SC Lawyer, July 2006, #5. What You Should Know About the New South Carolina Trust Code.

• Author: By Robert M. Kunes, Andrew W. Chandler and Virginia M. Shuman

South Carolina Lawyer

2006.

SC Lawyer, July 2006, #5.

What You Should Know About the New South Carolina Trust Code

South Carolina LawyerJuly 2006What You Should Know About the New South Carolina Trust CodeBy Robert M. Kunes, Andrew W. Chandler and Virginia M. ShumanThe new S.C. Trust Code (SCTC) was passed by the S.C. General Assembly and signed into law in 2005. It took effect on January 1, 2006, and generally applies retroactively. Modeled on the Uniform Trust Code (UTC), which was promulgated by the National Conference of Commissioners on Uniform State Laws, the SCTC was the result of the efforts of the SCTC Study Committee of the Probate, Estate Planning and Trust Section of the South Carolina Bar. The SCTC applies to most of the trusts that we deal with on a regular basis. It applies to revocable and irrevocable trusts, written and oral trusts, testamentary and inter vivos trusts. It does not apply to constructive, resulting, business or voting trusts, and it does not apply to trusts for employee benefit plans.

For the most part, the SCTC is a default statute. Much of the SCTC simply codifies existing common law. However, the law does introduce a few new concepts and does make a few changes to South Carolina trust law. The SCTC is codified in Article 7 of Title 62 of the South Carolina Code. There are 11 parts containing 131 sections. The SCTC includes the official UTC comments as well as South Carolina comments. With regard to each particular section, a practitioner should read the South Carolina comment before reading the UTC official comment. While the official UTC comments are very helpful in sections that were not altered or changed, the official UTC comments can be very confusing and, in fact, may have nothing to do with the section as adopted by South Carolina. The drafters of the SCTC have tried to alert readers to these situations in the South Carolina comments.

Attorneys, judges, corporate and individual trustees and trust beneficiaries are guided by the SCTC, and their duties and rights are governed by the SCTC. Here is a sampling of questions that occurred to us as we studied the new law and the statute's answers.

1. Does the SCTC apply to existing trusts or only those created after the effective date? SCTC § 62-7-1106 states that, except as otherwise stated in the Act, the SCTC applies to all trusts created before, on or after its effective date. It also applies to all judicial proceedings concerning trusts commenced on or after its effective date.

2. Are the statutory provisions obligatory, or can the settlor craft language outside the statute? The settlor can craft language that does not track the statute so he is free to draft his own charter, so to speak; however, there are 11 subsections in SCTC § 62-7-105(b) setting forth matters that cannot be deviated from by the terms of the trust. The 11 are (1) the requirements for creating a trust; (2) the duty of a trustee to act in good faith and in accordance with the purposes of the trust; (3) the requirement that a trust and its terms be for the benefit of its beneficiaries and that the trust have a purpose that is lawful and possible to achieve; (4) the power of the court to modify or terminate a trust under SCTC §§ 62-7-410 through 62-7-416; (5) the effect of a spendthrift provision and the rights of certain creditors and assignees to reach a trust as provided in Part 5; (6) the power of the court under SCTC § 62-7-708(b) to adjust a trustee's compensation specified in the terms of the trust which is unreasonably low or high; (7) the effect of an exculpatory term under SCTC § 62-7-1008; (8) the rights under SCTC §§ 62-7-1010 through 62-7-1013 of a person other than a trustee or beneficiary; (9) periods of limitation for commencing a judicial proceeding; (10) the power of the court to take such action and exercise such jurisdiction as may be necessary in the interests of justice; and (11) the subject-matter jurisdiction of the court and venue for commencing a proceeding as provided in SCTC §§ 62-7-201 and 62-7-204.

3. What are nonjudicial settlement agreements, and are they allowed under the SCTC? The SCTC provides that interested parties can enter into a nonjudicial settlement agreement, i.e., one not approved by the Court, for the following matters: (1) the approval of a trustee's report or accounting; (2) direction to a trustee to perform or refrain from performing a particular administrative act or the grant to a trustee of any necessary or desirable administrative power; (3) the resignation or appointment of a trustee and the determination of a trustee's compensation;(4) transfer of a trust's principal place of administration; and (5) liability of a trustee for an action relating to the trust.

4. What is virtual representation and how does it work under the SCTC? Virtual representation is the concept that persons having the same interests may be bound by another having the same interest; the SCTC provides that a minor, incapacitated or unborn individual, or a person whose identity or location is unknown and not reasonably ascertainable, may be represented by and bound by another having a substantially identical interest with respect to the particular question or dispute, but only to the extent there is no conflict of interest between the beneficiary representative and the person represented and provided the interest of the person represented is adequately represented by the beneficiary representative. In other words, virtual representation lessens the number of times a guardian ad litem (GAL) would have to be appointed. A person who, prior to the SCTC, would have needed a GAL to represent him or her can be represented by another having his or her same interests or by his or her parent, assuming in both cases that no conflict exists between the one representing and the one being represented.

5. Is an oral trust valid in SC? Yes, except that the SCTC does not recognize oral trusts for real property. In other words, a trust need not be evidenced by a trust instrument so long as the other requirements have been met (unless the trust owns real property). However, the creation of an oral trust and its terms may be established only by clear and convincing evidence.

6. Does the SCTC provide for the creation of a trust for pets? Yes, in contrast to existing South Carolina law, SCTC § 62-7-408 provides that a trust may be created to provide for the care of an animal or animals alive or in gestation during the settlor's lifetime, whether or not alive at the time the trust is created. The trust terminates upon the death of the last surviving animal.

7. What new provisions exist with regard to modification and/or termination of trusts? In a series of critical sections, the SCTC adds the ability to modify or terminate a nonchartiable irrevocable trust by consent with court approval (SCTC § 62-7-411); the ability to modify or terminate because of unanticipated circumstances or change in ability to administer the trust effectively (SCTC § 62-7-412); the ability to modify or terminate the trust because of size and operating costs of the trust (SCTC § 62-7-414); and the ability to reform to correct mistakes to conform the terms to the settlor's intentions or to achieve the settlor's tax objectives (SCTC §§ 62-7-415 and 62-7-416). And, as stated above, SCTC § 62-7-303 permits virtual representation by fiduciaries and parents in such actions (assuming no conflict exists).

8. Who must initiate the action to modify or terminate the trust? A proceeding to approve or disapprove a proposed modification or termination under SCTC §§ 62-7-411 through 62-7-414 may be commenced by a trustee or beneficiary, and a proceeding to approve or disapprove a proposed modification or termination under SCTC § 62-7-411 may be commenced by the settlor. A settlor's agent under a power of attorney can commence a proceeding so long as the power of attorney expressly authorizes him or her to do so.

9. Who must consent to the modification or termination of a trust? A noncharitable irrevocable trust may be modified or terminated with court approval upon consent of the settlor and all beneficiaries, even if the modification or termination is inconsistent with a material purpose of the trust. A noncharitable irrevocable trust may be terminated upon consent of all beneficiaries if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust. A nonchartiable irrevocable trust may be modified upon consent of all of the beneficiaries if the court concludes that modification is not inconsistent with a material purpose of the trust.

10. In what situations can the court modify the terms of the trust, and what happens to the property of the trust? Under SCTC § 62-7-412, (a) the court may modify the administrative or dispositive terms of a trust or terminate the trust if, because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust. To the extent practicable, the modification must be made in accordance with the settlor's probable intention. The court may also (b) modify the administrative terms of a trust if continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust's administration, and (c) upon termination of a trust under this section, the trustee shall distribute the trust property as ordered by the court.

11. At what point does the size of the...