South Carolina Lawyer
Vol. 14, No. 1, Pg. 26.
New regime for the total return trust: The 2001 South Carolina Uniform Principal and Income Act
26New regime for the total return trust: The 2001 South Carolina Uniform Principal and Income ActBy James C. Hardin III and Laura Pleicones28Background
The Uniform Principal and Income Act was originally promulgated by the National Conference of Commissioners on Uniform State Laws in 1931 and was later revised in 1962. In 1997, the Conference introduced another revised Principal and Income Act (1997 UPIA), which has since been endorsed by the American Bar Association for enactment in all the states. South Carolina adopted the 1962 version of the model act (1962 UPIA) in 1986 when the Probate Code was enacted and replaced it with the 1997 UPIA in 2001 by Act Number 80, § 3 (effective July 18, 2001). Also in 2001, South Carolina enacted the Uniform Prudent Investor Act, S.C. Code Ann. § 62-7 302, which outlines the standard of care and conduct to which fiduciaries are held in the context of total return investing and Modern Portfolio Theory. The Principal and Income Act works in tandem with the Prudent Investor Act by providing guidance to fiduciaries operating under the Prudent Investor Rule. Both acts apply not only to trustees, but also to personal representatives of estates. S.C. Code Ann. §§ 62-3-703(a) & 62-7402(3).
The new South Carolina Uniform Principal and Income Act, S.C. Code Ann. § 62-7-401 through § 62-7-432 (2001 SCUPIA), is critically important to fiduciaries of existing South Carolina estates and trusts because, unless the governing instrument provides to the contrary, it applies to all trusts and decedents' estates in existence as of the July 18, 2001, effective date. Trustees operating under the provisions of older documents should therefore be mindful that the default provisions governing their conduct have changed. The 2001 SCUPIA follows the 1997 UPIA almost verbatim, though some changes were made to make the 2001 SCUPIA consistent with other South Carolina Probate Code provisions. Versions of the 1997 UPIA have been enacted in 28 other states and are currently before the legislatures of eight states.
Like the previous version, the 2001 SCUPIA provides default rules which will apply only to the extent that they are not expanded, altered or replaced by the terms of the governing instrument. Thus, many drafters will routinely continue to draft around it by including a provision granting the fiduciary the power to allocate principal and income "irrespective of statute or rule of law" or similar language. The new Act remains significant, however, because it provides an updated "safety net" for fiduciaries administering intestate estates or those acting under wills or trusts that are either silent on the issue (as with many older documents) or which specifically direct compliance with state law regarding principal and income allocations. The principal purposes of the 1997 revision of the model act were:
* to establish a more modern principal and income allocation regime that would recognize new forms of investments and new issues facing the fiduciary; * to give fiduciaries greater freedom to adopt the Modern Portfolio Theory of investing embraced by the Third Restatement of Trusts and the Uniform Prudent Investor Act; and * to recognize the growing popularity of the revocable trust agreement as a will substitute by extending certain probate administration rules to revocable trusts after the decedent's death and to other terminating trusts.
Power to adjust
The 2001 SCUPIA embraces Modern Portfolio Theory by giving the trustee the power to adjust between income and principal accounts. 2001 SCUPIA § 62-72- 404; 1997 UPIA § 104. The trustee can exercise this power if the trustee determines that total return produced by the trust assets as a whole has, under traditional rules for defining income and principal, not achieved an impartial result. In this situation, the trustee may make such allocation between principal and income as it shall deem fair and reasonable under 2001 SCUPIA § 62-7-404(A), subject to the limitations of § 62-7-403 (1997 UPIA § 203). Section 62-7404(A) thus allows the trustee to reclassify what would otherwise be principal as income, or income as principal, and thereby make more income available for distribution to the current income beneficiary. It does not, however, allow the trustee to add to or change the class of beneficiaries or the quality or type of beneficial interests.
Preconditions to exercising the power to adjust
Despite its importance, the scope of the new power to adjust must be kept in perspective. Some preconditions to the trustee's power to adjust are as follows:
* The trustee must be investing the trust assets under the Prudent Investor Rule. The
South Carolina Prudent Investor Act was also enacted in 2001 by Act Number 80. See S.C. Code Ann. § 62-7-302. * The trust instrument must describe the beneficiaries' distribution rights in...