South Carolina Lawyer
Vol. 14, No. 2, Pg. 26.
2001 South Carolina legislative changes affecting estate planning and trust administration
262001 South Carolina legislative changes affecting estate planning and trust administrationBy Edward G.R. Bennett and Robert M. KunesThe year 2001 brought two critical pieces of state legislation for South Carolina estate planners and fiduciaries, as well as a significant change to the federal Treasury Income Tax Regulations that complement these changes. In the summer of 2001, the South Carolina Legislature adopted the Uniform Prudent Investor Act (S.C. Code Ann. § 62-7-302) and the revised Uniform Principal and Income Act (effective July 18, 2001). Both of these acts were part of Act No. 80 introduced as H 4044, found at the South Carolina Legislative Web site at http://www.lpitr.state.sc.us/legpage.htm. In addition, in what can be viewed as a federal companion to these two pieces of legislation, the U.S. Treasury Department promulgated proposed regulations to amend the definition of Fiduciary Accounting Income under § 643(b) of the Internal Revenue Code.
28Although the Uniform Prudent Investor Act is codified as part of the chapter on trustees, it is important to understand that the Probate Code specifically states that personal representatives are to observe the standards of care applicable to trustees under 62-7-302. S.C. Code Ann. § 623-703.
All fiduciaries, including trustees, personal representatives and conservators, as well as those who work with them, must have a comprehensive understanding of how these changes affect both planning and the administration of fiduciary relationships under South Carolina law. This article will examine the Uniform Prudent Investor Act and offer observations on the effect it will have on trust administration and other fiduciary relationships.
The South Carolina Uniform Prudent Investor Act
The principal thrust of the Prudent Investor Act is to establish a standard of conduct, not outcome or performance. In seeking to do so, the Act introduces several financial and risk management theories that are fundamental to asset management under the Act. The Act is built on the premise that risk comes in two forms (market risk and asset specific risk), each of which must be managed. The concept of the efficient market is a fundamental premise of the Act that results in one of the primary principles of the Act, i.e, that active management of a portfolio is generally considered "bad" and, as a result, cost of management should be low. There is a strong bias to passive investing.
There are five fundamental alter ations to prior prudent investing law:
(a) the prudence standard is now applied to investments as part of the total portfolio, rather than to each individual investment; (b) the trustee's central consideration in investing is the tradeoff between risk and return; (c) categorical restrictions on types of investment are eliminated; (d) diversification is integrated into the definition of prudent investing; and (e) contrary to prior law, trustees may now delegate investment and management functions.
Except as discussed below, the Act now applies to all fiduciary relationships in South Carolina. Fundamental to a reading of the Act is an understanding that its provisions are not elective (except to the extent that a particular document exempts the fiduciary from provisions of the Act). The Act is quite specific in defining its standard of behavior for fiduciaries - § 62-7-302 of the Act uses the phrase "a (or the) trustee shall" in defining no fewer than 19 different required actions and duties of trustees under the new Act.
When is the new law effective?
The effective date of the Act was July 18, 2001, so the Act represents the current law under which all South Carolina trusts now operate.
As the Prudent Investor legislation affects the administration of all existing trusts and estates and other fiduciary relationships, it is critical that fiduciaries spend time developing an understanding of its implications as soon as possible. Codified as part of Title 62, Chapter 7, § 302, the adopting legislation states:
Section 62-7-302 applies to trusts existing on and created after its effective date, except that as applied to trusts existing on its effective date, § 627-302 governs only decisions or actions occurring after that date (emphasis added).
Affirmative duty to comply with prudent investor rule
The statute begins with an affirmative statement regarding the trustee's duty to comply with the Prudent Investor Rule under:
Section 62-7-302(B) (1):
Except as otherwise provided in item (2), a trustee who invests and manages trust assets owes a duty to the beneficiaries of the trust to comply with the prudent investor rule in this section.
(B) (2)The prudent investor rule is a default rule that may be expanded, restricted, eliminated or otherwise altered by the provisions of a trust. A trustee is not liable to a beneficiary to the extent that the trustee acted in reasonable reliance on the provisions of the trust (emphasis added).
Principles for prudent investors
The crux of the new rule is contained in subsection (C) of § 62-7-302 which sets forth six major principles of which fiduciaries must be aware. The first principle is a codification of long standing fiduciary responsibility.
(C) (1)A trustee shall invest and manage trust assets as a prudent investor would by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.
The second principle is a change from the original investment rule promulgated by the American Courts in cases beginning with Amory v. Harvard. This change embodies a recognition that investment objectives and strategy need to be viewed as a whole rather than by an examination of each individual investment. This change has made the balancing of risk and reward, as embodied in Modern Portfolio Theory, part of the law. Section 62-7-302 demands a constant vigilance on the part of the fiduciary. Written notes and records of defined investment objectives relevant to the terms and purposes of the trust should henceforth be a part of every fiduciary's records.
(C) (2)A trustee's investment and management decisions respecting individual assets must...