and discretionary 27 authority given to the predecessor trustee. Upon reasonable 28 request, a successor trustee is entitled to a statement of the 29 accounts of the trust from a predecessor trustee. A successor 30 trustee may accept the account rendered and shall be under no duty 31 to examine the acts or omissions of the predecessor trustee and 32 shall not be liable for failure to seek redress for any act or 33 omission of the predecessor trustee. The trustee of a testamentary 34 trust may accept the account rendered by a personal representative 35 and shall be under no duty to examine the acts or omissions of the 36 predecessor personal representative and shall not be liable for 37 failure to seek redress for any act or omission of the predecessor 38 personal representative. 39 40 South Carolina Comment 41 421 [422] 224 1 South Carolina Trust Code Section 62-7-812 does not adopt 2 Uniform Trust Code Section 812. Instead, SCTC Section 3 62-7-812 retains and incorporates former SCPC Section 4 62-7-707(c). SCTC Section 62-7-703 has provisions similar to 5 former SCPC Section 62-7-707(a), (b), and (d). 6 7 Section 62-7-813. Duty to inform and report. 8 9 (a) A trustee shall keep the qualified beneficiaries of the trust 10 reasonably informed about the administration of the trust and of 11 the material facts necessary for them to protect their interests. 12 Unless unreasonable under the circumstances, a trustee shall 13 promptly respond to a beneficiary’s request for information related 14 to the administration of the trust. 15 (b) A trustee: 16 (1) upon request of a beneficiary, shall promptly furnish to 17 the beneficiary a copy of the trust instrument; 18 (2) within 60 days after accepting a trusteeship, shall notify 19 the qualified beneficiaries of the acceptance and of the trustee’s 20 name, address, and telephone number; 21 (3) within 60 days after the date the trustee acquires 22 knowledge of the creation of an irrevocable trust, or the date the 23 trustee acquires knowledge that a formerly revocable trust has 24 become irrevocable, whether by the death of the settlor or 25 otherwise, shall notify the qualified beneficiaries of the trust’s 26 existence, of the identity of the settlor or settlors, of the right to 27 request a copy of the trust instrument, and of the right to a trustee’s 28 report as provided in subsection (c); and 29 (4) shall notify the qualified beneficiaries in advance of any 30 change in the method or rate of the trustee’s compensation. 31 (c) A trustee shall send to the distributees or permissible 32 distributees of trust income or principal, and to other qualified or 33 nonqualified beneficiaries who request it, at least annually and at 34 the termination of the trust, a report of the trust property, liabilities, 35 receipts, and disbursements, including the source and amount of 36 the trustee’s compensation, a listing of the trust assets and, if 37 feasible, their respective market values. Upon a vacancy in a 38 trusteeship, unless a cotrustee remains in office, a report must be 39 sent to the qualified beneficiaries by the former trustee. A 40 personal representative, conservator, or guardian may send the 41 qualified beneficiaries a report on behalf of a deceased or 42 incapacitated trustee.1 [422] 225 1 (d) A beneficiary may waive the right to a trustee’s report or 2 other information otherwise required to be furnished under this 3 section. A beneficiary, with respect to future reports and other 4 information, may withdraw a waiver previously given. 5 (e) Subsections (b)(2) and (b)(3) of this section apply only to a 6 trustee who accepts a trusteeship on or after the effective date of 7 this article, to an irrevocable trust created on or after the effective 8 date of this article, and to a revocable trust which becomes 9 irrevocable on or after the effective date of this article. 10 11 Comment 12 13 The duty to keep the beneficiaries reasonably informed of the 14 administration of the trust is a fundamental duty of a trustee. For 15 the common law duty to keep the beneficiaries informed, see 16 Restatement (Second) of Trusts Section 173 (1959). This section 17 makes the duty to keep the beneficiaries informed more precise by 18 limiting it to the qualified beneficiaries. For the definition of 19 qualified beneficiary, see Section 103(12). The result of this 20 limitation is that the information need not be furnished to 21 beneficiaries with remote remainder interests unless they have 22 filed a specific request with the trustee. See Section 110(a) 23 (request for notice). 24 For the extent to which a settlor may waive the requirements of 25 this section in the terms of the trust, see Section 105(b)(8)-(9). 26 The trustee is under a duty to communicate to a qualified 27 beneficiary information about the administration of the trust that is 28 reasonably necessary to enable the beneficiary to enforce the 29 beneficiary’s rights and to prevent or redress a breach of trust. See 30 Restatement (Second) of Trusts Section 173 cmt. c (1959). 31 Ordinarily, the trustee is not under a duty to furnish information to 32 a beneficiary in the absence of a specific request for the 33 information. See Restatement (Second) of Trusts Section 173 34 cmt. d (1959). Thus, the duty articulated in subsection (a) is 35 ordinarily satisfied by providing the beneficiary with a copy of the 36 annual report mandated by subsection (c). However, special 37 circumstances may require that the trustee provide additional 38 information. For example, if the trustee is dealing with the 39 beneficiary on the trustee’s own account, the trustee must 40 communicate material facts relating to the transaction that the 41 trustee knows or should know. See Restatement (Second) of 42 Trusts Section 173 cmt. d (1959). Furthermore, to enable the 43 beneficiaries to take action to protect their interests, the trustee1 [422] 226 1 may be required to provide advance notice of transactions 2 involving real estate, closely-held business interests, and other 3 assets that are difficult to value or to replace. See In re Green 4 Charitable Trust, 431 N.W. 2d 492 (Mich. Ct. App. 1988); Allard 5 v. Pacific National Bank, 663 P.2d 104 (Wash. 1983). The trustee 6 is justified in not providing such advance disclosure if disclosure is 7 forbidden by other law, as under federal securities laws, or if 8 disclosure would be seriously detrimental to the interests of the 9 beneficiaries, for example, when disclosure would cause the loss 10 of the only serious buyer. 11 Subsection (a) provides a different standard if a beneficiary, 12 whether qualified or not, makes a request for information. In that 13 event, the trustee must promptly comply with the beneficiary’s 14 request unless unreasonable under the circumstances. Further 15 supporting the principle that a beneficiary should be allowed to 16 make an independent assessment of what information is relevant to 17 protecting the beneficiary’s interest, subsection (b)(1) requires the 18 trustee on request to furnish a beneficiary with a complete copy of 19 the trust instrument and not merely with those portions the trustee 20 deems relevant to the beneficiary’s interest. For a case reaching 21 the same result, see Fletcher v. Fletcher, 480 S.E. 2d 488 (Va. Ct. 22 App. 1997). Subsection (b)(1) is contrary to Section 7-303(b) of 23 the Uniform Probate Code, which provides that “[u]pon reasonable 24 request, the trustee shall provide the beneficiary with a copy of the 25 terms of the trust which describe or affect his interest. . . .” 26 The drafters of this Code decided to leave open for further 27 consideration by the courts the extent to which a trustee may claim 28 attorney-client privilege against a beneficiary seeking discovery of 29 attorney-client communications between the trustee and the 30 trustee’s attorney. The courts are split because of the important 31 values that are in tension on this question. “The [attorney-client] 32 privilege recognizes that sound legal advice or advocacy serves 33 public ends and that such advice or advocacy depends upon the 34 lawyer’s being fully informed by the client.” Upjohn Co. v. 35 United States, 449 U.S. 383 (1981). On the other hand, 36 subsection (a) of this section requires that a trustee keep the 37 qualified beneficiaries reasonably informed about the 38 administration of the trust and of the material facts necessary for 39 them to protect their interests, which could include facts that the 40 trustee has revealed only to the trustee’s attorney. There is 41 authority for the view that the trustee is estopped from pleading 42 attorney-client privilege in such circumstances. In the leading 43 case, Riggs National Bank v. Zimmer, 355 A.2d 709, 713 (Del. Ch.1 [422] 227 1 1976), the court reasoned that the beneficiary, not the trustee, is the 2 attorney’s client: “As a representative for the beneficiaries of the 3 trust which he is administering, the trustee is not the real 4 client . . . .” This beneficiary-as-client theory has been criticized 5 on the ground that it conflicts with the trustee’s fiduciary duty to 6 implement the intentions of the settlor, which are sometimes in 7 tension with the wishes of one or more beneficiaries. See Louis H. 8 Hamel, Jr., Trustee’s Privileged Counsel: A Rebuttal, 21 ACTEC 9 Notes 156 (1995); Charles F. Gibbs & Cindy D. Hanson, The 10 Fiduciary Exception to a Trustee’s Attorney/Client Privilege, 21 11 ACTEC Notes 236 (1995). Prominent decisions in California and 12 Texas have refused to follow Delaware in recognizing an 13 exception for the beneficiary against the trustee’s attorney-client 14 privilege. Wells Fargo Bank v. Superior Court (Boltwood), 990 15 P.2d 591 (Cal. 2000); Huie v. De Shazo, 922 S.W. 2d 920 (Tex. 16 1996). The beneficiary-as-client theory continues to be applied to 17 ERISA trusts. See, e.g., United States v. Mett, 178 F.3d 1058, 18 1062-64 (9th Cir. 1999). However, in a pension trust the 19 beneficiaries are the settlors of their own trust because the trust is 20 funded with their own earnings. Accordingly, in ERISA 21 attorney-client cases “[t]here are no competing interests such as 22 other stockholders or the intentions of the Settlor.” Gibbs & 23 Hanson, 21 ACTEC Notes at 238. For further discussion of the 24 attorney-client privilege and whether there is a duty to disclose to 25 the beneficiaries, see ACTEC Commentaries on the Model Rules 26 of Professional Conduct, Commentary on MRPC 1.2 (3d ed. 27 1999); Rust E. Reid et al., Privilege and Confidentiality Issues 28 When a Lawyer Represents a Fiduciary, 30 Real Prop. Prob. & Tr. 29 J. 541 (1996). 30 To enable beneficiaries to protect their interests effectively, it is 31 essential that they know the identity of the trustee. Subsection (b) 32 (2) requires that a trustee inform the qualified beneficiaries within 33 60 days of the trustee’s acceptance of office and of the trustee’s 34 name, address and telephone number. Similar to the obligation 35 imposed on a personal representative following admission of the 36 will to probate, subsection (b)(3) requires the trustee of a revocable 37 trust to inform the qualified beneficiaries of the trust’s existence 38 within 60 days after the settlor’s death. These two duties can 39 overlap. If the death of the settlor happens also to be the occasion 40 for the appointment of a successor trustee, the new trustee of the 41 formerly revocable trust would need to inform the qualified 42 beneficiaries both of the trustee’s acceptance and of the trust’s 43 existence.1 [422] 228 1 Subsection (b)(4) deals with the sensitive issue of changes, 2 usually increases, in trustee compensation. Changes can include 3 changes in a periodic base fee, rate of percentage compensation, 4 hourly rate, termination fee, or transaction charge. Regarding the 5 standard for setting trustee compensation, see Section 708 and 6 Comment. 7 Subsection (c) requires the trustee to furnish the current 8 beneficiaries and other beneficiaries who request it with a copy of 9 a trustee’s report at least annually and upon termination of the 10 trust. Unless a cotrustee remains in office, the former trustee also 11 must provide a report to all of the qualified beneficiaries upon the 12 trustee’s resignation or removal. If the vacancy occurred because 13 of the former trustee’s death or adjudication of incapacity, a report 14 may, but need not be provided by the former trustee’s personal 15 representative, conservator, or guardian. 16 The Uniform Trust Code employs the term “report” instead of 17 “accounting” in order to negate any inference that the report must 18 be prepared in any particular format or with a high degree of 19 formality. The reporting requirement might even be satisfied by 20 providing the beneficiaries with copies of the trust’s income tax 21 returns and monthly brokerage account statements if the 22 information on those returns and statements is complete and 23 sufficiently clear. The key factor is not the format chosen but 24 whether the report provides the beneficiaries with the information 25 necessary to protect their interests. For model account forms, 26 together with practical advice on how to prepare reports, see 27 Robert Whitman, Fiduciary Accounting Guide (2d ed. 1998). 28 Subsection (d) allows trustee reports and other required 29 information to be waived by a beneficiary. A beneficiary may also 30 withdraw a consent. However, a waiver of a trustee’s report or 31 other information does not relieve the trustee from accountability 32 and potential liability for matters that the report or other 33 information would have disclosed. 34 35 South Carolina Comment 36 37 The corresponding section under the former law was SCPC 38 Section 62-7-303, which required a trustee to notify requisite 39 beneficiaries within 30 days of becoming the trustee of an 40 irrevocable trust of the existence of the trust and, upon request, to 41 provide a copy of the trust document and periodic accountings. 42 SCTC Section 62-7-813 expands upon these trustee 43 responsibilities. The former SCPC 30-day notice period is1 [422] 229 1 expanded to 60 days after accepting a trusteeship or having 2 knowledge that a trust is no longer irrevocable. Section 62-7-813 3 clarifies and codifies the trustee’s general responsibility to keep 4 the beneficiaries reasonably informed about the administration of 5 the trust and of the material facts necessary to protect their 6 respective interests. Section 62-7-813 also specifically grants to 7 the beneficiary a right to waive the right to receive a trust report. 8 This section includes subsection (e), which is included in the 9 2004 Amendments to the UTC. 10 11 Section 62-7-814. Discretionary powers; tax savings. 12 13 (a) Notwithstanding the breadth of discretion granted to a 14 trustee in the terms of the trust, including the use of such terms as 15 ‘absolute’, ‘sole’, or ‘uncontrolled’, the trustee shall exercise a 16 discretionary power in good faith and in accordance with the terms 17 and purposes of the trust and the interests of the beneficiaries. 18 (b) A power whose exercise is limited or prohibited by 19 subsection (d) may be exercised by a majority of the remaining 20 trustees whose exercise of the power is not so limited or 21 prohibited. If the power of all trustees is so limited or prohibited, 22 the court may appoint a special fiduciary with authority to exercise 23 the power. 24 (c) Subject to subsection (d), and unless the application of this 25 section is clearly and convincingly negated in the will, the trust 26 document, terms of the trust, or a written instrument appointing a 27 fiduciary, expressly indicating that a rule in this subsection does 28 not apply, any power conferred upon the fiduciary, in his capacity 29 as a fiduciary (and not including any power conferred upon him in 30 his capacity as a beneficiary), which would, except for this section, 31 constitute, in whole or in part, a general power of appointment 32 cannot be exercised by him in favor of himself, his estate, his 33 creditors, or the creditors of his estate. 34 (1) The fiduciary can, however, exercise the power in favor 35 of someone other than himself, his estate, his creditors and the 36 creditors of his estate. 37 (2) If a power comes within subsection (c) and the power is 38 conferred upon two or more fiduciaries, it can be exercised by the 39 fiduciary or the fiduciaries who are not disqualified from 40 exercising the power as if they were the only fiduciary or 41 fiduciaries. 42 (3) If all of the serving fiduciaries are disqualified from 43 exercising a power, the court that would have jurisdiction to1 [422] 230 1 appoint a fiduciary under the instrument, if there were no fiduciary 2 currently serving, shall exercise, or shall appoint a special 3 fiduciary whose only power is to exercise the power that cannot be 4 exercised by the other fiduciaries by reason of subsection (c). 5 (4) A trustee may not exercise a power to make discretionary 6 distributions to satisfy a legal obligation of support that the trustee 7 personally owes another person. 8 (d) Subsection (c) does not apply to: 9 (1) a power held by the settlor’s spouse who is the trustee of 10 a trust for which a marital deduction, as defined in Section 2056(b) 11 (5) or 2523(e) of the Internal Revenue Code, as amended, was 12 previously allowed; 13 (2) any trust during any period that the trust may be revoked 14 or amended by its settlor; or 15 (3) a trust if contributions to the trust qualify for the annual 16 exclusion under Section 2503(c) of the Internal Revenue Code as 17 amended. 18 19 Comment 20 21 Despite the breadth of discretion purportedly granted by the 22 wording of a trust, no grant of discretion to a trustee, whether with 23 respect to management or distribution, is ever absolute. A grant of 24 discretion establishes a range within which the trustee may act. 25 The greater the grant of discretion, the broader the range. Pursuant 26 to subsection (a), a trustee’s action must always be in good faith, 27 with regard to the purposes of the trust, and in accordance with the 28 trustee’s other duties, including the obligation to exercise 29 reasonable skill, care and caution. See Sections 801 (duty to 30 administer trust) and 804 (duty to act with prudence). The 31 standard stated in subsection (a) applies only to powers which are 32 to be exercised in a fiduciary as opposed to a nonfiduciary 33 capacity. Regarding the standards for exercising discretion and 34 construing particular language of discretion, see Restatement 35 (Third) of Trusts Section 50 (Tentative Draft No. 2, approved 36 1999); Restatement (Second) of Trusts Section 187 (1959). See 37 also Edward C. Halbach, Jr., Problems of Discretion in 38 Discretionary Trusts, 61 Colum. L. Rev. 1425 (1961). An abuse 39 by the trustee of the discretion granted in the terms of the trust is a 40 breach of trust that can result in surcharge. See Section 1001(b) 41 (remedies for breach of trust). 42 Subsections (b) through (d) rewrite the terms of a trust that 43 might otherwise result in adverse estate and gift tax consequences1 [422] 231 1 to a beneficiary-trustee. This Code does not generally address the 2 subject of tax curative provisions. These are provisions that 3 automatically rewrite the terms of trusts that might otherwise fail 4 to qualify for probable intended tax benefits. Such provisions, 5 because they apply to all trusts using or failing to use specified 6 language, are often overbroad, applying not only to trusts intended 7 to qualify for tax benefits but also to smaller trust situations where 8 taxes are not a concern. Enacting tax-curative provisions also 9 requires special diligence by state legislatures to make certain that 10 these provisions are periodically amended to account for the 11 frequent changes in federal tax law. Furthermore, many failures to 12 draft with sufficient care may be correctable by including a tax 13 savings clause in the terms of the trust or by seeking modification 14 of the trust using one or more of the methods authorized by 15 Sections 411-417. Notwithstanding these reasons, the unintended 16 inclusion of the trust in the beneficiary-trustee’s gross estate is a 17 frequent enough occurrence that the drafters concluded that it is a 18 topic that this Code should address. It is also a topic on which 19 numerous States have enacted corrective statutes. 20 A tax curative provision differs from a statute such as 21 Section 416 of this Code, which allows a court to modify a trust to 22 achieve an intended tax benefit. Absent Congressional or 23 regulatory authority authorizing the specific modification, a lower 24 court decree in state court modifying a trust is controlling for 25 federal estate tax purposes only if the decree was issued before the 26 taxing event, which in the case of the estate tax would be the 27 decedent’s death. See Rev. Rul. 73-142, 1973-1 C.B. 405. There 28 is specific federal authority authorizing modification of trusts for a 29 number of reasons (see Comment to Section 416) but not on the 30 specific issues addressed in this section. Subsections (b) through 31 (d), by interpreting the original language of the trust instrument in 32 a way that qualifies for intended tax benefits, obviates the need to 33 seek a later modification of the trust. 34 Subsection (b)(1) states the main rule. Unless the terms of the 35 trust expressly indicate that the rule in this subsection is not to 36 apply, the power to make discretionary distributions to a 37 beneficiary-trustee is automatically limited by the requisite 38 ascertainable standard necessary to avoid inclusion of the trust in 39 the trustee’s gross estate or result in a taxable gift upon the 40 trustee’s release or exercise of the power. Trusts of which the 41 trustee-beneficiary is also a settlor are not subject to this 42 subsection. In such a case, limiting the discretion of a 43 settlor-trustee to an ascertainable standard would not be sufficient1 [422] 232 1 to avoid inclusion of the trust in the settlor’s gross estate. See 2 generally John J. Regan, Rebecca C. Morgan & David M. English, 3 Tax, Estate and Financial Planning for the Elderly 4 Section 17.07[2][h]. Furthermore, the inadvertent inclusion of a 5 trust in a settlor-trustee’s gross estate is a far less frequent and 6 better understood occurrence than is the inadvertent inclusion of 7 the trust in the estate of a nonsettlor trustee-beneficiary. 8 Subsection (b)(2) addresses a common trap, the trustee who is 9 not a beneficiary but who has power to make discretionary 10 distributions to those to whom the trustee owes a legal obligation 11 of support. Discretion to make distributions to those to whom the 12 trustee owes a legal obligation of support, such as to the trustee’s 13 minor children, results in inclusion of the trust in the trustee’s 14 gross estate even if the power is limited by an ascertainable 15 standard. The applicable regulation provides that the ascertainable 16 standard exception applies only to distributions for the benefit of 17 the decedent, not to distributions to those to whom the decedent 18 owes a legal obligation of support. See Treas. Reg. 19 Section 20.2041-1(c)(2). 20 Subsection (c) deals with cotrustees and adopts the common 21 planning technique of granting the broader discretion only to the 22 independent trustee. Cotrustees who are beneficiaries of the trust 23 or who have a legal obligation to support a beneficiary may 24 exercise the power only as limited by subsection (b). If all trustees 25 are so limited, the court may appoint a special fiduciary to make a 26 decision as to whether a broader exercise is appropriate. 27 Subsection (d) excludes certain trusts from the operation of this 28 section. Trusts qualifying for the marital deduction will be 29 includable in the surviving spouse’s gross estate regardless of 30 whether this section applies. Consequently, if the spouse is acting 31 as trustee, there is no need to limit the power of the spouse-trustee 32 to make discretionary distributions for the spouse’s benefit. 33 Similar reasoning applies to the revocable trust, which, because of 34 the settlor’s power to revoke, is automatically includable in the 35 settlor’s gross estate even if the settlor is not named as a 36 beneficiary. 37 QTIP marital trusts are subject to this section, however. QTIP 38 trusts qualify for the marital deduction only if so elected on the 39 federal estate tax return. Excluding a QTIP for which an election 40 has been made from the operation of this section would allow the 41 terms of the trust to be modified after the settlor’s death. By not 42 making the QTIP election, an otherwise unascertainable standard 43 would be limited. By making the QTIP election, the trustee’s1 [422] 233 1 discretion would not be curtailed. This ability to modify a trust 2 depending on elections made on the federal estate tax return could 3 itself constitute a taxable power of appointment resulting in 4 inclusion of the trust in the surviving spouse’s gross estate. 5 The exclusion of the Section 2503(c) minors trust is necessary to 6 avoid loss of gift tax benefits. While preventing a trustee from 7 distributing trust funds in discharge of a legal obligation of support 8 would keep the trust out of the trustee’s gross estate, such a 9 restriction might result in loss of the gift tax annual exclusion for 10 contributions to the trust, even if the trustee were otherwise 11 granted unlimited discretion. See Rev. Rul. 69-345, 1969-1 C.B. 12 226. 13 14 South Carolina Comment 15 16 The corresponding statute under the former South Carolina law 17 was SCPC Section 62-7-603. The intent of both SCPC Section 18 62-7-603 and SCTC Section 62-7-814 is to avoid inadvertent 19 income tax and estate tax consequences that might result under 20 certain circumstances where a beneficiary is also serving as a 21 trustee. 22 The introductory language to subsection (A) of former SCPC 23 Section 62-7-603 appears to be more demonstrative than the 24 corresponding language of Uniform Trust Code Section 814(b). 25 Consequently, SCTC Section 62-7-814 incorporates that 26 introductory clause from former SCPC Section 62-7-603 (A) that 27 SCTC Section 62-7-814 does not limit the intent and protection of 28 former SCPC Section 62-7-603. 29 Former SCPC Section 62-7-603 also limited certain fiduciary 30 powers so that the trustee was not deemed to have a general power 31 of appointment. A corresponding clause was not expressly 32 contained in the UTC version of Section 814. Thus, the 33 appropriate language from former SCPC Section 62-7-603 is 34 included at SCTC Section 62-7-814(c). 35 36 Section 62-7-815. General powers of trustee. 37 38 (a) A trustee, without authorization by the court, may exercise: 39 (1) powers conferred by the terms of the trust; and 40 (2) except as limited by the terms of the trust: 41 (A) all powers over the trust property which an unmarried 42 competent owner has over individually owned property;1 [422] 234 1 (B) any other powers appropriate to achieve the proper 2 investment, management, and distribution of the trust property; 3 and 4 (C) any other powers conferred by this part. 5 (b) The exercise of a power is subject to the fiduciary duties 6 prescribed by this part. 7 8 Comment 9 10 This section is intended to grant trustees the broadest possible 11 powers, but to be exercised always in accordance with the duties of 12 the trustee and any limitations stated in the terms of the trust. This 13 broad authority is denoted by granting the trustee the powers of an 14 unmarried competent owner of individually owned property, 15 unlimited by restrictions that might be placed on it by marriage, 16 disability, or cotenancy. 17 The powers conferred elsewhere in this Code that are subsumed 18 under this section include all of the specific powers listed in 19 Section 816 as well as other powers described elsewhere in this 20 Code. See Sections 108(c) (transfer of principal place of 21 administration), 414(a) (termination of uneconomic trust with 22 value less than $50,000), 417 (combination and division of trusts), 23 703(e) (delegation to cotrustee), 802(h) (exception to duty of 24 loyalty), 807 (delegation to agent of powers and duties), 810(d) 25 (joint investments), and Article 9 (Uniform Prudent Investor Act). 26 The powers conferred by this Code may be exercised without court 27 approval. If court approval of the exercise of a power is desired, a 28 petition for court approval should be filed. 29 A power differs from a duty. A duty imposes an obligation or a 30 mandatory prohibition. A power, on the other hand, is a discretion, 31 the exercise of which is not obligatory. The existence of a power, 32 however created or granted, does not speak to the question of 33 whether it is prudent under the circumstances to exercise the 34 power. 35 36 2003 Amendment. The amendment, which changes an “or” to 37 an “and” between subsections (a)(1) and (a)(2), corrects an 38 inadvertent style glitch. As the comments to Section 815 make 39 clear, the drafters intended that the trustee have both the powers 40 stated in the terms of the trust and the powers specified in this Act, 41 not that they be alternatives. 42 43 South Carolina Comment1 [422] 235 1 2 Former SCPC Section 62-7-704 contained the default powers 3 that were available to all trustees when the trust instrument did not 4 provide specific powers. Former SCPC Section 62-7-704 granted 5 general powers that a prudent person would perform incident to the 6 collection, preservation, management, use and distribution of the 7 trust estate, and it also contained various specific powers. SCTC 8 Section 62-7-815 broadens the former SCPC list of powers that 9 apply to all trustees by stating that a trustee has all of the powers 10 over trust property that an individual has over his own property. 11 12 Section 62-7-816. Specific powers of trustee. 13 14 Without limiting the authority conferred by Section 62-7-815, a 15 trustee may: 16 (1) collect trust property and accept or reject additions to the 17 trust property from a settlor or any other person; 18 (2) acquire or sell property, for cash or on credit, at public or 19 private sale; 20 (3) exchange, partition, or otherwise change the character of 21 trust property; 22 (4) deposit trust money in accounts – all types including 23 margin accounts – in a regulated financial-service institution; 24 (5) borrow money, with or without security, and mortgage or 25 pledge trust property for a period within or extending beyond the 26 duration of the trust; 27 (6) with respect to an interest in a proprietorship, partnership, 28 limited liability company, business trust, corporation, or other 29 form of business or enterprise, create and/or continue a business or 30 other enterprise and take any action that may be taken by 31 shareholders, members, or property owners, including merging, 32 dissolving, or otherwise changing the form of business 33 organization or contributing additional capital; 34 (7) with respect to stocks or other securities, exercise the rights 35 of an absolute owner, including the right to: 36 (A) vote, or give proxies to vote, with or without power of 37 substitution, or enter into or continue a voting trust agreement; 38 (B) hold a security in the name of a nominee or in other form 39 without disclosure of the trust so that title may pass by delivery; 40 (C) pay calls, assessments, and other sums chargeable or 41 accruing against the securities, and sell or exercise stock 42 subscription or conversion rights; and1 [422] 236 1 (D) deposit the securities with a depositary or other regulated 2 financial-service institution; 3 (8) with respect to an interest in real property, construct, or 4 make ordinary or extraordinary repairs to, alterations to, or 5 improvements in, buildings or other structures, demolish 6 improvements, raze existing or erect new party walls or buildings, 7 subdivide or develop land, dedicate land to public use or grant 8 public or private easements, including by way of example qualified 9 conservation and façade easements, and make or vacate plats and 10 adjust boundaries; 11 (9) enter into a lease for any purpose as lessor or lessee, 12 including a lease or other arrangement for exploration and removal 13 of natural resources, with or without the option to purchase or 14 renew, for a period within or extending beyond the duration of the 15 trust; 16 (10) grant an option involving a sale, lease, or other disposition 17 of trust property or acquire an option for the acquisition of 18 property, including an option exercisable beyond the duration of 19 the trust, and exercise an option so acquired; 20 (11) insure the property of the trust against damage or loss and 21 insure the trustee, the trustee’s agents, and beneficiaries against 22 liability arising from the administration of the trust; 23 (12) abandon or decline to administer property of no value or of 24 insufficient value to justify its collection or continued 25 administration; 26 (13) with respect to possible liability for violation of 27 environmental law: 28 (A) inspect or investigate property the trustee holds or has 29 been asked to hold, or property owned or operated by an 30 organization in which the trustee holds or has been asked to hold 31 an interest, for the purpose of determining the application of 32 environmental law with respect to the property; 33 (B) take action to prevent, abate, or otherwise remedy any 34 actual or potential violation of any environmental law affecting 35 property held directly or indirectly by the trustee, whether taken 36 before or after the assertion of a claim or the initiation of 37 governmental enforcement; 38 (C) decline to accept property into trust or disclaim any 39 power with respect to property that is or may be burdened with 40 liability for violation of environmental law; 41 (D) compromise claims against the trust which may be 42 asserted for an alleged violation of environmental law; and1 [422] 237 1 (E) pay the expense of any inspection, review, abatement, or 2 remedial action to comply with environmental law; 3 (14) pay or contest any claim, settle a claim by or against the 4 trust, and release, in whole or in part, a claim belonging to the 5 trust; 6 (15) pay taxes, assessments, compensation of the trustee and of 7 employees and agents of the trust, and other expenses incurred in 8 the administration of the trust; 9 (16) exercise elections with respect to federal, state, and local 10 taxes; 11 (17) select a mode of payment under any employee benefit or 12 retirement plan, annuity, or life insurance payable to the trustee, 13 exercise rights thereunder, including exercise of the right to 14 indemnification for expenses and against liabilities, and take 15 appropriate action to collect the proceeds; 16 (18) make loans out of trust property, including loans to a 17 beneficiary on terms and conditions the trustee considers to be fair 18 and reasonable under the circumstances, and the trustee has a lien 19 on future distributions for repayment of those loans; 20 (19) pledge trust property to guarantee loans made by others to 21 the beneficiary; 22 (20) appoint a trustee to act in another jurisdiction with respect 23 to trust property located in the other jurisdiction, confer upon the 24 appointed trustee all of the powers and duties of the appointing 25 trustee, require that the appointed trustee furnish security, and 26 remove any trustee so appointed; 27 (21) pay an amount distributable to a beneficiary who is under a 28 legal disability or who the trustee reasonably believes is 29 incapacitated, by paying it directly to the beneficiary or applying it 30 for the beneficiary’s benefit, or by: 31 (A) paying it to the beneficiary’s agent under a Power of 32 Attorney, to the beneficiary’s conservator or, if the beneficiary 33 does not have a conservator, to the beneficiary’s guardian; 34 (B) paying it to the beneficiary’s custodian under the 35 Uniform Gifts or Transfers to Minors Act or custodial trustee 36 under the Uniform Custodial Trust Act, and, for that purpose, 37 creating a custodianship or custodial trust; 38 (C) if the trustee does not know of an agent under a Power of 39 Attorney, conservator, guardian, custodian, or custodial trustee, 40 paying it to an adult relative or other person having legal or 41 physical care or custody of the beneficiary, to be expended on the 42 beneficiary’s behalf; or1 [422] 238 1 (D) managing it as a separate fund on the beneficiary’s 2 behalf, subject to the beneficiary’s continuing right to withdraw 3 the distribution; 4 (22) on distribution of trust property or the division or 5 termination of a trust, make distributions in divided or undivided 6 interests, allocate particular assets in proportionate or 7 disproportionate shares, value the trust property for those purposes, 8 and adjust for resulting differences in valuation; 9 (23) resolve a dispute concerning the interpretation of the trust 10 or its administration by mediation, arbitration, or other procedure 11 for alternative dispute resolution; 12 (24) prosecute or defend an action, claim, or judicial proceeding 13 in any jurisdiction to protect trust property and the trustee in the 14 performance of the trustee’s duties; 15 (25) sign and deliver contracts and other instruments that are 16 useful to achieve or facilitate the exercise of the trustee’s powers; 17 and 18 (26) on termination of the trust, exercise the powers appropriate 19 to wind up the administration of the trust and distribute the trust 20 property to the persons entitled to it. 21 (27) allocate items of income or expense to either trust income 22 or principal, as permitted or provided by the trust instrument and 23 applicable law, but this power shall not be construed as prescribing 24 the method of accounting for principal and income; 25 (28) to divide any trust into separate shares or separate trusts or 26 to create separate trusts if the Trustee reasonably deems it 27 appropriate and the division or creation is consistent with the 28 Settlor’s intent and facilitates the trust’s administration without 29 defeating or impairing the interests of the beneficiaries. 30 31 Comment 32 33 This section enumerates specific powers commonly included in 34 trust instruments and in trustee powers legislation. All the powers 35 listed are subject to alteration in the terms of the trust. See Section 36 105. The powers listed are also subsumed under the general 37 authority granted in Section 815(a)(2) to exercise all powers over 38 the trust property which an unmarried competent owner has over 39 individually owned property, and any other powers appropriate to 40 achieve the proper management, investment, and distribution of 41 the trust property. The powers listed add little of substance not 42 already granted by Section 815 and powers conferred elsewhere in 43 the Code, which are listed in the Comment to Section 815. While1 [422] 239 1 the Committee drafting this Code discussed dropping the list of 2 specific powers, it concluded that the demand of third parties to 3 see language expressly authorizing specific transactions justified 4 retention of a detailed list. 5 As provided in Section 815(b), the exercise of a power is subject 6 to fiduciary duties except as modified in the terms of the trust. The 7 fact that the trustee has a power does not imply a duty that the 8 power must be exercised. 9 Many of the powers listed in this section are similar to the 10 powers listed in Section 3 of the Uniform Trustees’ Powers Act 11 (1964). Several are new, however, and other powers drawn from 12 that Act have been updated. The powers enumerated in this section 13 may be divided into categories. Certain powers, such as the powers 14 to acquire or sell property, borrow money, and deal with real 15 estate, securities, and business interests, are powers that any 16 individual can exercise. Other powers, such as the power to collect 17 trust property, are by their very nature only applicable to trustees. 18 Other specific powers, particularly those listed in other sections of 19 the Uniform Trust Code, modify a trustee duty that would 20 otherwise apply. See, e.g., Sections 802(h) (exceptions to duty of 21 loyalty) and 810(d) (joint investments as exception to earmarking 22 requirement). 23 Paragraph (1) authorizes a trustee to collect trust property and 24 collect or decline additions to the trust property. The power to 25 collect trust property is an incident of the trustee’s duty to 26 administer the trust as provided in Section 801. The trustee has a 27 duty to enforce claims as provided in Section 811, the successful 28 prosecution of which can result in collection of trust property. 29 Pursuant to Section 812, the trustee also has a duty to collect trust 30 property from a former trustee or other person holding trust 31 property. For an application of the power to reject additions to the 32 trust property, see Section 816(13) (power to decline property with 33 possible environmental liability). 34 Paragraph (2) authorizes a trustee to sell trust property, for cash 35 or on credit, at public or private sale. Under the Restatement, a 36 power of sale is implied unless limited in the terms of the trust. 37 Restatement (Third) of Trusts: Prudent Investor Rule Section 190 38 (1992). In arranging a sale, a trustee must comply with the duty to 39 act prudently as provided in Section 804. This duty may dictate 40 that the sale be made with security. 41 Paragraph (4) authorizes a trustee to deposit funds in an account 42 in a regulated financial-service institution. This includes the right1 [422] 240 1 of a financial institution trustee to deposit funds in its own banking 2 department as authorized by Section 802(h)(4). 3 Paragraph (5) authorizes a trustee to borrow money. Under the 4 Restatement, the sole limitation on such borrowing is the general 5 obligation to invest prudently. See Restatement (Third) of Trusts: 6 Prudent Investor Rule Section 191 (1992). Language clarifying 7 that the loan may extend beyond the duration of the trust was 8 added to negate an older view that the trustee only had power to 9 encumber the trust property for the period that the trust was in 10 existence. 11 Paragraph (6) authorizes the trustee to continue, contribute 12 additional capital to, or change the form of a business. Any such 13 decision by the trustee must be made in light of the standards of 14 prudent investment stated in Article 9. 15 Paragraph (7), regarding powers with respect to securities, 16 codifies and amplifies the principles of Restatement (Second) of 17 Trusts Section 193 (1959). 18 Paragraph (9), authorizing the leasing of property, negates the 19 older view, reflected in Restatement (Second) of Trusts 20 Section 189 cmt. c (1959), that a trustee could not lease property 21 beyond the duration of the trust. Whether a longer term lease is 22 appropriate is judged by the standards of prudence applicable to all 23 investments. 24 Paragraph (10), authorizing a trustee to grant options with 25 respect to sales, leases or other dispositions of property, negates 26 the older view, reflected in Restatement (Second) of Trusts 27 Section 190 cmt. k (1959), that a trustee could not grant another 28 person an option to purchase trust property. Like any other 29 investment decision, whether the granting of an option is 30 appropriate is a question of prudence under the standards of Article 31 9. 32 Paragraph (11), authorizing a trustee to purchase insurance, 33 empowers a trustee to implement the duty to protect trust property. 34 See Section 809. The trustee may also insure beneficiaries, agents, 35 and the trustee against liability, including liability for breach of 36 trust. 37 Paragraph (13) is one of several provisions in the Uniform Trust 38 Code designed to address trustee concerns about possible liability 39 for violations of environmental law. This paragraph collects all the 40 powers relating to environmental concerns in one place even 41 though some of the powers, such as the powers to pay expenses, 42 compromise claims, and decline property, overlap with other 43 paragraphs of this section (decline property, paragraph (1);1 [422] 241 1 compromise claims, paragraph (14); pay expenses, paragraph 2 (15)). Numerous States have legislated on the subject of 3 environmental liability of fiduciaries. For a representative state 4 statute, see Tex. Prop. Code Ann. Section 113.025. See also 5 Sections 701(c)(2) (designated trustee may inspect property to 6 determine potential violation of environmental or other law or for 7 any purpose) and 1010(b) (trustee not personally liable for 8 violation of environmental law arising from ownership or control 9 of trust property). 10 Paragraph (14) authorizes a trustee to pay, contest, settle, or 11 release claims. Section 811 requires that a trustee need take only 12 “reasonable” steps to enforce claims, meaning that a trustee may 13 release a claim not only when it is uncollectible, but also when 14 collection would be uneconomic. See Restatement (Second) of 15 Trusts Section 192 (1959) (power to compromise, arbitrate and 16 abandon claims). 17 Paragraph (15), among other things, authorizes a trustee to pay 18 compensation to the trustee and agents without prior approval of 19 court. Regarding the standard for setting trustee compensation, see 20 Section 708. See also Section 709 (repayment of trustee 21 expenditures). While prior court approval is not required, Section 22 813(b)(4) requires the trustee to inform the qualified beneficiaries 23 in advance of a change in the method or rate of compensation. 24 Paragraph (16) authorizes a trustee to make elections with 25 respect to taxes. The Uniform Trust Code leaves to other law the 26 issue of whether the trustee, in making such elections, must make 27 compensating adjustments in the beneficiaries’ interests. 28 Paragraph (17) authorizes a trustee to take action with respect to 29 employee benefit or retirement plans, or annuities or life insurance 30 payable to the trustee. Typically, these will be beneficiary 31 designations which the settlor has made payable to the trustee, but 32 this Code also allows the trustee to acquire ownership of annuities 33 or life insurance. 34 Paragraphs (18) and (19) allow a trustee to make loans to a 35 beneficiary or to guarantee loans of a beneficiary upon such terms 36 and conditions as the trustee considers fair and reasonable. The 37 determination of what is fair and reasonable must be made in light 38 of the fiduciary duties of the trustee and the purposes of the trust. 39 Frequently, a trustee will make loans to a beneficiary which might 40 be considered less than prudent in an ordinary commercial sense 41 although of great benefit to the beneficiary and which help carry 42 out the trust purposes. If the trustee requires security for the loan to 43 the beneficiary, adequate security under this paragraph may consist1 [422] 242 1 of a charge on the beneficiary’s interest in the trust. See 2 Restatement (Second) of Trusts Section 255 (1959). However, the 3 interest of a beneficiary subject to a spendthrift restraint may not 4 be pledged as security for a loan. See Section 502. 5 Paragraph (20) authorizes the appointment of ancillary trustees 6 in jurisdictions in which the regularly appointed trustee is unable 7 or unwilling to act. Normally, an ancillary trustee will be 8 appointed only when there is a need to manage real estate located 9 in another jurisdiction. This paragraph allows the regularly 10 appointed trustee to select the ancillary trustee and to confer on the 11 ancillary trustee such powers and duties as may be necessary. The 12 appointment of ancillary trustees is a topic which a settlor may 13 wish to address in the terms of the trust. 14 Paragraph (21) authorizes a trustee to make payments to another 15 person for the use or benefit of a beneficiary who is under a legal 16 disability or who the trustee reasonably believes is incapacitated. 17 Although an adult relative or other person receiving funds is 18 required to spend it on the beneficiary’s behalf, it is preferable that 19 the trustee make the distribution to a person having more formal 20 fiduciary responsibilities. For this reason, payment may be made to 21 an adult relative only if the trustee does not know of a conservator, 22 guardian, custodian, or custodial trustee capable of acting for the 23 beneficiary. 24 Paragraph (22) authorizes a trustee to make non-pro-rata 25 distributions and allocate particular assets in proportionate or 26 disproportionate shares. This power provides needed flexibility 27 and lessens the risk that a non-pro-rata distribution will be treated 28 as a taxable sale. 29 Paragraph (23) authorizes a trustee to resolve disputes through 30 mediation or arbitration. The drafters of this Code encourage the 31 use of such alternate methods for resolving disputes. Arbitration is 32 a form of nonjudicial settlement agreement authorized by Section 33 111. In representing beneficiaries and others in connection with 34 arbitration or mediation, the representation principles of Article 3 35 may be applied. Settlors wishing to encourage use of alternate 36 dispute resolution may draft to provide it. For sample language, 37 see American Arbitration Association, Arbitration Rules for Wills 38 and Trusts (1995). 39 Paragraph (24) authorizes a trustee to prosecute or defend an 40 action. As to the propriety of reimbursement for attorney’s fees 41 and other expenses of an action or judicial proceeding, see Section 42 709 and Comment. See also Section 811 (duty to defend actions).1 [422] 243 1 Paragraph (26), which is similar to Section 344 of the 2 Restatement (Second) of Trusts (1959), clarifies that even though 3 the trust has terminated, the trustee retains the powers needed to 4 wind up the administration of the trust and distribute the remaining 5 trust property. 6 7 South Carolina Comment 8 9 South Carolina Trust Code Section 62-7-816 added to the UTC 10 version subsections (27) and (28) to retain and incorporate specific 11 powers the trustee had under former South Carolina law but which 12 were not specifically included in the Uniform Trust Code version. 13 14 Section 62-7-817. Distribution upon termination. 15 16 (a) Upon termination or partial termination of a trust, the 17 trustee may send to the beneficiaries a proposal for distribution. 18 The right of any beneficiary to object to the proposed distribution 19 terminates if the beneficiary does not notify the trustee of an 20 objection within 30 days after the proposal was sent but only if the 21 proposal informed the beneficiary of the right to object and of the 22 time allowed for objection. 23 (b) Upon the occurrence of an event terminating or partially 24 terminating a trust, the trustee shall proceed expeditiously to 25 distribute the trust property to the persons entitled to it, subject to 26 the right of the trustee to retain a reasonable reserve for the 27 payment of debts, expenses, and taxes. 28 (c) A release by a beneficiary of a trustee from liability for 29 breach of trust is invalid to the extent: 30 (1) it was induced by improper conduct of the trustee; or 31 (2) the beneficiary, at the time of the release, did not know 32 of the beneficiary’s rights or of the material facts relating to the 33 breach. 34 35 Comment 36 37 This section contains several provisions governing distribution 38 upon termination. Other provisions of the Uniform Trust Code 39 relevant to distribution upon termination include Section 816(26) 40 (powers upon termination to windup administration and 41 distribution), and 1005 (limitation of action against trustee). 42 Subsection (a) is based on Section 3-906(b) of the Uniform 43 Probate Code. It addresses the dilemma that sometimes arises1 [422] 244 1 when the trustee is reluctant to make distribution until the 2 beneficiary approves but the beneficiary is reluctant to approve 3 until the assets are in hand. The procedure made available under 4 subsection (a) facilitates the making of non-pro-rata distributions. 5 However, whenever practicable it is normally better practice to 6 obtain the advance written consent of the beneficiaries to a 7 proposed plan of distribution. 8 Subsection (b) recognizes that upon an event terminating or 9 partially terminating a trust, expeditious distribution should be 10 encouraged to the extent reasonable under the circumstances. 11 However, a trustee is entitled to retain a reasonable reserve for 12 payment of debts, expenses, and taxes. Sometimes these reserves 13 must be quite large, for example, upon the death of the beneficiary 14 of a QTIP trust that is subject to federal estate tax in the 15 beneficiary’s estate. Not infrequently, a substantial reserve must be 16 retained until the estate tax audit is concluded several years after 17 the beneficiary’s death. 18 Subsection (c) is an application of Section 1009. Section 1009 19 addresses the validity of any type of release that a beneficiary 20 might give. Subsection (c) is more limited, dealing only with 21 releases given upon termination of the trust. Factors affecting the 22 validity of a release include adequacy of disclosure, whether the 23 beneficiary had a legal incapacity, and whether the trustee engaged 24 in any improper conduct. See Restatement (Second) of Trusts 25 Section 216 (1959). 26 27 South Carolina Comment 28 29 SCPC Section 62-3-906(b), which provides for a proposal for 30 distribution by a personal representative, is analogous to SCTC 31 Section 62-7-817(a). 32 33 Part 9 34 35 South Carolina Uniform Principal and Income Act; 36 South Carolina Uniform Prudent Investor Act 37 38 General South Carolina Comment 39 40 The South Carolina Trust Code retains and incorporates at 41 SCTC Sections 62-7-901 through 932 the provisions of the South 42 Carolina Uniform Principal and Income Act formerly found at 43 South Carolina Probate Code Sections 62-7-401 through 62-7-432.1 [422] 245 1 Any reference elsewhere in the South Carolina Code to former 2 SCPC Sections 62-7-401 through 62-7-432 should now refer to 3 SCTC Sections 62-7-901 through 62-7-932. 4 With a few exceptions, the South Carolina Trust Code retains 5 and incorporates at SCTC Section 62-7-933 the provisions of the 6 South Carolina Uniform Prudent Investor Act formerly found at 7 South Carolina Probate Code Section 62-7-302. The exceptions 8 result from the deletion of several subsections of former SCPC 9 Section 62-7-302 that are duplicative of provisions in the South 10 Carolina Trust Code: former SCPC Section 62-7-302(C)(6), (F), 11 and (H). The correlative provisions of the South Carolina Trust 12 Code, which govern investment, administration, and distribution of 13 trust property, are broader in perspective than the deleted SCPC 14 subsections, which governed only investment and management of 15 trust property. Any reference elsewhere in the South Carolina 16 Code to former SCPC Section 62-7-302 should now refer to SCTC 17 Section 62-7-933. SCTC Section 62-7-933(C)(5)(c) retains and 18 incorporates former South Carolina Probate Code Section 19 62-7-602. 20 21 Section 62-7-901. Short title. 22 23 Sections 62-7-901 through 62-7-932 of this Part may be cited as 24 the South Carolina Uniform Principal and Income Act. 25 26 Section 62-7-902. Definitions. 27 28 As used in this part: 29 (1) ‘Accounting period’ means a calendar year unless another 30 twelve-month period is selected by a fiduciary. The term includes 31 a portion of a calendar year or other twelve-month period that 32 begins when an income interest begins or ends when an income 33 interest ends. 34 (2) ‘Beneficiary’ includes, in the case of a decedent’s estate, an 35 heir, legatee, and devisee and, in the case of a trust, an income 36 beneficiary and a remainder beneficiary. 37 (3) ‘Fiduciary’ means a personal representative or a trustee. 38 The term includes an executor, administrator, successor personal 39 representative, special administrator, and a person performing 40 substantially the same function. 41 (4) ‘Income’ means money or property that a fiduciary receives 42 as current return from a principal asset. The term includes a 43 portion of receipts from a sale, exchange, or liquidation of a1 [422] 246 1 principal asset, to the extent provided in Section 62-7-910 through 2 Section 62-7-924. 3 (5) ‘Income beneficiary’ means a person to whom net income 4 of a trust is or may be payable. 5 (6) ‘Income interest’ means the right of an income beneficiary 6 to receive all or part of net income, whether the terms of the trust 7 require it to be distributed or authorize it to be distributed in the 8 trustee’s discretion. 9 (7) ‘Mandatory income interest’ means the right of an income 10 beneficiary to receive net income that the terms of the trust require 11 the fiduciary to distribute. 12 (8) ‘Net income’ means the total receipts allocated to income 13 during an accounting period minus the disbursements made from 14 income during the period, plus or minus transfers under this part to 15 or from income during the period. 16 (9) ‘Person’ means an individual, a corporation, a business 17 trust, an estate, a trust, a partnership, a limited liability company, 18 an association, a joint venture, a government or a governmental 19 subdivision, an agency, or an instrumentality; a public corporation, 20 or other legal or commercial entity. 21 (10) ‘Principal’ means property held in trust for distribution to a 22 remainder beneficiary when the trust terminates. 23 (11) ‘Remainder beneficiary’ means a person entitled to receive 24 principal when an income interest ends. 25 (12) ‘Terms of a trust’ means the manifestation of the intent of a 26 settlor or decedent with respect to the trust, expressed in a manner 27 that admits of its proof in a judicial proceeding, whether by written 28 or spoken words or by conduct. 29 (13) ‘Trustee’ includes an original, additional, or successor 30 trustee, whether or not appointed or confirmed by a court. 31 32 Section 62-7-903. Allocation of receipts and disbursements. 33 34 (A) In allocating receipts and disbursements to or between 35 principal and income, and with respect to any matter within the 36 scope of Sections 62-7-905 and 62-7-909, a fiduciary: 37 (1) shall administer a trust or estate in accordance with the 38 terms of the trust or the will, even if there is a different provision 39 in this part; 40 (2) may administer a trust or estate by the exercise of a 41 discretionary power of administration given to the fiduciary by the 42 terms of the trust or the will, even if the exercise of the power1 [422] 247 1 produces a result different from a result required or permitted by 2 this part; 3 (3) shall administer a trust or estate in accordance with this 4 part if the terms of the trust or the will do not contain a different 5 provision or do not give the fiduciary a discretionary power of 6 administration; and 7 (4) shall add a receipt or charge a disbursement to principal 8 to the extent that the terms of the trust and this part do not provide 9 a rule for allocating the receipt or disbursement to or between 10 principal and income. 11 (B) In exercising the power to adjust pursuant to Section 12 62-7-904(A) or a discretionary power of administration regarding a 13 matter within the scope of this part, whether granted by the terms 14 of a trust, a will, or this part, a fiduciary shall administer a trust or 15 estate impartially, based on what is fair and reasonable to all of the 16 beneficiaries, except to the extent that the terms of the trust or the 17 will clearly manifest an intention that the fiduciary shall or may 18 favor one or more of the beneficiaries. A determination in 19 accordance with this part is presumed to be fair and reasonable to 20 all of the beneficiaries. 21 22 Section 62-7-904. Adjustments between principal and 23 income. 24 25 (A) A trustee may adjust between principal and income to the 26 extent the trustee considers necessary if the trustee invests and 27 manages trust assets as a prudent investor, the terms of the trust 28 describe the amount that may or must be distributed to a 29 beneficiary by referring to the trust’s income, and the trustee 30 determines, after applying the provisions in Section 62-7-903(A), 31 that the trustee is unable to comply with Section 62-7-903(B). 32 (B) In deciding whether and to what extent to exercise the 33 power of adjustment in subsection (A), a trustee shall consider all 34 factors relevant to the trust and its beneficiaries, including: 35 (1) nature, purpose, and expected duration of the trust; 36 (2) intent of the settlor; 37 (3) identity and circumstances of the beneficiaries; 38 (4) needs for liquidity, regularity of income, and 39 preservation and appreciation of capital; 40 (5) assets held in the trust and the extent to which they 41 consist of financial assets, interests in closely held enterprises, 42 tangible and intangible personal property, or real property and the1 [422] 248 1 extent to which an asset is used by a beneficiary, and whether an 2 asset was purchased by the trustee or received from the settlor; 3 (6) net amount otherwise allocated to income and the 4 increase or decrease in the value of the principal assets, which the 5 trustee may estimate as to assets for which market values are not 6 readily available; 7 (7) terms of the trust and whether and to what extent they 8 give the trustee the power to, or prohibit him from, invade 9 principal or accumulate income or prohibit the trustee from 10 invading principal or accumulating income, and the extent to 11 which the trustee has exercised a power from time to time to 12 invade principal or accumulate income; 13 (8) actual and anticipated effect of economic conditions on 14 principal and income and effects of inflation and deflation; and 15 (9) anticipated tax consequences of an adjustment. 16 (C) A trustee may not make an adjustment: 17 (1) that diminishes the income interest in a trust that requires 18 all of the income to be paid at least annually to a surviving spouse 19 and for which an estate tax or gift tax marital deduction is allowed, 20 in whole or in part, if the trustee did not have the power to make 21 the adjustment; 22 (2) that reduces the actuarial value of the income interest in 23 a trust to which a person transfers property with the intent to 24 qualify for a gift tax exclusion; 25 (3) that changes the amount payable to a beneficiary as a 26 fixed annuity or a fixed fraction of the value of the trust assets; 27 (4) from any amount that is permanently set aside for 28 charitable purposes under a will or the terms of a trust unless both 29 income and principal are so set aside; 30 (5) if possessing or exercising the power to make an 31 adjustment is determinative in causing an individual to be treated 32 as the owner of all or part of the trust for income tax purposes; 33 (6) if possessing or exercising the power to make an 34 adjustment is determinative in causing all or part of the trust assets 35 to be included for estate tax purposes in the estate of an individual 36 who has the power to remove a trustee or appoint a trustee, or 37 both; 38 (7) if the trustee is a beneficiary of the trust; or 39 (8) if the trustee is not a beneficiary, but the adjustment 40 benefits the trustee directly or indirectly. 41 (D) If subsection (C)(5), (6), (7), or (8) applies to a trustee and 42 there is more than one trustee, a cotrustee to whom the provision 43 does not apply may make the adjustment unless the exercise of the1 [422] 249 1 power by the remaining trustee or trustees is not permitted by the 2 terms of the trust. 3 (E) A trustee may release the entire power of adjustment in 4 subsection (A) or may release only the power to adjust from 5 income to principal or the power to adjust from principal to 6 income if the trustee is uncertain about whether possessing or 7 exercising the power causes a result described in subsection (C)(1) 8 through (6) or (C)(8) or if the trustee determines that possessing or 9 exercising the power may deprive the trust of a tax benefit or 10 impose a tax burden not contemplated in subsection (C). The 11 release may be permanent or for a specified period, including a 12 period measured by the life of an individual. 13 (F) Terms of a trust that limit the power of a trustee to make an 14 adjustment between principal and income do not affect the 15 application of this section unless it is clear from the terms of the 16 trust that the terms are intended to deny the trustee the power of 17 adjustment in subsection (A). 18 19 Section 62-7-905. Determinations of income and principal; 20 distributions upon death of decedent or end of an income 21 interest in a trust. 22 23 After a decedent dies, in the case of an estate, or after an income 24 interest in a trust ends, a fiduciary: 25 (1) of an estate or of a terminating income interest shall 26 determine the amount of net income and net principal receipts 27 received from property specifically given to a beneficiary pursuant 28 to Sections 62-7-907 through 62-7-930 which apply to trustees and 29 the provisions of item (5). The fiduciary shall distribute the net 30 income and net principal receipts to the beneficiary who is to 31 receive the specific property; 32 (2) shall determine the remaining net income of a decedent’s 33 estate or a terminating income interest pursuant to Sections 34 62-7-907 through 62-7-930 which apply to trustees and by: 35 (a) including in net income all income from property used to 36 discharge liabilities; 37 (b) paying from income or principal, in the fiduciary’s 38 discretion, fees of attorneys, accountants, and fiduciaries, court 39 costs and other expenses of administration, and interest on death 40 taxes; except that the fiduciary may pay those expenses from 41 income of property passing to a trust for which the fiduciary 42 claims an estate tax marital or charitable deduction only to the1 [422] 250 1 extent that the payment of those expenses from income does not 2 cause the reduction or loss of the deduction; and 3 (c) paying from principal all other disbursements made or 4 incurred in connection with the settlement of a decedent’s estate or 5 the winding up of a terminating income interest, including debts, 6 funeral expenses, disposition of remains, family allowances, and 7 death taxes and related penalties that are apportioned to the estate 8 or terminating income interest by the will, the terms of the trust, or 9 applicable law; 10 (3) shall distribute to a beneficiary who receives a pecuniary 11 amount outright the rate of interest or other amount provided by 12 the will or the terms of the trust. If the will or the terms of the trust 13 provide no interest amount, the beneficiary of a pecuniary amount 14 outright shall receive no interest or other income on the bequest for 15 one year after the first appointment of a personal representative. 16 Beginning one year after the first appointment of a personal 17 representative, and notwithstanding any other provision of law to 18 the contrary, the beneficiary of a pecuniary amount outright must 19 be treated as any other beneficiary under item (4). If a beneficiary 20 is to receive a pecuniary amount outright from a trust after an 21 income interest ends and no interest or other amount is provided 22 for by the terms of the trust, the fiduciary shall treat the pecuniary 23 amount as if it were required to be paid under a will and as if the 24 payment were being made beginning one year after the first 25 appointment of a personal representative; 26 (4) shall distribute the net income remaining after distributions 27 required by item (3) in the manner pursuant to Section 62-7-906 to 28 all other beneficiaries, including a beneficiary who receives a 29 pecuniary amount in trust, even if the beneficiary holds an 30 unqualified power to withdraw assets from the trust or other 31 presently exercisable general power of appointment over the trust; 32 and 33 (5) may not reduce principal or income receipts from property 34 described in item (1) because of a payment pursuant to Sections 35 62-7-924 and 62-7-925 to the extent that the will, the terms of the 36 trust, or applicable law requires the fiduciary to make the payment 37 from assets other than the property or to the extent that the 38 fiduciary recovers or expects to recover the payment from a third 39 party. The net income and principal receipts from the property are 40 determined by including all of the amounts the fiduciary receives 41 or pays with respect to the property, whether those amounts 42 accrued or became due before, on, or after the date of a decedent’s 43 death or an income interest’s terminating event, and by making a1 [422] 251 1 reasonable provision for amounts that the fiduciary believes the 2 estate or terminating income interest may become obligated to pay 3 after the property is distributed. 4 5 Section 62-7-906. Determination and distribution of net 6 income. 7 8 (A) Each beneficiary described in Section 62-7-905(4) is 9 entitled to receive a portion of the net income equal to his 10 fractional interest in undistributed principal assets, using values as 11 of the distribution date. If a fiduciary makes more than one 12 distribution of assets to beneficiaries to whom this section applies, 13 each beneficiary, including one who does not receive part of the 14 distribution, is entitled, as of each distribution date, to the net 15 income the fiduciary has received after the date of death or 16 terminating event or earlier distribution date but has not distributed 17 as of the current distribution date. 18 (B) In determining a beneficiary’s share of net income, the: 19 (1) beneficiary is entitled to receive a portion of the net 20 income equal to his fractional interest in the undistributed principal 21 assets immediately before the distribution date, including assets 22 that later may be sold to meet principal obligations. 23 (2) fractional interest of the beneficiary in the undistributed 24 principal assets must be calculated without regard to property 25 specifically given to a beneficiary and property required to pay 26 pecuniary amounts not in trust. 27 (3) fractional interest of the beneficiary in the undistributed 28 principal assets must be calculated on the basis of the aggregate 29 value of those assets as of the distribution date without reducing 30 the value by any unpaid principal obligation; and 31 (4) distribution date for purposes of this section may be the 32 date as of which the fiduciary calculates the value of the assets if 33 that date is reasonably near the date on which assets are actually 34 distributed. 35 (C) If a fiduciary does not distribute all of the collected but 36 undistributed net income to each person as of a distribution date, 37 the fiduciary shall maintain appropriate records showing the 38 interest of each beneficiary in that net income. 39 (D) A trustee may apply the provisions of this section, to the 40 extent that the trustee considers it appropriate, to net gain or loss 41 realized after the date of death or terminating event or earlier 42 distribution date from the disposition of a principal asset if this 43 section applies to the income from the asset. 1 [422] 252 1 2 Section 62-7-907. Beginning and end of income interests. 3 4 (A) An income beneficiary is entitled to net income from the 5 date on which the income interest begins. An income interest 6 begins on the date specified in the terms of the trust or, if no date is 7 specified, on the date an asset becomes subject to a trust or 8 successive income interest. 9 (B) An asset becomes subject to a trust on the date: 10 (1) it is transferred to the trust, in the case of an asset that is 11 transferred to a trust during the transferor’s life; 12 (2) the testator dies, in the case of an asset that becomes 13 subject to a trust by reason of a will, even if there is an intervening 14 period of administration of the estate; or 15 (3) the individual dies, in the case of an asset that is 16 transferred to a fiduciary by a third party because of the death of 17 the individual. 18 (C) An asset becomes subject to a successive income interest 19 on the day after the preceding income interest ends, as determined 20 pursuant to subsection (D), even if there is an intervening period of 21 administration to wind up the preceding income interest. 22 (D) An income interest ends on the day before an income 23 beneficiary dies or another terminating event occurs or on the last 24 day of a period during which there is no beneficiary to whom a 25 trustee may distribute income. 26 27 Section 62-7-908. Allocation of income receipts and 28 disbursements. 29 30 (A) A trustee shall allocate an income receipt or disbursement, 31 other than one subject to Section 62-7-905(1), to principal if its 32 due date occurs before a decedent dies in the case of an estate or 33 before an income interest begins in the case of a trust or successive 34 income interest. 35 (B) A trustee shall allocate an income receipt or disbursement 36 to income if its due date occurs on or after the date on which a 37 decedent dies or an income interest begins and it is a periodic due 38 date. An income receipt or disbursement must be treated as 39 accruing from day to day if its due date is not periodic or it has no 40 due date. The portion of the receipt or disbursement accruing 41 before the date on which a decedent dies or an income interest 42 begins must be allocated to principal and the balance must be 43 allocated to income. 1 [422] 253 1 (C) An item of income or an obligation is due on the date the 2 payer is required to make a payment. If a payment date is not 3 stated, there is no due date for the purposes of this part. 4 Distributions to shareholders or other owners from an entity 5 subject to Section 62-7-910 are considered due on the date fixed 6 by the entity for determining who is entitled to receive the 7 distribution or, if no date is fixed, on the declaration date for the 8 distribution. A due date is periodic for receipts or disbursements 9 that must be paid at regular intervals under a lease or an obligation 10 to pay interest or if an entity customarily makes distributions at 11 regular intervals. 12 13 Section 62-7-909. Undistributed income. 14 15 (A) In this section, ‘undistributed income’ means net income 16 received before the date on which an income interest ends. The 17 term does not include an item of income or expense that is due or 18 accrued or net income that has been added or must be added to 19 principal under the terms of the trust. 20 (B) When a mandatory income interest ends, the trustee shall 21 pay to a mandatory income beneficiary who survives that date, or 22 the estate of a deceased mandatory income beneficiary whose 23 death causes the interest to end, the beneficiary’s share of the 24 undistributed income that is not disposed of under the terms of the 25 trust, unless the beneficiary has an unqualified power to revoke 26 more than five percent of the trust immediately before the income 27 interest ends. In that case, the undistributed income from the 28 portion of the trust that may be revoked must be added to 29 principal. 30 (C) When the obligation of a trustee to pay a fixed annuity or a 31 fixed fraction of the value of the trust assets ends, the trustee shall 32 prorate the final payment if, and to the extent, required by 33 applicable law to accomplish a purpose of the trust or its settlor 34 relating to income, gift, estate, or other tax requirements. 35 36 Section 62-7-910. Allocation of receipts from an entity to 37 principal or income. 38 39 (A) In this section, ‘entity’ means a corporation, partnership, 40 limited liability company, regulated investment company, real 41 estate investment trust, common trust fund, or other organization 42 in which a trustee has an interest other than a trust or estate subject 43 to Section 62-7-911, a business or activity to which Section1 [422] 254 1 62-7-912 applies, or an asset-backed security to which Section 2 62-7-924 applies. 3 (B) Except as otherwise provided in this section, a trustee shall 4 allocate to income money received from an entity. 5 (C) A trustee shall allocate the following receipts from an 6 entity to principal: 7 (1) property other than money; 8 (2) money received in one distribution or a series of related 9 distributions in exchange for part or all of a trust’s interest in the 10 entity; 11 (3) money received in total or partial liquidation of the 12 entity; and 13 (4) money received from an entity that is a regulated 14 investment company or a real estate investment trust if the money 15 distributed is a capital gain dividend for federal income tax 16 purposes. 17 (D) Money is received in partial liquidation: 18 (1) to the extent that the entity, at or near the time of a 19 distribution, indicates that it is a distribution in partial liquidation; 20 or 21 (2) if the total amount of money and property received in a 22 distribution or series of related distributions is greater than twenty 23 percent of the entity’s gross assets of the entity, as shown by the 24 year-end financial statements immediately preceding the initial 25 receipt. 26 (E) Money is not received in partial liquidation, nor may it be 27 taken into account pursuant to subsection (D)(2), to the extent that 28 it does not exceed the amount of income tax that a trustee or 29 beneficiary must pay on taxable income of the entity that 30 distributes the money. 31 (F) A trustee may rely upon a statement made by an entity 32 about the source or character of a distribution if the statement is 33 made at or near the time of distribution by the board of directors or 34 other person or group of persons authorized to exercise powers to 35 pay money or transfer property comparable to those of a 36 corporation’s board of directors. 37 38 Section 62-7-911. Allocations of income and principal 39 received from a trust or an estate. 40 41 A trustee shall allocate to income an amount received as a 42 distribution of income from a trust or an estate in which the trust 43 has an interest other than a purchased interest, and shall allocate to1 [422] 255 1 principal an amount received as a distribution of principal from 2 such a trust or estate. If a trustee purchases an interest in a trust 3 that is an investment entity, or a decedent or donor transfers an 4 interest in such a trust to a trustee, Section 62-7-910 or 62-7-924 5 applies to a receipt from the trust. 6 7 Section 62-7-912. Separate accounting for a business 8 activity. 9 10 (A) If a trustee who conducts a business or other activity 11 determines that it is in the best interest of all the beneficiaries to 12 account separately for the business or activity instead of 13 accounting for it as part of the general accounting records of the 14 trust, the trustee may maintain separate accounting records for its 15 transactions, whether or not its assets are segregated from other 16 trust assets. 17 (B) A trustee who accounts separately for a business or other 18 activity may determine the extent to which its net cash receipts 19 must be retained for working capital, the acquisition or 20 replacement of fixed assets, and other reasonably foreseeable 21 needs of the business or activity, and the extent to which the 22 remaining net cash receipts are accounted for as principal or 23 income in the trust’s general accounting records. If a trustee sells 24 assets of the business or other activity, other than in the ordinary 25 course of the business or activity, the trustee shall account for the 26 net amount received as principal in the general accounting records 27 of the trust to the extent the trustee determines that the amount 28 received is no longer required in the conduct of the business. 29 (C) Activities for which a trustee may maintain separate 30 accounting records include: 31 (1) retail, manufacturing, service, and other traditional 32 business activities; 33 (2) farming; 34 (3) raising and selling livestock and other animals; 35 (4) management of rental properties; 36 (5) extraction of minerals and other natural resources; 37 (6) timber operations; and 38 (7) activities subject to Section 62-7-923. 39 40 Section 62-7-913. Allocations to principal. 41 42 A trustee shall allocate to principal: 1 [422] 256 1 (1) to the extent not allocated to income pursuant to this part, 2 assets received from a transferor during his lifetime, a decedent’s 3 estate, a trust with a terminating income interest, or a payer under a 4 contract naming the trust or its trustee as beneficiary; 5 (2) money or other property received from the sale, exchange, 6 liquidation, or change in form of a principal asset, including 7 realized profit; 8 (3) amounts recovered from third parties to reimburse the trust 9 because of disbursements described in Section 62-7-926(A)(7) or 10 for other reasons to the extent not based on the loss of income; 11 (4) proceeds of property taken by eminent domain, but a 12 separate award made for the loss of income with respect to an 13 accounting period during which a current income beneficiary had a 14 mandatory income interest is income; 15 (5) net income received in an accounting period during which 16 there is no beneficiary to whom a trustee may or must distribute 17 income; and 18 (6) other receipts as provided in Sections 62-7-917 through 19 62-7-924. 20 21 Section 62-7-914. Accounting for receipts from rental 22 property. 23 24 To the extent that a trustee accounts for receipts from rental 25 property pursuant to this section, the trustee shall allocate to 26 income an amount received as rent of real or personal property, 27 including an amount received for cancellation or renewal of a 28 lease. An amount received as a refundable deposit, including a 29 security deposit or a deposit applied as rent for future periods, 30 must be added to principal and held subject to the terms of the 31 lease and is not available for distribution to a beneficiary until the 32 trustee’s contractual obligations have been satisfied with respect to 33 that amount. 34 35 Section 62-7-915. Allocation of interest as income; 36 allocation of proceeds from disposition of an obligation as 37 principal; exceptions. 38 39 (A) An amount received as interest, whether determined at a 40 fixed, variable, or floating rate, on an obligation to pay money to 41 the trustee, including an amount received as consideration for 42 prepaying principal, must be allocated to income without provision 43 for amortization of premium. 1 [422] 257 1 (B) A trustee shall allocate to principal an amount received 2 from the sale, redemption, or other disposition of an obligation to 3 pay money to the trustee more than one year after it is purchased 4 or acquired by the trustee, including an obligation whose purchase 5 price or value when it is acquired is less than its value at maturity. 6 If the obligation matures within one year after it is purchased or 7 acquired by the trustee, an amount received in excess of its 8 purchase price or its value when acquired by the trust must be 9 allocated to income. 10 (C) This section does not apply to an obligation subject to 11 Section 62-7-918, 62-7-919, 62-7-920, 62-7-921, or 62-7-924. 12 13 Section 62-7-916. Allocation of proceeds of insurance 14 contracts; exception. 15 16 (A) Except as otherwise provided in subsection (B), a trustee 17 shall allocate to principal the proceeds of a life insurance policy or 18 other contract in which the trust or its trustee is named as 19 beneficiary, including a contract that insures the trust or its trustee 20 against loss for damage to, destruction of, or loss of title to a trust 21 asset. The trustee shall allocate dividends on an insurance policy to 22 income if the premiums on the policy are paid from income, and to 23 principal if the premiums are paid from principal. 24 (B) A trustee shall allocate to income proceeds of a contract 25 that insures the trustee against loss of occupancy or other use by an 26 income beneficiary, loss of income, or, subject to Section 27 62-7-912, loss of profits from a business. 28 (C) This section does not apply to a contract subject to Section 29 62-7-918. 30 31 Section 62-7-917. Insubstantial allocations. 32 33 If a trustee determines that an allocation between principal and 34 income required by Section 62-7-918, 62-7-919, 62-7-920, 35 62-7-921, or 62-7-924 is insubstantial, the trustee may allocate the 36 entire amount to principal unless one of the circumstances 37 provided in Section 62-7-904(C) applies to the allocation. This 38 power may be exercised by a cotrustee in the circumstances 39 provided in Section 62-7-904(D) and may be released for the 40 reasons and in the manner provided in Section 62-7-904(E). An 41 allocation is presumed to be insubstantial if: 1 [422] 258 1 (1) the amount of the allocation increases or decreases net 2 income in an accounting period, as determined before the 3 allocation, by less than ten percent; or 4 (2) the value of the asset producing the receipt for which the 5 allocation is made is less than ten percent of the total value of the 6 assets of the trust at the beginning of the accounting period. 7 8 Section 62-7-918. Allocation of payments; interest, 9 dividends, or payments made instead of interest or dividends; 10 marital deductions; exception. 11 12 (A) In this section, ‘payment’ means a payment that a trustee 13 may receive over a fixed number of years or during the life of one 14 or more individuals because of services rendered or property 15 transferred to the payer in exchange for future payments. The term 16 includes a payment made in money or property from the payer’s 17 general assets or from a separate fund created by the payer, 18 including a private or commercial annuity, an individual retirement 19 account, and a pension, profit-sharing, stock-bonus, or 20 stock-ownership plan. 21 (B) To the extent that a payment is characterized as interest or a 22 dividend or a payment made instead of interest or a dividend, a 23 trustee shall allocate it to income. The trustee shall allocate to 24 principal the balance of the payment and any other payment 25 received in the same accounting period that is not characterized as 26 interest, a dividend, or an equivalent payment. 27 (C) If part of a payment is not characterized as interest, a 28 dividend, or an equivalent payment, and all or part of the payment 29 is required to be made, a trustee shall allocate to income ten 30 percent of the part that is required to be made during the 31 accounting period and the balance to principal. If a part of a 32 payment is not required to be made or the payment received is the 33 entire amount to which the trustee is entitled, the trustee shall 34 allocate the entire payment to principal. For purposes of this 35 subsection, a payment is not ‘required to be made’ to the extent 36 that it is made because the trustee exercises a right of withdrawal. 37 (D) If, to obtain an estate tax marital deduction for a trust, a 38 trustee must allocate more of a payment to income than provided 39 for by this section, the trustee shall allocate to income the 40 additional amount necessary to obtain the marital deduction. 41 (E) This section does not apply to payments subject to Section 42 62-7-919. 431 [422] 259 1 Section 62-7-919. Liquidating assets. 2 3 (A) In this section, ‘liquidating asset’ means an asset whose 4 value diminishes or terminates because the asset is expected to 5 produce receipts for a period of limited duration. The term 6 includes a leasehold, patent, copyright, royalty right, and right to 7 receive payments during a period of more than one year under an 8 arrangement that does not provide for the payment of interest on 9 the unpaid balance. The term does not include a payment subject to 10 Section 62-7-918, resources subject to Section 62-7-920, timber 11 subject to Section 62-7-921, an activity subject to Section 12 62-7-923, an asset subject to Section 62-7-924, or any asset for 13 which the trustee establishes a reserve for depreciation pursuant to 14 Section 62-7-927. 15 (B) A trustee shall allocate to income ten percent of the receipts 16 from a liquidating asset and the balance to principal. 17 18 Section 62-7-920. Allocation of receipts from interests in 19 minerals or other natural resources. 20 21 (A) To the extent that a trustee accounts for receipts from an 22 interest in minerals or other natural resources pursuant to this 23 section, the trustee shall allocate them if: 24 (1) received as nominal delay rental or nominal annual rent 25 on a lease, a receipt must be allocated to income; 26 (2) received from a production payment, a receipt must be 27 allocated to income if and to the extent that the agreement creating 28 the production payment provides a factor for interest or its 29 equivalent. The balance must be allocated to principal; 30 (3) an amount received as a royalty, shut-in-well payment, 31 take-or-pay payment, bonus, or delay rental is more than nominal, 32 ninety percent must be allocated to principal and the balance to 33 income; 34 (4) an amount is received from a working interest or any 35 other interest not otherwise provided for in this subsection, ninety 36 percent of the net amount received must be allocated to principal 37 and the balance to income. 38 (B) An amount received on account of an interest in water that 39 is renewable must be allocated to income. If the water is not 40 renewable, ninety percent of the amount must be allocated to 41 principal and the balance to income. 1 [422] 260 1 (C) This part applies whether or not a decedent or donor was 2 extracting minerals, water, or other natural resources before the 3 interest became subject to the trust. 4 (D) If a trust owns an interest in minerals, water, or other 5 natural resources on the effective date of this part, the trustee may 6 allocate receipts from the interest as provided in this part or in the 7 manner used by the trustee before the effective date of this part. If 8 the trust acquires an interest in minerals, water, or other natural 9 resources after the effective date of this part, the trustee shall 10 allocate receipts from the interest as provided in this part. 11 12 Section 62-7-921. Allocation of receipts from sale of timber 13 and related products. 14 15 (A) To the extent that a trustee accounts for receipts from the 16 sale of timber and related products pursuant to this section, the 17 trustee shall allocate the net receipts to: 18 (1) income, to the extent that the amount of timber removed 19 from the land does not exceed the rate of growth of the timber 20 during the accounting periods in which a beneficiary has a 21 mandatory income interest; 22 (2) principal, to the extent that the amount of timber 23 removed from the land exceeds the rate of growth of the timber or 24 the net receipts are from the sale of standing timber; 25 (3) or between income and principal, if the net receipts are 26 from the lease of timberland or from a contract to cut timber from 27 land owned by a trust, by determining the amount of timber 28 removed from the land under the lease or contract and applying 29 items (1) and (2); or 30 (4) principal, to the extent that advance payments, bonuses, 31 and other payments are not otherwise allocated pursuant to this 32 subsection. 33 (B) In determining net receipts to be allocated pursuant to 34 subsection (A), a trustee shall deduct and transfer to principal a 35 reasonable amount for depletion. 36 (C) This part applies whether or not a decedent or transferor 37 was harvesting timber from the property before it became subject 38 to the trust. 39 (D) If a trust owns an interest in timberland on the effective 40 date of this part, the trustee may allocate net receipts from the sale 41 of timber and related products as provided in this part or in the 42 manner used by the trustee before the effective date of this part. If 43 the trust acquires an interest in timberland after the effective date1 [422] 261 1 of this part, the trustee shall allocate net receipts from the sale of 2 timber and related products as provided in this part. 3 4 Section 62-7-922. Marital deduction adjustments. 5 6 (A) If a marital deduction is allowed for all or part of a trust 7 whose assets consist substantially of property that does not provide 8 the surviving spouse with sufficient income from or use of the trust 9 assets, and if the amounts that the trustee transfers from principal 10 to income pursuant to Section 62-7-904 and distributes to the 11 spouse from principal pursuant to the terms of the trust are 12 insufficient to provide the spouse with the beneficial enjoyment 13 required to obtain the marital deduction, the spouse may require 14 the trustee to make property productive of income, convert 15 property within a reasonable time, or exercise the power in Section 16 62-7-904(A). The trustee may decide which action or combination 17 of actions to take. 18 (B) If subsection (A) is inapplicable, proceeds from the sale or 19 other disposition of an asset are principal without regard to the 20 amount of income the asset produces during any accounting 21 period. 22 23 Section 62-7-923. Allocation of derivatives; options. 24 25 (A) In this section, ‘derivative’ means a contract or financial 26 instrument or a combination of contracts and financial instruments 27 which gives a trust the right or obligation to participate in some or 28 all changes in the price of a tangible or intangible asset or group of 29 assets, or changes in a rate, an index of prices or rates, or other 30 market indicator for an asset or a group of assets. 31 (B) To the extent that a trustee does not account pursuant to 32 Section 62-7-912 for transactions in derivatives, the trustee shall 33 allocate to principal receipts from and disbursements made in 34 connection with those transactions. 35 (C) If a trustee grants an option to buy property from the trust, 36 whether or not the trust owns the property when the option is 37 granted, grants an option that permits another person to sell 38 property to the trust, or acquires an option to buy property for the 39 trust or an option to sell an asset owned by the trust, and the trustee 40 or other owner of the asset is required to deliver the asset if the 41 option is exercised, an amount received for granting the option 42 must be allocated to principal. An amount paid to acquire the 43 option must be paid from principal. A gain or loss realized upon1 [422] 262 1 the exercise of an option, including an option granted to a settlor of 2 the trust for services rendered, must be allocated to principal. 3 4 Section 62-7-924. Allocation of payments related to 5 asset-backed securities. 6 7 (A) In this section, ‘asset-backed security’ means an asset 8 whose value is based upon the right it gives the owner to receive 9 distributions from the proceeds of financial assets that provide 10 collateral for the security. The term includes an asset that gives the 11 owner the right to receive from the collateral financial assets only 12 the interest or other current return or only the proceeds other than 13 interest or current return. The term does not include an asset 14 subject to Section 62-7-909 or 62-7-918. 15 (B) If a trust receives a payment from interest or other current 16 return and from other proceeds of the collateral financial assets, 17 the trustee shall allocate to income the portion of the payment 18 which the payer identifies as being from interest or other current 19 return and shall allocate the balance of the payment to principal. 20 (C) If a trust receives one or more payments in exchange for 21 the entire interest in an asset-backed security in one accounting 22 period, the trustee shall allocate the payments to principal. If a 23 payment is one of a series of payments that results in the 24 liquidation of the interest of the trust in the security over more than 25 one accounting period, the trustee shall allocate ten percent of the 26 payment to income and the balance to principal. 27 28 Section 62-7-925. Disbursements from income. 29 30 A trustee shall make the following disbursements from income 31 to the extent that they are not disbursements subject to Section 32 62-7-905(2)(b) or (c): 33 (1) one-half of the regular compensation of the trustee and of 34 any person providing investment advisory or custodial services to 35 the trustee; 36 (2) one-half of all expenses for accountings, judicial 37 proceedings, or other matters that involve both the income and 38 remainder interests; 39 (3) all of the other ordinary expenses incurred in connection 40 with the administration, management, or preservation of trust 41 property and the distribution of income, including interest, 42 ordinary repairs, regularly recurring taxes assessed against1 [422] 263 1 principal, and expenses of a proceeding or other matter that 2 concerns primarily the income interest; and 3 (4) recurring premiums on insurance covering the loss of a 4 principal asset or the loss of income from or use of the asset. 5 6 Section 62-7-926. Disbursements from principal. 7 8 (A) A trustee shall make the following disbursements from 9 principal: 10 (1) the remaining one-half of the disbursements provided in 11 Section 62-7-925(1) and (2); 12 (2) all of the trustee’s compensation calculated on principal 13 as a fee for acceptance, distribution, or termination, and 14 disbursements made to prepare property for sale; 15 (3) payments on the principal of a trust debt; 16 (4) expenses of a proceeding that concerns primarily 17 principal, including a proceeding to construe the trust or to protect 18 the trust or its property; 19 (5) premiums paid on a policy of insurance not provided in 20 Section 62-7-925(4) of which the trust is the owner and 21 beneficiary; 22 (6) estate, inheritance, and other transfer taxes, including 23 penalties, apportioned to the trust; and 24 (7) disbursements related to environmental matters, 25 including reclamation, assessing environmental conditions, 26 remedying and removing environmental contamination, 27 monitoring remedial activities and the release of substances, 28 preventing future releases of substances, collecting amounts from 29 persons liable or potentially liable for the costs of those activities, 30 penalties imposed under environmental laws or regulations and 31 other payments made to comply with those laws or regulations, 32 statutory or common law claims by third parties, and defending 33 claims based on environmental matters. 34 (B) If a principal asset is encumbered with an obligation that 35 requires income from that asset to be paid directly to the creditor, 36 the trustee shall transfer from principal to income an amount equal 37 to the income paid to the creditor in reduction of the principal 38 balance of the obligation. 39 40 Section 62-7-927. Transfer to principal of cash receipts 41 from asset subject to depreciation. 421 [422] 264 1 (A) In this section, ‘depreciation’ means a reduction in value 2 due to wear, tear, decay, corrosion, or gradual obsolescence of a 3 fixed asset having a useful life of more than one year. 4 (B) A trustee may transfer to principal a reasonable amount of 5 the net cash receipts from a principal asset that is subject to 6 depreciation, but may not transfer any amount for depreciation: 7 (1) of that portion of real property used or available for use 8 by a beneficiary as a residence or of tangible personal property 9 held or made available for the personal use or enjoyment of a 10 beneficiary; 11 (2) during the administration of a decedent’s estate; or 12 (3) under this section if the trustee is accounting pursuant to 13 Section 62-7-912 for the business or activity in which the asset is 14 used. 15 (C) An amount transferred to principal need not be held as a 16 separate fund. 17 18 Section 62-7-928. Future principal disbursements reserves. 19 20 (A) If a trustee makes or expects to make a principal 21 disbursement described in this section, the trustee may transfer an 22 appropriate amount from income to principal in one or more 23 accounting periods to reimburse principal or to provide a reserve 24 for future principal disbursements. 25 (B) A principal disbursement for purposes of this section 26 includes the following, but only to the extent that the trustee has 27 not been, and does not expect to be, reimbursed by a third party: 28 (1) an amount chargeable to income but paid from principal 29 because it is unusually large, including extraordinary repairs; 30 (2) a capital improvement to a principal asset, whether in the 31 form of changes to an existing asset or the construction of a new 32 asset, including special assessments; 33 (3) a disbursement made to prepare property for rental, 34 including tenant allowances, leasehold improvements, and 35 broker’s commissions; 36 (4) a periodic payment on an obligation secured by a 37 principal asset to the extent that the amount transferred from 38 income to principal for depreciation is less than the periodic 39 payments; and 40 (5) a disbursement described in Section 62-7-926(A)(7). 41 (C) If the asset whose ownership gives rise to the 42 disbursements becomes subject to a successive income interest1 [422] 265 1 after an income interest ends, a trustee may continue to transfer 2 amounts from income to principal as provided in subsection (A). 3 4 Section 62-7-929. Payment of taxes from income and 5 principal. 6 7 (A) A tax required to be paid by a trustee based on receipts 8 allocated to income must be paid from income. 9 (B) A tax required to be paid by a trustee based on receipts 10 allocated to principal must be paid from principal, even if the tax is 11 called an income tax by the taxing authority. 12 (C) A tax required to be paid by a trustee on the trust’s share of 13 the taxable income of the entity must be paid proportionately from: 14 (1) income, to the extent that receipts from the entity are 15 allocated to income; and 16 (2) principal, to the extent that: 17 (a) receipts from the entity are allocated to principal; and 18 (b) the trust’s share of the taxable income of the entity 19 exceeds the total receipts described in items (1) and (2)(a). 20 (D) For purposes of this section, receipts allocated to principal 21 or income must be reduced by the amount distributed to a 22 beneficiary from principal or income for which the trust receives a 23 deduction in calculating the tax. 24 25 Section 62-7-930. Certain adjustments between principal 26 and income; reduction of marital deduction or charitable 27 contribution deduction. 28 29 (A) A fiduciary may make adjustments between principal and 30 income to offset the shifting of economic interests or tax benefits 31 between income beneficiaries and remainder beneficiaries which 32 arise from: 33 (1) elections and decisions, other than those provided in 34 subsection (B), that the fiduciary makes from time to time 35 regarding tax matters; 36 (2) an income tax or any other tax that is imposed upon the 37 fiduciary or a beneficiary as a result of a transaction involving or a 38 distribution from the estate or trust; or 39 (3) the ownership by an estate or trust of an interest in an 40 entity whose taxable income, whether or not distributed, is 41 includable in the taxable income of the estate, trust, or a 42 beneficiary. 1 [422] 266 1 (B) If the amount of an estate tax marital deduction or 2 charitable contribution deduction is reduced because a fiduciary 3 deducts an amount paid from principal for income tax purposes 4 instead of deducting it for estate tax purposes, and as a result estate 5 taxes paid from principal are increased and income taxes paid by 6 an estate, trust, or beneficiary are decreased, each estate, trust, or 7 beneficiary that benefits from the decrease in income tax shall 8 reimburse the principal from which the increase in estate tax is 9 paid. The total reimbursement must equal the increase in the estate 10 tax to the extent that the principal used to pay the increase would 11 have qualified for a marital deduction or charitable contribution 12 deduction but for the payment. The proportionate share of the 13 reimbursement for each estate, trust, or beneficiary whose income 14 taxes are reduced must be the same as its proportionate share of the 15 total decrease in income tax. An estate or trust shall reimburse 16 principal from income. 17 18 Section 62-7-931. Application and construction of Uniform 19 Principal and Income Act. 20 21 In applying and construing this Uniform Act, consideration must 22 be given to the need to promote uniformity of the law with respect 23 to its subject matter among states that enact it. 24 25 Section 62-7-932. Discretionary power of a fiduciary. 26 27 (A) A court must not change a fiduciary’s decision to exercise 28 or not to exercise a discretionary power conferred by this part 29 unless it determines that the decision was an abuse of the 30 fiduciary’s discretion. A court shall not determine that a fiduciary 31 abused its discretion merely because the court would have 32 exercised the discretion in a different manner or would not have 33 exercised the discretion. 34 (B) The decisions subject to subsection (A) include a 35 determination: 36 (1) pursuant to Section 62-7-904(A) of whether and to what 37 extent an amount should be transferred from principal to income or 38 from income to principal; and 39 (2) of the factors that are relevant to the trust and its 40 beneficiaries, the extent to which they are relevant, and the weight, 41 if any, to be given to the relevant factors, in deciding whether and 42 to what extent to exercise the power in Section 62-7-904(A). 1 [422] 267 1 (C) If a court determines that a fiduciary has abused its 2 discretion, the remedy is to restore the income and remainder 3 beneficiaries to the positions they would have occupied if the 4 fiduciary had not abused its discretion, according to the following 5 rules: 6 (1) to the extent that the abuse of discretion has resulted in 7 no distribution to a beneficiary or a distribution that is too small, 8 the court must require the fiduciary to distribute from the trust to 9 the beneficiary an amount that the court determines will restore the 10 beneficiary, in whole or in part, to his or her appropriate position; 11 (2) to the extent that the abuse of discretion has resulted in a 12 distribution to a beneficiary that is too large, the court must restore 13 the beneficiaries, the trust, or both, in whole or in part, to their 14 appropriate positions by requiring the fiduciary to withhold an 15 amount from one or more future distributions to the beneficiary 16 who received the distribution that was too large or requiring that 17 beneficiary to return some or all of the distribution to the trust; 18 (3) to the extent that the court is unable, after applying items 19 (1) and (2), to restore the beneficiaries, the trust, or both, to the 20 positions they would have occupied if the fiduciary had not abused 21 its discretion, the court may require the fiduciary to pay an 22 appropriate amount from its own funds to one or more of the 23 beneficiaries or the trust, or both. 24 (D) Upon a petition by the fiduciary, the court having 25 jurisdiction over the trust or estate must determine whether a 26 proposed exercise or nonexercise by the fiduciary of a 27 discretionary power in this part results in an abuse of the 28 fiduciary’s discretion. If the petition describes the proposed 29 exercise or nonexercise of the power and contains sufficient 30 information to inform the beneficiaries of the reasons for the 31 proposal, the facts upon which the fiduciary relies, and an 32 explanation of how the income and remainder beneficiaries are 33 affected by the proposed exercise or nonexercise of the power, a 34 beneficiary who challenges the proposed exercise or nonexercise 35 has the burden of establishing that it will result in an abuse of 36 discretion. 37 38 Section 62-7-933. Uniform Prudent Investor Act. 39 40 (A) This section may be cited as the South Carolina Uniform 41 Prudent Investor Act. 1 [422] 268 1 (B)(1) Except as otherwise provided in item (2), a trustee who 2 invests and manages trust assets owes a duty to the beneficiaries of 3 the trust to comply with the prudent investor rule in this section. 4 (2) The prudent investor rule is a default rule that may be 5 expanded, restricted, eliminated, or otherwise altered by the 6 provisions of a trust. A trustee is not liable to a beneficiary to the 7 extent that the trustee acted in reasonable reliance on the 8 provisions of the trust. 9 (C)(1) A trustee shall invest and manage trust assets as a 10 prudent investor would by considering the purposes, terms, 11 distribution requirements, and other circumstances of the trust. In 12 satisfying this standard, the trustee shall exercise reasonable care, 13 skill, and caution. 14 (2) A trustee’s investment and management decisions 15 respecting individual assets must be evaluated not in isolation but 16 in the context of the trust portfolio as a whole and as a part of an 17 overall investment strategy having risk and return objectives 18 reasonably suited to the trust. 19 (3) A trustee shall consider in investing and managing trust 20 assets those circumstances of the following as are relevant to the 21 trust or its beneficiaries: 22 (a) general economic conditions; 23 (b) the possible effect of inflation or deflation; 24 (c) the expected tax consequences of investment decisions 25 or strategies; 26 (d) the role that each investment or course of action plays 27 within the overall trust portfolio, including financial assets, 28 interests in closely held enterprises, tangible and intangible 29 personal property, and real property; 30 (e) the expected total return from income and the 31 appreciation of capital; 32 (f) other resources of the beneficiaries; 33 (g) needs for liquidity, regularity of income, and 34 preservation or appreciation of capital; and 35 (h) an asset’s special relationship or special value to the 36 purposes of the trust or to one or more of the beneficiaries. 37 (4) trustee shall make a reasonable effort to verify facts 38 relevant to the investment and management of trust assets. 39 (5)(a) A trustee may invest in any kind of property or type of 40 investment consistent with the standards of this section. 41 (b) Nothing in this section prohibits affiliate investments 42 if they otherwise comply with the standards of this section. For 43 these purposes, ‘affiliate’ means an entity that owns or is owned by1 [422] 269 1 the trustee, in whole or in part, or is owned by the same entity that 2 owns the trustee. Affiliate investments include: 3 (i) investment and reinvestment in the securities of an 4 open-end or closed-end management investment company or of an 5 investment trust registered under the Investment Company Act of 6 1940, as amended. A bank or trustee, or both of them, may invest 7 in these securities even if the bank or trustee, or an affiliate of the 8 bank or trustee, provides services to the investment company or 9 investment trust such as that of an investment advisor, custodian, 10 transfer agent, registrar, sponsor, distributor, manager, or 11 otherwise, and receives reasonable remuneration for those 12 services; 13 (ii) retention of the securities into which corporate 14 securities owned by the trustee may be converted or which may be 15 derived as a result of merger, consolidation, stock dividends, splits, 16 liquidations, and similar procedures, and the exercise by purchase 17 or otherwise any rights, warrants, or conversion features attaching 18 to the securities; 19 (iii) purchase or other acquisition and retention of a 20 security underwritten by a syndicate, even if the trustee or its 21 affiliate participates or has participated as a member of the 22 syndicate, provided the trustee does not purchase the security from 23 itself, its affiliate, or from another member of the underwriting 24 syndicate, or its affiliate, pursuant to an implied or express 25 reciprocal agreement between the trustee, or its affiliate, and the 26 other member, or its affiliate, to purchase all or part of each other’s 27 underwriting participation commitment within the syndicate. 28 (c) Notwithstanding any other provision of law, any 29 fiduciary holding securities in its fiduciary capacity, any bank, 30 trust company, or private banker holding securities as a custodian 31 or managing agent, and any bank, trust company, or private banker 32 holding securities as custodian for a fiduciary, is authorized to 33 deposit or arrange for the deposit of such securities in a clearing 34 corporation (as defined in Article 8 of the Uniform Commercial 35 Code). When such securities are so deposited, certificates 36 representing securities of the same class of the same issuer may be 37 merged and held in bulk in the name of the nominee of such 38 clearing corporation with any other such securities deposited in 39 such clearing corporation by any person regardless of the 40 ownership of such securities, and certificates of small 41 denomination may be merged into one or more certificates of 42 larger denomination. The records of such fiduciary and the 43 records of such bank, trust company, or private banker acting as1 [422] 270 1 custodian, as managing agent or as custodian for a fiduciary shall 2 at all times show the name of the party for whose account the 3 securities are so deposited. Ownership of, and other interests in, 4 such securities may be transferred by bookkeeping entry on the 5 books of such clearing corporation without physical delivery of 6 certificates representing such securities. A bank, trust company, or 7 private banker so depositing securities pursuant to this section 8 shall be subject to such regulations as in the case of state-chartered 9 institutions, the Board of Financial Institutions, and, in the case of 10 national banking associations, The Comptroller of the Currency 11 may from time to time issue. A bank, trust company, or private 12 banker acting as custodian for a fiduciary shall, on demand by the 13 fiduciary, certify in writing to the fiduciary the securities so 14 deposited by such bank, trust company, or private banker in such 15 clearing corporation for the account of such fiduciary. A fiduciary 16 shall, on demand by any party to a judicial proceeding for the 17 settlement of such fiduciary’s account or on demand by the 18 attorney for such party, certify in writing to such party the 19 securities deposited by such fiduciary in such clearing corporation 20 for its account as such fiduciary. This subsection shall apply to 21 any fiduciary holding securities in its fiduciary capacity, and to 22 any bank, trust company, or private banker holding securities as a 23 custodian, managing agent, or custodian for a fiduciary, acting on 24 April 17, 1973, or who thereafter may act regardless of the date of 25 the agreement, instrument, or court order by which it is appointed 26 and regardless of whether or not such fiduciary, custodian, 27 managing agent, or custodian for a fiduciary owns capital stock of 28 such clearing corporation. 29 (6) [RESERVED]. 30 (D) A trustee shall diversify the investments of the trust unless 31 the trustee reasonably determines that, because of special 32 circumstances, the purposes of the trust are better served without 33 diversifying. 34 (E) Within a reasonable time after accepting a trusteeship or 35 receiving trust assets, a trustee shall review the trust assets and 36 make and implement decisions concerning the retention and 37 disposition of assets in order to bring the trust portfolio into 38 compliance with the purposes, terms, distribution requirements, 39 and other circumstances of the trust and with the requirements of 40 this section. 41 (F) [RESERVED] 1 [422] 271 1 (G) Compliance with the prudent investor rule is determined in 2 light of the facts and circumstances existing at the time of a 3 trustee’s decision or action and not by hindsight. 4 (H) [RESERVED] 5 (I) The following terms or comparable language in the 6 provisions of a trust, unless otherwise limited or modified, 7 authorize any investment or strategy permitted pursuant to this 8 section: ‘investments permissible by law for investment of trust 9 funds’, ‘legal investments’, ‘authorized investments’, ‘using the 10 judgment and care under the circumstances then prevailing that 11 persons of prudence, discretion, and intelligence exercise in the 12 management of their own affairs, not in regard to speculation but 13 in regard to the permanent disposition of their funds, considering 14 the probable income as well as the probable safety of their capital’, 15 ‘prudent man rule’, ‘prudent trustee rule’, ‘prudent person rule’, 16 and ‘prudent investor rule’. 17 (J)(1) Notwithstanding provisions of this section to the 18 contrary, the duties of a trustee with respect to acquiring a contract 19 of insurance upon the life of the trustor or upon the lives of the 20 trustor and the trustor’s spouse, children, or parents do not include 21 a duty to: 22 (a) determine whether the contract is or remains a proper 23 investment; 24 (b) exercise policy options available under the contract; or 25 (c) diversify the contract. 26 (2) The trustee is not liable to the beneficiaries of the 27 contract of insurance or to another party for loss arising from this 28 subsection. 29 (3) Except as specifically provided in the trust instrument, 30 the provisions of this subsection apply to a trust established before 31 or after the effective date of this subsection and to a life insurance 32 policy acquired by the trustee before or after the effective date of 33 this section. 34 (K) This section applies to ‘charitable remainder trusts’. 35 ‘Charitable remainder trust’ means a trust that provides for a 36 specified distribution at least annually for either life or a term of 37 years to one or more beneficiaries, at least one of which is not a 38 charity with an irrevocable remainder interest to be held for the 39 benefit of, or paid over to, charity. 40 (L) This section must be applied and construed to effectuate its 41 general purpose to make uniform the law with respect to the 42 subject of this section among the States enacting it. 431 [422] 272 1 Part 10 2 3 Liability of Trustees and Rights 4 of Persons Dealing With Trustee 5 6 General Comment 7 8 Sections 1001 through 1009 identify the remedies for breach of 9 trust, describe how money damages are to be determined, and 10 specify potential defenses. Section 1001 lists the remedies for 11 breach of trust and specifies when a breach of trust occurs. A 12 breach of trust occurs when the trustee breaches one of the duties 13 contained in Article 8 or elsewhere in the Code. The remedies for 14 breach of trust in Section 1001 are broad and flexible. Section 15 1002 provides how money damages for breach of trust are to be 16 determined. The standard for determining money damages rests on 17 two principles: (1) the trust should be restored to the position it 18 would have been in had the harm not occurred; and (2) the trustee 19 should not be permitted to profit from the trustee’s own wrong. 20 Section 1003 holds a trustee accountable for profits made from the 21 trust even in the absence of a breach of trust. Section 1004 22 reaffirms the court’s power in equity to award costs and attorney’s 23 fees as justice requires. 24 Sections 1005 through 1009 deal with potential defenses. 25 Section 1005 provides a statute of limitations on actions against a 26 trustee. Section 1006 protects a trustee who acts in reasonable 27 reliance on the terms of a written trust instrument. Section 1007 28 protects a trustee who has exercised reasonable care to ascertain 29 the happening of events that might affect distribution, such as a 30 beneficiary’s marriage or death. Section 1008 describes the effect 31 and limits on the use of an exculpatory clause. Section 1009 deals 32 with the standards for recognizing beneficiary approval of acts of 33 the trustee that might otherwise constitute a breach of trust. 34 Sections 1010 through 1013 address trustee relations with 35 persons other than beneficiaries. The emphasis is on encouraging 36 third parties to engage in commercial transactions to the same 37 extent as if the property were not held in trust. Section 1010 38 negates personal liability on contracts entered into by the trustee if 39 the fiduciary capacity was properly disclosed. The trustee is also 40 relieved from liability for torts committed in the course of 41 administration unless the trustee was personally at fault. Section 42 1011 negates personal liability for contracts entered into by 43 partnerships in which the trustee is a general partner as long as the1 [422] 273 1 fiduciary capacity was disclosed in the contract or partnership 2 certificate. Section 1012 protects persons other than beneficiaries 3 who deal with a trustee in good faith and without knowledge that 4 the trustee is exceeding or improperly exercising a power. Section 5 1013 permits a third party to rely on a certification of trust, thereby 6 reducing the need for a third party to request a copy of the 7 complete trust instrument. 8 Much of this article is not subject to override in the terms of the 9 trust. The settlor may not limit the rights of persons other than 10 beneficiaries as provided in Sections 1010 through 1013, nor 11 interfere with the court’s ability to take such action to remedy a 12 breach of trust as may be necessary in the interests of justice. See 13 Section 105. 14 15 Section 62-7-1001. Remedies for breach of trust. 16 17 (a) A violation by a trustee of a duty the trustee owes to a 18 beneficiary is a breach of trust. 19 (b) To remedy a breach of trust that has occurred or may occur, 20 the court may: 21 (1) compel the trustee to perform the trustee’s duties; 22 (2) enjoin the trustee from committing a breach of trust; 23 (3) compel the trustee to redress a breach of trust by paying 24 money, restoring property, or other means; 25 (4) order a trustee to account; 26 (5) appoint a special fiduciary to take possession of the trust 27 property and administer the trust; 28 (6) suspend the trustee; 29 (7) remove the trustee as provided in Section 62-7-706; 30 (8) reduce or deny compensation to the trustee; 31 (9) subject to Section 62-7-1012, void an act of the trustee, 32 impose a lien or a constructive trust on trust property, or trace trust 33 property wrongfully disposed of and recover the property or its 34 proceeds; or 35 (10) order any other appropriate relief. 36 37 Comment 38 39 This section codifies the remedies available to rectify or to 40 prevent a breach of trust for violation of a duty owed to a 41 beneficiary. The duties that a trust might breach include those 42 contained in Article 8 in addition to those specified elsewhere in 43 the Code.1 [422] 274 1 This section identifies the available remedies but does not 2 attempt to cover the refinements and exceptions developed in case 3 law. The availability of a remedy in a particular circumstance will 4 be determined not only by this Code but also by the common law 5 of trusts and principles of equity. See Section 106. 6 Beneficiaries and cotrustees have standing to bring a petition to 7 remedy a breach of trust. Following a successor trustee’s 8 acceptance of office, a successor trustee has standing to sue a 9 predecessor for breach of trust. See Restatement (Second) of Trusts 10 Section 200 (1959). A person who may represent a beneficiary’s 11 interest under Article 3 would have standing to bring a petition on 12 behalf of the person represented. In the case of a charitable trust, 13 those with standing include the state attorney general, a charitable 14 organization expressly designated to receive distributions under 15 the terms of the trust, and other persons with a special interest. See 16 Section 110 & Restatement (Second) of Trusts Section 391 (1959). 17 A person appointed to enforce a trust for an animal or a trust for a 18 noncharitable purpose would have standing to sue for a breach of 19 trust. See Sections 110(b), 408, 409. 20 Traditionally, remedies for breach of trust at law were limited to 21 suits to enforce unconditional obligations to pay money or deliver 22 chattels. See Restatement (Second) of Trusts Section 198 (1959). 23 Otherwise, remedies for breach of trust were exclusively equitable, 24 and as such, punitive damages were not available and findings of 25 fact were made by the judge and not a jury. See Restatement 26 (Second) of Trusts Section 197 (1959). The Uniform Trust Code 27 does not preclude the possibility that a particular enacting 28 jurisdiction might not follow these norms. 29 The remedies identified in this section are derived from 30 Restatement (Second) of Trusts Section 199 (1959). The reference 31 to payment of money in subsection (b)(3) includes liability that 32 might be characterized as damages, restitution, or surcharge. For 33 the measure of liability, see Section 1002. Subsection (b)(5) makes 34 explicit the court’s authority to appoint a special fiduciary, also 35 sometimes referred to as a receiver. See Restatement (Second) of 36 Trusts Section 199(d) (1959). The authority of the court to appoint 37 a special fiduciary is not limited to actions alleging breach of trust 38 but is available whenever the court, exercising its equitable 39 jurisdiction, concludes that an appointment would promote 40 administration of the trust. See Section 704(d) (special fiduciary 41 may be appointed whenever court considers such appointment 42 necessary for administration). 1 [422] 275 1 Subsection (b)(8), which allows the court to reduce or deny 2 compensation, is in accord with Restatement (Second) of Trusts 3 Section 243 (1959). For the factors to consider in setting a trustee’s 4 compensation absent breach of trust, see Section 708 and 5 Comment. In deciding whether to reduce or deny a trustee 6 compensation, the court may wish to consider (1) whether the 7 trustee acted in good faith; (2) whether the breach of trust was 8 intentional; (3) the nature of the breach and the extent of the loss; 9 (4) whether the trustee has restored the loss; and (5) the value of 10 the trustee’s services to the trust. See Restatement (Second) of 11 Trusts Section 243 cmt. c (1959). 12 The authority under subsection (b)(9) to set aside wrongful acts 13 of the trustee is a corollary of the power to enjoin a threatened 14 breach as provided in subsection (b)(2). However, in setting aside 15 the wrongful acts of the trustee the court may not impair the rights 16 of bona fide purchasers protected under Section 1012. See 17 Restatement (Second) of Trusts Section 284 (1959). 18 South Carolina Comment 19 20 This section lists the remedies available to a beneficiary for a 21 breach of trust by the trustee. Although subsections (b)(2) through 22 (b)(9) list specific remedies, subsection (b)(10) provides a general 23 statement of available remedies, which essentially confirms broad 24 authority in the court to fashion an appropriate remedy for breach 25 of trust. 26 27 Section 62-7-1002. Damages for breach of trust. 28 29 (a) A trustee who commits a breach of trust is liable to the 30 beneficiaries affected for the greater of: 31 (1) the amount required to restore the value of the trust 32 property and trust distributions to what they would have been had 33 the breach not occurred; or 34 (2) the profit the trustee made by reason of the breach. 35 (b) Except as otherwise provided in this subsection, if more 36 than one trustee is liable to the beneficiaries for a breach of trust, a 37 trustee is entitled to contribution from the other trustee or trustees. 38 A trustee is not entitled to contribution if the trustee was 39 substantially more at fault than another trustee or if the trustee 40 committed the breach of trust in bad faith or with reckless 41 indifference to the purposes of the trust or the interests of the 42 beneficiaries. A trustee who received a benefit from the breach of1 [422] 276 1 trust is not entitled to contribution from another trustee to the 2 extent of the benefit received. 3 4 Comment 5 6 Subsection (a) is based on Restatement (Third) of Trusts: 7 Prudent Investor Rule Section 205 (1992). If a trustee commits a 8 breach of trust, the beneficiaries may either affirm the transaction 9 or, if a loss has occurred, hold the trustee liable for the amount 10 necessary to compensate fully for the consequences of the breach. 11 This may include recovery of lost income, capital gain, or 12 appreciation that would have resulted from proper administration. 13 Even if a loss has not occurred, the trustee may not benefit from 14 the improper action and is accountable for any profit the trustee 15 made by reason of the breach. 16 For extensive commentary on the determination of damages, 17 traditionally known as trustee surcharge, with numerous specific 18 applications, see Restatement (Third) of Trusts: Prudent Investor 19 Rule Sections 205-213 (1992). For the use of benchmark portfolios 20 to determine damages, see Restatement (Third) of Trusts: Prudent 21 Investor Rule Reporter’s Notes to Sections 205 and 208-211 22 (1992). On the authority of a court of equity to reduce or excuse 23 damages for breach of trust, see Restatement (Second) of Trusts 24 Section 205 cmt. g (1959). 25 For purposes of this section and Section 1003, “profit” does not 26 include the trustee’s compensation. A trustee who has committed a 27 breach of trust is entitled to reasonable compensation for 28 administering the trust unless the court reduces or denies the 29 trustee compensation pursuant to Section 1001(b)(8). 30 Subsection (b) is based on Restatement (Second) of Trusts 31 Section 258 (1959). Cotrustees are jointly and severally liable for a 32 breach of trust if there was joint participation in the breach. Joint 33 and several liability also is imposed on a nonparticipating cotrustee 34 who, as provided in Section 703(g), failed to exercise reasonable 35 care (1) to prevent a cotrustee from committing a serious breach of 36 trust, or (2) to compel a cotrustee to redress a serious breach of 37 trust. Joint and several liability normally carries with it a right in 38 any trustee to seek contribution from a cotrustee to the extent the 39 trustee has paid more than the trustee’s proportionate share of the 40 liability. Subsection (b), consistent with Restatement (Second) of 41 Trusts Section 258 (1959), creates an exception. A trustee who was 42 substantially more at fault or committed the breach of trust in bad 43 faith or with reckless indifference to the purposes of the trust or the1 [422] 277 1 interests of the beneficiaries is not entitled to contribution from the 2 other trustees. 3 Determining degrees of comparative fault is a question of fact. 4 The fact that one trustee was more culpable or more active than 5 another does not necessarily establish that this trustee was 6 substantially more at fault. Nor is a trustee substantially less at 7 fault because the trustee did not actively participate in the breach. 8 See Restatement (Second) of Trusts Section 258 cmt. e (1959). 9 Among the factors to consider: (1) Did the trustee fraudulently 10 induce the other trustee to join in the breach? (2) Did the trustee 11 commit the breach intentionally while the other trustee was at most 12 negligent? (3) Did the trustee, because of greater experience or 13 expertise, control the actions of the other trustee? (4) Did the 14 trustee alone commit the breach with liability imposed on the other 15 trustee only because of an improper delegation or failure to 16 properly monitor the actions of the cotrustee? See Restatement 17 (Second) of Trusts Section 258 cmt. d (1959). 18 19 South Carolina Comment 20 21 For purposes of this section and Section 62-7-1003, “profit” 22 does not include the trustee’s compensation. A trustee who has 23 committed a breach of trust is entitled to reasonable compensation 24 for administering the trust unless the court reduces or denies the 25 trustee compensation pursuant to Section 62-7-1001(b)(8). 26 27 Section 62-7-1003. Damages in absence of breach. 28 29 (a) A trustee is accountable to an affected beneficiary for any 30 profit made by the trustee arising from the administration of the 31 trust, even absent a breach of trust. 32 (b) Absent a breach of trust, a trustee is not liable to a 33 beneficiary for a loss or depreciation in the value of trust property 34 or for not having made a profit. 35 36 Comment 37 38 The principle on which a trustee’s duty of loyalty is premised is 39 that a trustee should not be allowed to use the trust as a means for 40 personal profit other than for routine compensation earned. While 41 most instances of personal profit involve situations where the 42 trustee has breached the duty of loyalty, not all cases of personal 43 profit involve a breach of trust. Subsection (a), which holds a1 [422] 278 1 trustee accountable for any profit made, even absent a breach of 2 trust, is based on Restatement (Second) of Trusts Section 203 3 (1959). A typical example of a profit is receipt by the trustee of a 4 commission or bonus from a third party for actions relating to the 5 trust’s administration. See Restatement (Second) of Trusts 6 Section 203 cmt. a (1959). 7 A trustee is not an insurer. Similar to Restatement (Second) of 8 Trusts Section 204 (1959), subsection (b) provides that absent a 9 breach of trust a trustee is not liable for a loss or depreciation in 10 the value of the trust property or for failure to make a profit. 11 12 South Carolina Comment 13 14 For purposes of this section and Section 62-7-1002, “profit” 15 does not include the trustee’s compensation. A trustee who has 16 committed a breach of trust is entitled to reasonable compensation 17 for administering the trust unless the court reduces or denies the 18 trustee compensation pursuant to Section 62-7-1001(b)(8). 19 Section 62-7-1004. Attorney’s fees and costs. 20 21 In a judicial proceeding involving the administration of a trust, 22 the court, as justice and equity may require, may award costs and 23 expenses, including reasonable attorney’s fees, to any party, to be 24 paid by another party or from the trust that is the subject of the 25 controversy. 26 27 Comment 28 29 This section, which is based on Massachusetts General Laws 30 chapter 215, Section 45, codifies the court’s historic authority to 31 award costs and fees, including reasonable attorney’s fees, in 32 judicial proceedings grounded in equity. The court may award a 33 party its own fees and costs from the trust. The court may also 34 charge a party’s costs and fees against another party to the 35 litigation. Generally, litigation expenses were at common law 36 chargeable against another party only in the case of egregious 37 conduct such as bad faith or fraud. With respect to a party’s own 38 fees, Section 709 authorizes a trustee to recover expenditures 39 properly incurred in the administration of the trust. The court 40 may award a beneficiary litigation costs if the litigation is 41 deemed beneficial to the trust. Sometimes, litigation brought by 42 a beneficiary involves an allegation that the trustee has 43 committed a breach of trust. On other occasions, the suit by the1 [422] 279 1 beneficiary is brought because of the trustee’s failure to take 2 action against a third party, such as to recover property properly 3 belonging to the trust. For the authority of a beneficiary to bring 4 an action when the trustee fails to take action against a third party, 5 see Restatement (Second) of Trusts Sections 281-282 (1959). 6 For the case law on the award of attorney’s fees and other 7 litigation costs, see 3 Austin W. Scott & William F. Fratcher, The 8 Law of Trusts Sections 188.4 (4th ed. 1988). 9 10 South Carolina Comment 11 12 This section is similar to former South Carolina Probate Code 13 Section 62-7-204. Paragraph (B) of that section granted to the 14 probate court concurrent jurisdiction with the circuit courts of 15 South Carolina over attorney’s fees. As that section states, 16 “Attorney’s fees may be set at a fixed or hourly rate or by 17 contingency fee.” SCTC Section 62-7-1004 goes further by 18 codifying the power of the courts to award costs and expenses. 19 Generally, litigation expenses were at common law chargeable 20 against another party only in the case of egregious conduct such as 21 bad faith or fraud. 22 23 Section 62-7-1005. Limitation of action against trustee. 24 25 (a) Unless previously barred by adjudication, consent, or 26 limitation, a beneficiary may not commence a proceeding against 27 a trustee for breach of trust more than one year after the date the 28 beneficiary or a representative of the beneficiary was sent a report 29 that adequately disclosed the existence of a potential claim for 30 breach of trust. 31 (b) A report adequately discloses the existence of a potential 32 claim for breach of trust if it provides sufficient information so 33 that the beneficiary or representative knows of the potential claim 34 or should have inquired into its existence. 35 (c) If subsection (a) does not apply, a judicial proceeding by a 36 beneficiary or on behalf of a beneficiary against a trustee for 37 breach of trust must be commenced within three years after the 38 first to occur of: 39 (1) the removal, resignation, or death of the trustee; 40 (2) the termination of the beneficiary’s interest in the trust; 41 or 42 (3) the termination of the trust. 431 [422] 280 1 Comment 2 3 The one-year and five-year limitations periods under this section 4 are not the only means for barring an action by a beneficiary. A 5 beneficiary may be foreclosed by consent, release, or ratification as 6 provided in Section 1009. Claims may also be barred by principles 7 such as estoppel and laches arising in equity under the common 8 law of trusts. See Section 106. 9 The representative referred to in subsection (a) is the person who 10 may represent and bind a beneficiary as provided in Article 3. 11 During the time that a trust is revocable and the settlor has capacity, 12 the person holding the power to revoke is the one who must receive 13 the report. See Section 603(a) (rights of settlor of revocable trust). 14 This section addresses only the issue of when the clock will start 15 to run for purposes of the statute of limitations. If the trustee 16 wishes to foreclose possible claims immediately, a consent to the 17 report or other information may be obtained pursuant to 18 Section 1009. For the provisions relating to the duty to report to 19 beneficiaries, see Section 813. 20 Subsection (a) applies only if the trustee has furnished a report. 21 The one-year statute of limitations does not begin to run against a 22 beneficiary who has waived the furnishing of a report as provided 23 in Section 813(d). 24 Subsection (c) is intended to provide some ultimate repose for 25 actions against a trustee. It applies to cases in which the trustee 26 has failed to report to the beneficiaries or the report did not meet the 27 disclosure requirements of subsection (b). It also applies to 28 beneficiaries who did not receive notice of the report, whether 29 personally or through representation. While the five-year 30 limitations period will normally begin to run on termination of the 31 trust, it can also begin earlier. If a trustee leaves office prior to the 32 termination of the trust, the limitations period for actions against 33 that particular trustee begins to run on the date the trustee leaves 34 office. If a beneficiary receives a final distribution prior to the date 35 the trust terminates, the limitations period for actions by that 36 particular beneficiary begins to run on the date of final 37 distribution. 38 If a trusteeship terminates by reason of death, a claim against the 39 trustee’s estate for breach of fiduciary duty would, like other 40 claims against the trustee’s estate, be barred by a probate creditor’s 41 claim statute even though the statutory period prescribed by this 42 section has not yet expired.1 [422] 281 1 This section does not specifically provide that the statutes of 2 limitations under this section are tolled for fraud or other 3 misdeeds, the drafters preferring to leave the resolution of this 4 question to other law of the State. 5 6 South Carolina Comment 7 8 This section is similar in content to former South Carolina 9 Probate Code Section 62-7-307. Both sections establish a statute 10 of limitations especially applicable to trustees’ liabilities to trust 11 beneficiaries for breach of trust. SCTC Section 62-7-1005 sets the 12 limit for commencing a proceeding against a trustee for breach of 13 trust at one year after receiving a report from the Trustee or its 14 representative that provides sufficient information so that the 15 beneficiary or representative should know of or be on inquiry 16 notice about the claim. In other cases, the three-year limitation 17 period applies. 18 SCTC Section 62-7-1005(a) does not adopt the Uniform Trust 19 Code requirement that, for the one-year statute to commence, the 20 report inform the beneficiary of the limitations period. SCTC 21 Section 62-7-1005(c) reduces the UTC limitations period from five 22 to three years. 23 24 Section 62-7-1006. Reliance on trust instrument. 26 A trustee who acts in reasonable reliance on the terms of the 27 trust as expressed in the trust instrument is not liable to a 28 beneficiary for a breach of trust to the extent the breach resulted 29 from the reliance. 30 31 Comment 32 33 It sometimes happens that the intended terms of the trust differ 34 from the apparent meaning of the trust instrument. This can occur 35 because the court, in determining the terms of the trust, is allowed 36 to consider evidence extrinsic to the trust instrument. See 37 Section 103(17) (definition of “terms of a trust”). Furthermore, if 38 a trust is reformed on account of mistake of fact or law, as 39 authorized by Section 415, provisions of a trust instrument can be 40 deleted or contradicted and provisions not in the trust instrument 41 may be added. The concept of the “terms of a trust,” both as 42 defined in this Code and as used in the doctrine of reformation, is 43 intended to effectuate the principle that a trust should be 44 administered and distributed in accordance with the settlor’s intent.1 [422] 282 1 However, a trustee should also be able to administer a trust with 2 some dispatch and without concern that a reasonable reliance on 3 the terms of the trust instrument is misplaced. This section 4 protects a trustee who so relies on a trust instrument but only to the 5 extent the breach of trust resulted from such reliance. This section 6 is similar to Section 1(b) of the Uniform Prudent Investor Act, 7 which protects a trustee from liability to the extent that the trustee 8 acted in reasonable reliance on the provisions of the trust. 9 This section protects a trustee only if the trustee’s reliance is 10 reasonable. For example, a trustee’s reliance on the trust 11 instrument would not be justified if the trustee is aware of a prior 12 court decree or binding nonjudicial settlement agreement 13 clarifying or changing the terms of the trust. 14 15 South Carolina Comment 16 17 Former South Carolina statutes and case law resembled SCTC 18 Section 62-7-1006. Former South Carolina Probate Code Section 19 62-7-302(B)(2), retained and incorporated in Part 9, stated “[a] 20 trustee is not liable to a beneficiary to the extent that the trustee 21 acted in reasonable reliance on the provisions of the trust.” That 22 section is part of the South Carolina Uniform Prudent Investor Act, 23 retained and incorporated in Part 9, which provides trustee 24 guidelines for the administration of trusts, and specifically relates 25 to the investment and management of trust assets. As a result, that 26 section arguably applies to only the investment and management 27 of the trust corpus. SCTC Section 62-7-1006, however, covers a 28 broader scope because it does not contain language limiting its 29 application to investment and management of trust assets. 30 Prior South Carolina case law could be interpreted to allow 31 trustees to rely not only on terms pertaining to investment and 32 management of the trust, but also to other terms contained in the 33 trust document. South Carolina courts have held “[i]n ascertaining 34 the Settlor’s intent, [a] court must resort first to the language of the 35 trust instrument . . . .” Sarlin v. Sarlin, 312 S.C. 27, 29, 430 S.E.2d 36 530, 532 (S.C. Ct. App. 1993). One could infer that a trustee 37 should follow the same canons of interpretation as applied by the 38 courts. Additionally, former SCPC Section 62-7-704 encouraged 39 trustees to perform without the assistance of the courts in 40 providing that “a trustee has the power to perform, without court 41 authorization, every act which a prudent man would perform for 42 the purpose of the trust . . . .” This combination of case law and 43 statutory law seems to hold (or at the very least imply) that a1 [422] 283 1 trustee could reasonably rely on the terms contained in the trust 2 instrument for all types of provisions, not only those pertaining to 3 the investment and management of trust assets. SCTC Section 4 62-7-1006 provides more certainty with respect to this issue. 5 6 Section 62-7-1007. Event affecting administration or 7 distribution. 8 10 If the happening of an event, including marriage, divorce, 11 performance of educational requirements, or death, affects the 12 administration or distribution of a trust, a trustee who has 13 exercised reasonable care to ascertain the happening of the event is 14 not liable for a loss resulting from the trustee’s lack of knowledge. 15 16 Comment 17 18 This section, which is based on Washington Revised Code 19 Section 11.98.100, is designed to encourage trustees to administer 20 trusts expeditiously and without undue concern about liability for 21 failure to ascertain external facts, often of a personal nature, that 22 might affect administration or distribution of the trust. The 23 common law, contrary to this section, imposed absolute liability 24 against a trustee for misdelivery regardless of the trustee’s level of 25 care. See Restatement (Second) of Trusts Section 226 (1959). The 26 events listed in this section are not exclusive. A trustee who has 27 exercised reasonable care to ascertain the occurrence of other events, 28 such as the attainment by a beneficiary of a certain age, is also 29 protected from liability. 30 31 South Carolina Comment 32 33 There was no prior South Carolina statute specifically 34 addressing the issue of a trustee’s duty to ascertain the happening 35 of events affecting the administration or distribution of a trust. 36 Prior South Carolina case law essentially stated that a trustee 37 could be held liable for negligently failing to investigate events 38 affecting the status of a beneficiary’s rights to distributions. See 39 Rogers v. Herron, 226 S.C. 317, 85 S.E.2d 104 (S.C. 1954); see 40 also First Union Nat. Bank of South Carolina v. Soden, 511 S.E.2d 41 372 (Ct. App.1998) (essentially applying the same standards to a 42 remainder beneficiary for failing to disclose her father’s 43 remarriage). SCTC Section 62-7-1007 expressly provides1 [422] 284 1 protection from liability for trustees who do exercise reasonable 2 care. 3 4 Section 62-7-1008. Exculpation of trustee. 5 6 A term of a trust relieving a trustee of liability for breach of trust 7 is unenforceable to the extent that it: 8 (a) relieves the trustee of liability for breach of trust committed 9 in bad faith or with reckless indifference to the purposes of the 10 trust or the interests of the beneficiaries; or 11 (b) was inserted as the result of an abuse by the trustee of a 12 fiduciary or confidential relationship to the settlor. 13 14 Comment 15 16 Even if the terms of the trust attempt to completely exculpate a 17 trustee for the trustee’s acts, the trustee must always comply with a 18 certain minimum standard. As provided in subsection (a), a trustee 19 must always act in good faith with regard to the purposes of the trust 20 and the interests of the beneficiaries. Subsection (a) is consistent 21 with the standards expressed in Sections 105 and 814(a), which, 22 similar to this section, place limits on the power of a settlor to 23 negate trustee duties. This section is also similar to Section 222 of 24 the Restatement (Second) of Trusts (1959), except that this Code, 25 unlike the Restatement, allows a settlor to exculpate a trustee for a 26 profit that the trustee made from the trust. 27 Subsection (b) disapproves of cases such as Marsman v. Nasca, 28 573 N.E.2d 1025 (Mass. App. Ct. 1991), which held that an 29 exculpatory clause in a trust instrument drafted by the trustee was 30 valid because the beneficiary could not prove that the clause was 31 inserted as a result of an abuse of a fiduciary relationship. For a later 32 case where sufficient proof of abuse was present, see Rutanan v. 33 Ballard, 678 N.E.2d 133 (Mass. 1997). Subsection (b) responds to 34 the danger that the insertion of such a clause by the fiduciary or its 35 agent may have been undisclosed or inadequately understood by the 36 settlor. To overcome the presumption of abuse in subsection (b), the 37 trustee must establish that the clause was fair and that its existence 38 and contents were adequately communicated to the settlor. In 39 determining whether the clause was fair, the court may wish to 40 examine: (1) the extent of the prior relationship between the 41 settlor and trustee; (2) whether the settlor received independent 42 advice; (3) the sophistication of the settlor with respect to business 43 and fiduciary matters; (4) the trustee’s reasons for inserting the1 [422] 285 1 clause; and (5) the scope of the particular provision inserted. See 2 Restatement (Second) of Trusts Section 222 cmt. d (1959). 3 The requirements of subsection (b) are satisfied if the settlor was 4 represented by independent counsel. If the settlor was represented 5 by independent counsel, the settlor’s attorney is considered the 6 drafter of the instrument even if the attorney used the trustee’s 7 form. Because the settlor’s attorney is an agent of the settlor, 8 disclosure of an exculpatory teen to the settlor’s attorney is 9 disclosure to the settlor. 10 11 South Carolina Comment 12 13 South Carolina Trust Code Section 62-7-1008 does not include 14 Uniform Trust Code Section 1008(b) concerning exculpatory terms 15 drafted or caused to be drafted by the trustee. 16 17 Section 62-7-1009. Beneficiary’s consent, release, or 18 ratification. 20 21 (a) A trustee is not liable to a beneficiary for breach of trust if 22 the beneficiary consented to the conduct constituting the breach, 23 released the trustee from liability for the breach, or ratified the 24 transaction constituting the breach, unless: 25 (1) the consent, release, or ratification of the beneficiary was 26 induced by improper conduct of the trustee; or 27 (2) at the time of the consent, release, or ratification, the 28 beneficiary did not have knowledge of the beneficiary’s rights or 29 of the material facts relating to the breach. 30 (b) No consideration is required for the consent, release or 31 ratification to be valid. 32 33 Comment 34 35 This section is based on Sections 216 through 218 of the 36 Restatement (Second) of Trusts (1959). A consent, release, or 37 affirmance under this section may occur either before or after the 38 approved conduct. This section requires an affirmative act by the 39 beneficiary. A failure to object is not sufficient. See Restatement 40 (Second) of Trusts Section 216 cmt. a (1959). A consent is 41 binding on a consenting beneficiary although other beneficiaries 42 have not consented. See Restatement (Second) of Trusts 43 Section 216 cmt. g (1959). To constitute a valid consent, the 44 beneficiary must know of the beneficiary’s rights and of the1 [422] 286 1 material facts relating to the breach. See Restatement (Second) of 2 Trusts Section 216 cmt. k (1959). If the beneficiary’s approval 3 involves a self-dealing transaction, the approval is binding only if 4 the transaction was fair and reasonable. See Restatement (Second) 5 of Trusts Sections 170(2), 216(3) & cmt. n (1959). 6 An approval by the settlor of a revocable trust or by the holder 7 of a presently exercisable power of withdrawal binds all the 8 beneficiaries. See Section 603. A beneficiary is also bound to the 9 extent an approval is given by a person authorized to represent the 10 beneficiary as provided in Article 3. 11 12 2001 Amendment. By a 2001 amendment, the limitation of this 13 section to beneficiaries “having capacity” was deleted. This 14 limitation was included by mistake. As indicated in the second 15 paragraph of the comment, the drafting committee did not intend 16 to prohibit the use of the representation provisions of Article 3, 17 several of which address representation of and the giving of a 18 binding consent on behalf of an incapacitated beneficiary. 19 20 South Carolina Comment 21 22 The South Carolina Trust Code adds Section 62-7-1009(b) not 23 found in the Uniform Trust Code version. 24 25 Section 62-7-1010. Limitation on personal liability of trustee. 26 27 (a) Except as otherwise provided in the contract, a trustee is 28 not personally liable on a contract properly entered into in the 29 trustee’s fiduciary capacity in the course of administering the trust 30 if the trustee in the contract disclosed the fiduciary capacity. 31 (b) A trustee is personally liable for torts committed in the 32 course of administering a trust, or for obligations arising from 33 ownership or control of trust property, including liability for 34 violation of environmental law, only if the trustee is personally at 35 fault. 36 (c) A claim based on a contract entered into by a trustee in the 37 trustee’s fiduciary capacity, on an obligation arising from 38 ownership or control of trust property, or on a tort committed in 39 the course of administering a trust, may be asserted in a judicial 40 proceeding against the trustee in the trustee’s fiduciary capacity, 41 whether or not the trustee is personally liable for the claim. 42 (d) The question of liability as between the trust estate and the 43 trustee individually may be determined in a proceeding for1 [422] 287 1 accounting, surcharge, or indemnification or other appropriate 2 proceeding. 3 4 Comment 5 6 This section is based on Section 7-306 of the Uniform Probate 7 Code. However, unlike the Uniform Probate Code, which requires 8 that the contract both disclose the representative capacity and 9 identify the trust, subsection (a) protects a trustee who reveals the 10 fiduciary relationship either by indicating a signature as trustee or 11 by simply referring to the trust. The protection afforded the trustee 12 by this section applies only to contracts that are properly entered 13 into in the trustee’s fiduciary capacity, meaning that the trustee is 14 exercising an available power and is not violating a duty. This 15 section does not excuse any liability the trustee may have for 16 breach of trust. 17 Subsection (b) addresses trustee liability arising from ownership 18 or control of trust property and for torts occurring incident to the 19 administration of the trust. Liability in such situations is imposed 20 on the trustee personally only if the trustee was personally at fault, 21 either intentionally or negligently. This is contrary to Restatement 22 (Second) of Trusts Section 264 (1959), which imposes liability on 23 a trustee regardless of fault, including liability for acts of agents 24 under respondeat superior. Responding to a particular concern of 25 trustees, subsection (b) specifically protects a trustee from personal 26 liability for violations of environmental law such as CERCLA (42 27 U.S.C. Section 9607) or its state law counterparts, unless the 28 trustee was personally at fault. See also Sections 701(c)(2) 29 (nominated trustee may investigate trust property to determine 30 potential violation of environmental law without having accepted 31 trusteeship) and 816(13) (trustee powers with respect to possible 32 liability for violation of environmental law). 33 Subsection (c) alters the common law rule that a trustee could 34 not be sued in a representative capacity if the trust estate was not 35 liable. 36 37 South Carolina Comment 38 39 South Carolina Trust Code Section 62-7-1010(a) is substantially 40 similar to former South Carolina Probate Code Section 41 62-7-306(a). 42 Section 62-7-1010(b) is substantially similar to former South 43 Carolina Probate Code Section 62-7-306(b). Section 62-7-1010(b)1 [422] 288 1 could be viewed as expanding on a trustee’s exemption from tort 2 liability by its specific reference to excluding trustees from 3 liabilities arising from violation of environmental laws. This 4 specific exemption is not contained in former SCPC Section 5 62-7-306(b). It could be assumed, however, that the general 6 exemption for liability from torts provided by former SCPC 7 Section 62-7-306(b) would cover tort liabilities associated with 8 environmental laws by virtue of the all encompassing general 9 reference to the term “torts.” This assumption, however, is less 10 than certain in light of the Uniform Trust Code Comment to 11 Section 1010, which indicates that UTC subsection 1010(b) was 12 enacted in response to particular concerns from trustees over this 13 type of liability. UTC Section 1010(c) essentially mirrors Section 14 62-7-306(c) of the South Carolina Probate Code. 15 SCTC Section 62-7-1010(d) retains and incorporates the 16 provisions of former SCPC Section 62-7-306(d), not found in the 17 UTC version of Section 1010. 18 19 Section 62-7-1011. Interest as general partner. 20 21 (a) Except as otherwise provided in subsection (c) or unless 22 personal liability is imposed in the contract, a trustee who holds an 23 interest as a general partner in a general or limited partnership is not 24 personally liable on a contract entered into by the partnership after 25 the trust’s acquisition of the interest if the fiduciary capacity was 26 disclosed in the contract or in a statement previously filed pursuant 27 to the South Carolina versions of the Uniform Partnership Act or 28 Uniform Limited Partnership Act. 29 (b) Except as otherwise provided in subsection (c), a trustee 30 who holds an interest as a general partner is not personally liable 31 for torts committed by the partnership or for obligations arising 32 from ownership or control of the interest unless the trustee is 33 personally at fault. 34 (c) The immunity provided by this section does not apply if an 35 interest in the partnership is held by the trustee in a capacity other 36 than that of trustee or is held by the trustee’s spouse or one or more 37 of the trustee’s descendants, siblings, or parents, or the spouse of 38 any of them. 39 (d) If the trustee of a revocable trust holds an interest as a general 40 partner, the settlor is personally liable for contracts and other 41 obligations of the partnership as if the settlor were a general partner. 42 43 Comment1 [422] 289 1 2 Section 1010 protects a trustee from personal liability on 3 contracts that the trustee enters into on behalf of the trust. 4 Section 1010 also absolves a trustee from liability for torts 5 committed in administering the trust unless the trustee was 6 personally at fault. It does not protect a trustee from personal 7 liability for contracts entered into or torts committed by a general or 8 limited partnership of which the trustee was a general partner. That 9 is the purpose of this section, which is modeled after Ohio Revised 10 Code Section 1339.65. Subsection (a) protects the trustee from 11 personal liability for such partnership obligations whether the 12 trustee signed the contract or it was signed by another general 13 partner. Subsection (b) protects a trustee from personal liability for 14 torts committed by the partnership unless the trustee was personally 15 at fault. Protection from the partnership’s contractual obligations is 16 available under subsection (a) only if the other party is on notice of 17 the fiduciary relationship, either in the contract itself or in the 18 partnership certificate on file. 19 Special protection is not needed for other business interests that 20 the trustee may own, such as an interest as a limited partner, a 21 membership interest in an LLC, or an interest as a corporate 22 shareholder. In these cases the nature of the entity or the interest 23 owned by the trustee carries with it its own limitation on liability. 24 Certain exceptions apply. The section is not intended to be used 25 as a device for individuals or their families to shield assets from 26 creditor claims. Consequently, subsection (c) excludes from the 27 protections provided by this section trustees who own an interest in 28 the partnership in another capacity or if an interest is owned by the 29 trustee’s spouse or the trustee’s descendants, siblings, parents, or 30 the spouse of any of them. 31 Nor can a revocable trust be used as a device for avoiding 32 claims against the partnership. Subsection (d) imposes personal 33 liability on the settlor for partnership contracts and other 34 obligations of the partnership the same as if the settlor were a 35 general partner. 36 This section has been placed in brackets to alert enacting 37 jurisdictions to consider modifying the section to conform it to the 38 State’s specific laws on partnerships and other forms of 39 unincorporated businesses. 40 41 South Carolina Comment 421 [422] 290 1 There was no prior South Carolina statutory or case law 2 counterpart. 3 4 Section 62-7-1012. Protection of person dealing with trustee. 5 6 (a) A person other than a beneficiary who in good faith assists 7 a trustee, or who in good faith and for value deals with a trustee, 8 without knowledge that the trustee is exceeding or improperly 9 exercising the trustee’s powers is protected from liability as if the 10 trustee properly exercised the power. 11 (b) A person other than a beneficiary who in good faith deals 12 with a trustee is not required to inquire into the extent of the 13 trustee’s powers or the propriety of their exercise. 14 (c) A person who in good faith delivers assets to a trustee need 15 not ensure their proper application. 16 (d) A person other than a beneficiary who in good faith assists 17 a former trustee, or who in good faith and for value deals with a 18 former trustee, without knowledge that the trusteeship has 19 terminated is protected from liability as if the former trustee were 20 still a trustee. 21 (e) Comparable protective provisions of other laws relating to 22 commercial transactions or transfer of securities by fiduciaries 23 prevail over the protection provided by this section. 24 25 Comment 26 27 This section is derived from Section 7 of the Uniform Trustee 28 Powers Act. 29 Subsection (a) protects two different classes; persons other than 30 beneficiaries who assist a trustee with a transaction, and persons 31 other than beneficiaries who deal with the trustee for value. As 32 long as the assistance was provided or the transaction was entered 33 into in good faith and without knowledge, third persons in either 34 category are protected in the transaction even if the trustee was 35 exceeding or improperly exercising the power. For the definition of 36 “know,” see Section 104. This Code does not define “good faith” 37 for purposes of this and the next section. Defining good faith with 38 reference to the definition used in the State’s commercial statutes 39 would be consistent with the purpose of this section, which is to 40 treat commercial transactions with trustees similar to other 41 commercial transactions. 42 Subsection (b) confirms that a third party who is acting in good 43 faith is not charged with a duty to inquire into the extent of a1 [422] 291 1 trustee’s powers or the propriety of their exercise. The third party 2 may assume that the trustee has the necessary power. 3 Consequently, there is no need to request or examine a copy of the 4 trust instrument. A third party who wishes assurance that the trustee 5 has the necessary authority instead should request a certification of 6 trust as provided in Section 1013. Subsection (b), and the 7 comparable provisions enacted in numerous States, are intended to 8 negate the rule, followed by some courts, that a third party is 9 charged with constructive notice of the trust instrument and its 10 contents. The cases are collected in George G. Bogert & George T. 11 Bogert, The Law of Trusts and Trustees Section 897 (Rev. 2d ed. 12 1995); and 4 Austin W. Scott & William F. Fratcher, The Law of 13 Trusts Section 297 (4th ed. 1989). 14 Subsection (c) protects any person, including a beneficiary, who 15 in good faith delivers property to a trustee. The standard of 16 protection in the Restatement is phrased differently although the 17 result is similar. Under Restatement (Second) of Trusts 18 Section 321 (1959), the person delivering property to a trustee is 19 liable if at the time of the delivery the person had notice that the 20 trustee was misapplying or intending to misapply the property 21 Subsection (d) extends the protections afforded by the section to 22 assistance provided to or dealings for value with a former trustee. 23 The third party is protected the same as if the former trustee still 24 held the office. 25 Subsection (e) clarifies that a statute relating to commercial 26 transactions controls whenever both it and this section could apply 27 to a transaction. Consequently, the protections provided by this 28 section are superseded by comparable protective provisions of 29 these other laws. The principal statutes in question are the various 30 articles of the Uniform Commercial Code, including Article 8 on 31 the transfer of securities, as well as the Uniform Simplification of 32 Fiduciary Securities Transfer Act. 33 34 South Carolina Comment 35 36 South Carolina Trust Code Section 62-7-1012 is similar to 37 former South Carolina Probate Code Section 62-7-708. SCTC 38 Section 62-7-1012 protects third parties who act in good faith in 39 dealings with trustees. While good faith is not defined in the 40 South Carolina Trust Code, definitions of good faith in the 41 commercial context should be consistent with the purpose of this 42 section, which is to treat commercial transactions with trustees 43 similar to other commercial transactions. In addition, SCTC1 [422] 292 1 Section 62-7-1012 protects a third party who in good faith deals 2 with a former trustee without knowledge that the trusteeship has 3 terminated. 4 5 Section 62-7-1013. Certification of trust. 6 7 (a) Instead of furnishing a copy of the trust instrument to a 8 person other than a beneficiary, the trustee may furnish to the 9 person a certification of trust containing the following information: 10 (1) that the trust exists and the date the trust instrument was 11 executed; 12 (2) the identity of the settlor; 13 (3) the identity and address of the currently acting trustee; 14 (4) the powers of the trustee which may make a reference to 15 the powers set forth in the South Carolina Trust Code; 16 (5) the revocability or irrevocability of the trust and the 17 identity of any person holding a power to revoke the trust; 18 (6) the authority of cotrustees to sign or otherwise 19 authenticate and whether all or less than all are required in order to 20 exercise powers of the trustee; 21 (7) the trust’s taxpayer identification number; and 22 (8) the manner of taking title to trust property. 23 (b) A certification of trust may be signed or otherwise 24 authenticated by any trustee. 25 (c) A certification of trust must state that the trust has not been 26 revoked, modified, or amended in any manner that would cause the 27 representations contained in the certification of trust to be 28 incorrect. 29 (d) A certification of trust need not contain the dispositive terms 30 of a trust. 31 (e) A recipient of a certification of trust may require the trustee 32 to furnish copies of those excerpts from the original trust 33 instrument and later amendments which designate the trustee and 34 confer upon the trustee the power to act in the pending transaction. 35 (f) A person who acts in reliance upon a certification of trust 36 without knowledge that the representations contained therein are 37 incorrect is not liable to any person for so acting and may assume 38 without inquiry the existence of the facts contained in the 39 certification. Knowledge of the terms of the trust may not be inferred 40 solely from the fact that a copy of all or part of the trust instrument is 41 held by the person relying upon the certification. 42 (g) A person who in good faith enters into a transaction in 43 reliance upon a certification of trust may enforce the transaction1 [422] 293 1 against the trust property as if the representations contained in the 2 certification were correct. 3 (h) A person making a demand for the trust instrument in 4 addition to a certification of trust or excerpts is liable for damages 5 if the court determines that the person did not act in good faith in 6 demanding the trust instrument. 7 (i) This section does not limit the right of a person to obtain a 8 copy of the trust instrument in a judicial proceeding concerning the 9 trust. 10 (j) The Certificate of Trust may be either in the form set forth 11 below or in any other form that satisfies the above requirements. 12 13 Certification of Trust 14 15 Settlor: ______16 Name of Trust: ______17 Date of Trust: ______18 Current Trustee(s): ______19 Address of Trust: ______20 Trust Tax Identification Number: ______21 22 The undersigned trustee(s) does hereby confirm the existence of 23 the within described Trust and certify the following: 24 1. The undersigned is/are all of the currently serving trustee(s). 25 2. The Trust is in full force and effect and has not been revoked, 26 terminated or otherwise amended in any manner which would 27 cause the representations in this Certification of Trust to be 28 incorrect. 29 3. The Trust is revocable/irrevocable. (If revocable, define who 30 can revoke the document). 31 4. The above designated trustee(s) is/are fully empowered to act 32 for said Trust and is/are properly exercising the trustee’s authority 33 under this Trust. No other trustee or other individual or entity is 34 required to execute any document for the Trust. 35 5. The signature(s) of ______of the trustees is/are required for 36 any action taken on behalf of the Trust. (Define signature 37 requirements) 38 6. The proper manner for taking title to Trust property is: 39 [Name(s) of all current trustees], Trustee 40 [Name of trust], dated [Date of trust] 41 7. To the undersigned’s knowledge, there are no claims, 42 challenges of any kind, or cause of action alleged, which contest or1 [422] 294 1 question the validity of the Trust or the trustee’s authority to act 2 for the Trust. 3 8. The trustee is authorized by the Trust Agreement to 4 ______. (State, synopsize, or 5 describe relevant powers.) 6 7 IN WITNESS THEREOF: the undersigned, being all of the 8 trustees, do hereby execute this Certificate of Trust this ___ day of 9 ______, 20__. 10 11 12 Witnesses: Trustee(s): 13 14 15 ______16 17 ______18 19 ______20 21 ______22 23 ______24 25 26 STATE OF SOUTH CAROLINA ) 27 ) ACKNOWLEDGMENT 28 COUNTY OF ______) 29 30 31 I, , do hereby certify that trustee(s) 32 personally appeared before me this day and acknowledged the due 33 execution of the foregoing instrument. 34 35 Witness my hand and official seal this the day of ______, 36 20__. 37 38 39 (SEAL) 40 Notary Public for South Carolina 41 My Commission Expires: 42 43 Comment1 [422] 295 1 2 This section, derived from California Probate Code 3 Section 18100.5, is designed to protect the privacy of a trust 4 instrument by discouraging requests from persons other than 5 beneficiaries for complete copies of the instrument in order to 6 verify a trustee’s authority. Even absent this section, such requests 7 are usually unnecessary. Pursuant to Section 1012(b), a third 8 person proceeding in good faith is not required to inquire into the 9 extent of the trustee’s powers or the propriety of their exercise. 10 This section adds another layer of protection. 11 Third persons frequently insist on receiving a copy of the 12 complete trust instrument solely to verify a specific and narrow 13 authority of the trustee to engage in a particular transaction. While 14 a testamentary trust, because it is created under a will, is a matter of 15 public record, an inter vivos trust instrument is private. Such privacy 16 is compromised, however, if the trust instrument must be 17 distributed to third persons. A certification of trust is a document 18 signed by a currently acting trustee that may include excerpts from 19 the trust instrument necessary to facilitate the particular 20 transaction. A certification provides the third party with an 21 assurance of authority without having to disclose the trust’s 22 dispositive provisions. Nor is there a need for third persons who 23 may already have a copy of the instrument to pry into its provisions. 24 Persons acting in reliance on a certification may assume the truth 25 of the certification even if they have a complete copy of the trust 26 instrument in their possession. 27 Subsections (a) through (c) specify the required contents of a 28 certification. Subsection (d) clarifies that the certification need not 29 include the trust’s dispositive terms. A certification, however, 30 normally will contain the administrative terms of the trust relevant 31 to the transaction. Subsection (e) provides that the third party may 32 make this a condition of acceptance. Subsections (f) and (g) protect 33 a third party who relies on the certification. The third party may 34 assume that the certification is true, and is not charged with 35 constructive knowledge of the terms of the trust instrument even if 36 the third party has a copy. 37 To encourage compliance with this section, a person demanding 38 a trust instrument after already being offered a certification may be 39 liable under subsection (h) for damages if the refusal to accept the 40 certification is determined not to have been in good faith. A 41 person acting in good faith would include a person required to 42 examine a complete copy of the trust instrument pursuant to due 43 diligence standards or as required by other law. Examples of such1 [422] 296 1 due diligence and legal requirements include (1) in connection with 2 transactions to be executed in the capital markets where documentary 3 standards have been established in connection with underwriting 4 concerns; (2) to satisfy documentary requirements established by 5 state or local government or regulatory agency; (3) to satisfy 6 documentary requirements established by a state or local 7 government or regulatory agency; and (4) where the insurance rates 8 or premiums or other expenses of the party would be higher absent 9 the availability of the documentation. 10 The Uniform Trust Code leaves to other law the issue of how 11 damages for a bad faith refusal are to be computed and whether 12 attorney’s fees might be recoverable. For a discussion of the 13 meaning of “good faith,” see Section 1012 Comment. 14 15 South Carolina Comment 16 17 South Carolina Trust Code Section 62-7-1013, which has no 18 prior South Carolina statutory counterpart, permits a third party to 19 request a certification of trust from the trustee. The elements of a 20 certification are set forth in this section, and a third party may 21 assume, without inquiry, the existence of facts contained in the 22 certification. A third party who in good faith enters into a 23 transaction in reliance upon the certification may enforce the 24 transaction as if the representations contained in the certification 25 were correct. This section is also designed to protect the privacy 26 of the trust agreement and its beneficiaries, and under certain 27 circumstances, a third party may be liable for damages if he 28 demands a copy of the trust agreement in addition to the 29 certification. The SCTC adds subsection (j) to the UTC version, 30 providing a sample form certificate for use in South Carolina. 31 32 Part 11 33 34 Miscellaneous Provisions 35 36 Section 62-7-1101. Uniformity of application and 37 construction. 38 39 In applying and construing this Uniform Act, consideration must 40 be given to the need to promote uniformity of the law with respect 41 to its subject matter among States that enact it. 42 43 South Carolina Comment1 [422] 297 1 2 This is consistent with SCPC Section 62-1-102, which provides 3 that one of the underlying purposes and policies of the South 4 Carolina Probate Code “is to make uniform the law among the 5 various jurisdictions.” See SCPC Section 62-1-102(b)(5). 6 7 Section 62-7-1102. Electronic records and signatures. 8 9 The provisions of this article governing the legal effect, validity, 10 or enforceability of electronic records or electronic signatures, and 11 of contracts formed or performed with the use of such records or 12 signatures, conform to the requirements of Section 102 of the 13 Electronic Signatures in Global and National Commerce Act (15 14 U.S.C. Section 7002) and supersede, modify, and limit the 15 requirements of the Electronic Signatures in Global and National 16 Commerce Act. 17 Comment 18 19 This section, which is being inserted in all Uniform Acts 20 approved in 2000 or later, preempts the federal Electronic 21 Signatures in Global and National Commerce Act. Section 102(a) 22 (2)(B) of that Act provides that the federal law can be preempted 23 by a later statute of the State that specifically refers to the federal 24 law The effect of this section, when enacted as part of this Code, is 25 to leave to state law the procedures for obtaining and validating an 26 electronic signature. The Uniform Trust Code does not require that 27 any document be in paper form, allowing all documents under this 28 Code to be transmitted in electronic form. A properly directed 29 electronic message is a valid method of notice under the Code as 30 long as it is reasonably suitable under the circumstances and likely 31 to result in receipt of the notice or document. See Section 109(a). 32 33 South Carolina Comment 34 35 There was no prior South Carolina statutory counterpart. 36 37 Section 62-7-1103. Severability Clause. 38 39 If any provision of this article or its application to any person or 40 circumstances is held invalid, the invalidity does not affect other 41 provisions or applications of this article which can be given effect 42 without the invalid provision or application, and to this end the 43 provisions of this article are severable.1 [422] 298 1 2 South Carolina Comment 3 4 The South Carolina Probate Code has a substantially identical 5 provision in SCPC Section 62-1-104. 6 7 Section 62-7-1104. [RESERVED] 8 9 Section 62-7-1105. [RESERVED] 10 11 Section 62-7-1106. Application to existing relationships. 12 (a) Except as otherwise provided in this article, on the effective 13 date of this article: 14 (1) this article applies to all trusts created before, on, or after 15 its effective date; 16 (2) this article applies to all judicial proceedings concerning 17 trusts commenced on or after its effective date; 18 (3) this article applies to judicial proceedings concerning 19 trusts commenced before its effective date unless the court finds 20 that application of a particular provision of this article would 21 substantially interfere with the effective conduct of the judicial 22 proceedings or prejudice the rights of the parties, in which case the 23 particular provision of this article does not apply and the 24 superseded law applies; 25 (4) subject to subsections (a)(5) and (b), any rule of 26 construction or presumption provided in this article applies to trust 27 instruments executed before the effective date of the article unless 28 there is a clear indication of a contrary intent in the terms of the 29 trust; and 30 (5) an act done and any right acquired or accrued before the 31 effective date of the article is not affected by this article. Unless 32 otherwise provided in this article, any right in a trust accrues in 33 accordance with the law in effect on the date of the creation of a 34 trust. 35 (b) If a right is acquired, extinguished, or barred upon the 36 expiration of a prescribed period that has commenced to run 37 under any other statute before the effective date of the article, that 38 statute continues to apply to the right even if it has been repealed 39 or superseded.” 40 41 Comment 421 [422] 299 1 The Uniform Trust Code is intended to have the widest possible 2 effect within constitutional limitations. Specifically, the Code 3 applies to all trusts whenever created, to judicial proceedings 4 concerning trusts commenced on or after its effective date, and 5 unless the court otherwise orders, to judicial proceedings in 6 progress on the effective date. In addition, any rules of 7 construction or presumption provided in the Code apply to 8 preexisting trusts unless there is a clear indication of a contrary 9 intent in the trust’s terms. By applying the Code to preexisting 10 trusts, the need to know two bodies of law will quickly lessen. 11 This Code cannot be fully retroactive, however. Constitutional 12 limitations preclude retroactive application of rules of construction 13 to alter property rights under trusts that became irrevocable prior to 14 the effective date. Also, rights already barred by a statute of 15 limitation or rule under former law are not revived by a possibly 16 longer statute or more liberal rule under this Code. Nor is an act 17 done before the effective date of the Code affected by the Code’s 18 enactment. 19 The Uniform Trust Code contains an additional effective date 20 provision. Pursuant to Section 602(a), prior law will determine 21 whether a trust executed prior to the effective date of the Code is 22 presumed to be revocable or irrevocable. 23 For a comparable uniform law effective date provision, see 24 Uniform Probate Code Section 8-101. 25 26 South Carolina Comment 27 28 The South Carolina Probate Code counterpart is SCPC Section 29 62-1-100, which has been subject to considerable litigation in the 30 years after the probate code’s enactment effective July 1, 1987. 31 Importantly, the intent to safeguard preexisting rights is contained 32 in SCTC Section 62-7-1106 as it is in SCPC Section 62-1-100. 33 The South Carolina drafters of SCPC Section 62-1-100 drew a 34 dichotomy between procedural provisions of the SCPC (as in 35 SCPC Section 62-1-100(b)(2)) and substantive rights in the 36 decedent’s estate, which are to be unimpaired. SCPC Section 37 62-1-100(b)(4). 38 Rules of construction or presumption apply to trusts executed 39 before the effective date unless there is a clear indication of a 40 contrary intent in the terms of the trust. This appears similar to 41 SCPC Section 62-1-100(b)(5). SCTC Section 1106(b), providing 42 that any period of limitation which had commenced to run before 43 the effective date would continue to apply, is a counterpart to1 [422] 300 1 SCPC Section 62-1-100(b)(4), last sentence. SCTC subsection (a) 2 (4) makes clear that the application of a presumption or rule of 3 construction shall not disrupt accrued or acquired rights in the 4 trust, which are determined according to the law in effect at the 5 trust’s creation. 6 Reference in the last sentence of the Uniform Trust Code 7 Comment to Uniform Probate Code Section 8-101 is the current 8 Uniform Probate Code counterpart to SCPC Section 62-1-100, 9 described in this South Carolina Comment. 10 11 SECTION 2. Section 27-6-50(7) of the 1976 Code is amended to 12 read: 13 14 “(7) a property interest, power of appointment, or arrangement 15 that was not subject to the common law rule against perpetuities or 16 is excluded by another statute of this State, including, but not 17 limited to, the interests, powers, and arrangements coming within 18 Sections 13-7-30, 27-5-70, 27-5-80, 33-53-30, 39-55-135, and 19 62-7-105 62-7-409.” 20 21 SECTION 3. Section 33-31-152 of the 1976 Code, as added by 22 Act 384 of 1994, is amended to read: 23 24 “Section 33-31-152. Nothing in Sections 33-31-150, 25 33-31-151, 62-7-506 62-7-405(f), and 62-7-507 62-7-405(g) 26 impairs the rights and powers of the courts or the Attorney General 27 of this State with respect to a corporation.” 28 29 SECTION 4. Section 34-15-10 of the 1976 Code, as last amended 30 by Act 521 of 1990, is further amended to read: 31 32 “Section 34-15-10. Subject to the provisions of Sections Section 33 62-3-203 and 62-7-207, any a banking corporation or trust 34 company with at least two hundred fifty thousand dollars total 35 unimpaired capital may be appointed executor of a will, codicil, or 36 writing testamentary, administrator with the will annexed, 37 administrator of the estate of any person, receiver, assignee, 38 guardian or trustee under a will or instrument creating a trust for 39 the care and management of property, under the same 40 circumstances, in the same manner, and subject to the same control 41 by the court having jurisdiction of such the appointment as a 42 legally qualified person. Any such An appointment as guardian 43 shall apply applies to the estate and not to the person of the ward.1 [422] 301 1 Such The corporation shall is not be required to receive or hold 2 property or money or assume or execute a trust under the 3 provisions of pursuant to this section without its assent.” 4 5 SECTION 5. Section 62-3-703(a) of the 1976 Code is amended to 6 read: 7 8 “(a) A personal representative is a fiduciary who shall observe 9 the standards of care applicable to trustees as described by Section 10 62-7-302 62-7-933. A personal representative is under has a duty 11 to settle and distribute the estate of the decedent in accordance 12 with the terms of any a probated and effective will and this Code, 13 and as expeditiously and efficiently as is consistent with the best 14 interests of the estate. He shall use the authority conferred upon 15 him by this Code, the terms of the will, if any, and any order in 16 proceedings to which he is party for the best interests of successors 17 to the estate.” 18 19 SECTION 6. Section 62-3-913(a) of the 1976 Code is amended to 20 read: 21 22 “(a) Before distributing to a trustee, the personal representative 23 may require that the trust be registered if the state in which it is to 24 be administered provides for registration and that the trustee 25 inform the beneficiaries as provided in Section 62-7-303 62-7- 26 813.” 27 28 SECTION 7. Section 62-5-417 of the 1976 Code is amended to 29 read: 30 31 “Section 62-5-417. In the exercise of his powers, a conservator 32 is to act as a fiduciary and shall observe the standards of care 33 applicable to trustees as described by Section 62-7-302 62-7-933.” 34 35 SECTION 8. Section 27-5-70 of the 1976 Code is repealed. 36 37 SECTION 9. This act takes effect on January 1, 2006. 38 ----XX---- 391 [422] 302

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