What a Will Can and Can’t Do
A last will is an important and powerful estate planning document. However, there are many things you cannot legally do through a will. Before drawing up your own will, you should know what a will can and can’t do so you can ensure your intentions are carried out.
Note that laws regarding wills vary from state to state. Speak with an estate planning attorney in your state if you have specific questions about what is and is not allowed under the law in your state.
A will can: Direct where assets subject to probate should go.
A will can direct where assets subject to probate go. Probate is the court-supervised process that settles the estate’s debts and taxes and transfers the remaining assets to the appropriate beneficiaries. Common assets subject to probate include:
- Real property solely owned or owned as tenants in common
- Bank and investment accounts without a beneficiary
- Personal property like cars, clothes, and furniture
Learn more about probate in South Carolina here on our blog.
A will cannot: Direct where assets not subject to probate should go.
A will cannot disburse assets that are not subject to probate, such as:
- Real property owned as joint tenants with rights of survivorship
- Payable on Death (POD) or Transfer on Death (TOD) accounts
- 401Ks, IRAs, and other retirement and pension accounts with a named beneficiary
- Life insurance proceeds from a policy with a named beneficiary
- Assets in irrevocable trusts and revocable living trusts
These assets are not subject to probate and go directly to the listed beneficiary or co-owner (in the case of assets owned jointly), bypassing probate altogether. Only if the assets are unable to go to the beneficiary or co-owner – if, for example, they predeceased you – would they end up going through probate.
A will can: Disinherit a blood relative.
A testator has the right to disinherit an adult child, sibling, parent, or any other blood relative in their will. (Whether an individual can legally disinherit a minor child depends on state law.)
A will cannot: Disinherit a spouse.
Spouses are protected under the law and are entitled to a portion of the deceased spouse’s estate after death, regardless of the provisions in the will. The only way to disinherit a spouse is to get their knowing consent in writing, and that must happen separately from the will.
In community property states, the surviving spouse is automatically entitled to the “community property share,” which is one half of the assets acquired during the marriage. Couples in these states may use a prenuptial agreement or postnuptial agreement to waive the surviving spouse’s right to the community property share.
Other states have something called “elective share,” a portion of the deceased spouse’s estate that the surviving spouse is entitled to under the law. This amount varies by state; in South Carolina, it’s one third. The only way to legally disinherit a spouse is for both spouses to sign a waiver of elective share. Read more about how to disinherit a spouse in South Carolina with a waiver of elective share here on our blog.
A will can: Put reasonable conditions on inheritance.
A testator is allowed to put legal, reasonable conditions on inheritance. For instance, a testator may say that their daughter will inherit the lake house when she turns 25 or that their nephew will inherit $50,000 if he earns a college degree by 30.
A will cannot: Put invalid conditions on inheritance.
A testator cannot make inheritance conditional on things that are illegal or that violate public policy. For instance, stipulating that a son will inherit his portion of the estate only if he marries someone of the same race or that a daughter will inherit $100,000 if she divorces her current husband will likely not be honored.
This is case-dependent and varies by state, so if you are considering including questionable stipulations in your will, discuss it first with an experienced estate planning attorney in your state.
A will can: Name individuals to certain roles.
The testator can name the people you’d like to be your personal representative / executor, guardian(s), and trustee(s). Naming people who are fit for the job and who have already agreed to take it on can save time in the probate process.
A will cannot: Obligate individuals to take certain roles.
An individual named in the will is not legally obligate to take on the role and may decline it. In that case, the probate judge will appoint someone else.
For this reason, it’s wise to talk with the individuals you choose to make sure they agree to take on the role and to include a back-up, just in case.
A will can: Help avoid Family Malpractice™.
Family Malpractice™ is a term we use for an individual whose actions or negligence have put their family in a bad legal situation. Most often, this happens as a result of not doing something that should have been done, such as not having a valid will drawn up. Dying without a will is one of the main causes of Family Malpractice™, as it can cause financial hardships, legal challenges, and family rifts for those left behind.
Getting a will is not just about carrying out your wishes after you’re gone, but about protecting your family and their future, too.
Get Help with Your Will and Estate Plan
Do you have a last will in place or are you relying on the government to decide where your assets should go after your death? If you live in South Carolina and you’re looking for help creating or updating a will, call estate planning attorney Gem McDowell. Gem and his team at the Gem McDowell Law Group help individuals and couples in South Carolina create wills and estate plans tailored to their circumstances and needs. Call 843-284-1021 to schedule an appointment or a consultation at the Myrtle Beach or Mount Pleasant, SC office today.
What Is a Will?
A last will and testament is arguably the single most important estate planning document you can have. Not having a valid, up-to-date will is a leading cause of Family Malpractice™ and can create legal, financial, and even personal problems for your heirs. If you’re an adult, you should have a last will, even if it’s a simple one.
But let’s start at the beginning:
What is a will?
A will is a legally binding document that directs what should happen to a person’s estate after death.
A last will is a legal instrument in which someone – the testator (or, sometimes, testatrix for a woman) – specifies what should happen to their estate and dependents after they die. In the United States, a will is subject to state laws, which vary somewhat from state to state.
A last will is entirely different from a living will (aka, advance directive or advance healthcare directive), which is a legal instrument outlining wishes for end-of-life care or care after incapacity. In contrast, a last will only comes into effect upon the death of the testator.
There are different types of wills, including simple wills, “I love you” wills, pour-over wills, and more. Read more about the Different Types of Wills and how to choose the best kind for you and your circumstances on our blog.
What can a will do?
A valid, up-to-date will can ensure that your intentions for what happens to your estate and your dependents after your death are known and honored.
By making your wishes clear, you can help prevent litigation, legal quagmires, and fractured relationships that can result when someone dies either without a will (this is called dying intestate) or with an invalid, unclear, or out-of-date will.
A will allows the testator to:
Direct how and where certain assets in the estate will go.
A will only directs how to handle the testator’s assets that are subject to probate, the court-supervised process of paying debts and taxes and transferring ownership of remaining assets after a person’s death. Learn more about probate in South Carolina here on our blog.
Assets subject to probate include bank accounts without a named beneficiary, real estate not owned jointly with rights of survivorship, and personal property. Assets not subject to probate include life insurance proceeds, retirement accounts, and assets held jointly, such as real property owned as a joint tenancy with rights of survivorship. These assets bypass the probate process and go directly to the named beneficiary or co-owner.
If someone dies without a will, aka dies intestate, then state statute determines what happens to their assets and children/dependents. A valid last will is the best way for you – not the government – to direct what happens to your estate after you die. Read more about dying intestate in SC here.
Make arrangements for care of dependents.
The testator can name a guardian to take on legal responsibility for any minor children or other dependents (such as an adult child who needs lifelong care). The testator may also make provisions to create a trust for minor children or dependents and name a separate trustee to manage and oversee the trust’s assets.
Name a personal representative.
The testator can name a personal representative, aka an executor (or sometimes executrix, for a woman), to carry out the intentions of the will and close the estate.
And…
Depending on the testator’s unique circumstances, a will can also be used to:
- Create one or more trusts to hold assets for beneficiaries
- Make donations to charitable organizations
- Make arrangements for care of pets
- Make final wishes for funeral/cremation/celebration of life known
On this last point, we don’t believe a last will is the ideal place to include final wishes. For one, a decedent’s will may not be located and read for several days or weeks after death, by which time it’s too late. Also, last wishes may not be legally binding. If being cremated is important to you, read about legally binding pre-authorization forms for cremation in South Carolina.
A last will has several other limitations as well. Read more about What a Will Can and Can’t Do on our blog.
Parts of a will
A will can and should be tailored to an individual’s circumstances. It may end up being simple and straightforward or long and complex, depending on the nature of the testator’s estate, wishes, and family circumstances. However, most wills typically contain the following basic sections:
Declaration of the testator. The testator gives his or her name and personal information (city and state of residence, marital status, and children), states that he or she has testamentary capacity, and states that the document that follows is intended to be his or her last will. Testamentary capacity is the legal threshold of cognitive ability the testator must meet in order to execute a valid will. This is where the phrase “being of sound mind” may occur.
Naming a personal representative / executor (executrix). The testator names someone to carry out the intentions of the will and close the estate. (Read more about the rights and roles of the personal representative in SC here on our blog.)
Settling debts and taxes. The testator directs how debts and taxes should be paid and may specify from which account or source.
Bequests/Gifts and distribution of assets. The testator lists exactly which assets should go to which beneficiary. The gifts may be specific (such as a particular diamond necklace or piece of real property) or general (such as $20,000). The testator may also specify which sources should be used, e.g., “$20,000 from my [XYZ] Bank savings account.” Alternatively, the testator may choose to divide the estate among heirs by percentages.
Note that in some states, a written memorandum can be used to bequeath personal property to beneficiaries; read more about the written memorandum below.
Appointing a guardian for children and dependents. If the testator has minor children or other dependents, he or she should name a guardian to take on legal responsibility for their care and a back-up guardian.
Signatures. The testator signs the will, often in the presence of two witnesses, though the exact requirements vary by state. Failure to follow state law here can result in the will being invalid.
Depending on an individual’s circumstances, the will may also contain sections on trusts and trustees, guardians for surviving pets, special requests for funeral or memorial services, and more.
Supplemental Parts of a Will
A testator may wish to make changes to the will sometime in the future. Having an entirely new will drawn up is one way to make changes. Alternatively, the testator may use a codicil or a written memorandum to document the changes. Here’s how these two supplementary parts of a will work and how they’re different:
Codicil. A codicil is a separate document that allows the testator to make changes to the will without drafting an entirely new will. It must be executed in the same manner as the original will (e.g., with two witness signatures) in order to be valid.
Written memorandum or personal property memorandum. Some states, including South Carolina, allow for a separate document in which the testator can bequeath personal items like family heirlooms or coin collections. A written memorandum cannot be used to distribute real property, cash, or securities like stocks and bonds. The written memorandum should be referred to in the will.
Get Help with Your Will and Estate Plan
Do you have an up-to-date last will? Having a current and valid last will is key to doing right by your family and avoiding Family Malpractice™.
If you live in South Carolina and you need to update your will or have one drawn up for the first time, contact estate planning attorney Gem McDowell of the Gem McDowell Law Group. He and his team can help you create a last will and comprehensive estate plan tailored to your circumstances, wishes, and needs.
Call to schedule an appointment or consultation at the Myrtle Beach or Mount Pleasant, SC office today at 843-284-1021.
What Exactly Are Trade Secrets? More Than Just Secret Recipes
When you hear the term “trade secrets,” you might think of the recipe for Coca Cola or the formula for WD-40. And these are certainly two of the most famous trade secrets in the world.
But the concept of “trade secret” encompasses much more than secret recipes and formulas. Did you know that even things like customer lists, payroll information, and marketing strategies can be considered trade secrets?
The broader definition is important because trade secrets are protected under state and federal law, and a company can take legal action against a party that misappropriates or misuses its trade secrets.
That’s what happened in a 2024 South Carolina Court of Appeals case, Jennings-Dill, Inc. v. Eric Israel (read the case here). The company took legal action against Israel, a former employee, alleging that he harmed the company by taking and misusing confidential personnel information. We’ll look at that case a little more closely later.
But first, what exactly is a “trade secret”?
What is a Trade Secret? State and Federal Definitions
South Carolina Code Section 39-8-20(5) defines “trade secret” as:
- information including, but not limited to, a formula, pattern, compilation, program, device, method, technique, product, system, or process, design, prototype, procedure, or code that:
(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by the public or any other person who can obtain economic value from its disclosure or use, and
(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
This definition is almost word-for-word the same as the definition in the United Trade Secrets Act (UTSA; link to PDF), a model law created by the Uniform Law Commission. The UTSA has been adopted in some form by nearly every state (with the notable exception of New York, whose courts rely on a similar definition).
The statute continues:
- A trade secret may consist of a simple fact, item, or procedure, or a series or sequence of items or procedures which, although individually could be perceived as relatively minor or simple, collectively can make a substantial difference in the efficiency of a process or the production of a product, or may be the basis of a marketing or commercial strategy. The collective effect of the items and procedures must be considered in any analysis of whether a trade secret exists and not the general knowledge of each individual item or procedure.
At the federal level, trade secrets are also similarly defined. Under the Defense of Trade Secrets Act (18 U.S. Code Chapter 90):
- (3) the term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—
- (A) the owner thereof has taken reasonable measures to keep such information secret; and
- (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information
“Compilations” as Trade Secrets: Customer Lists, Financial Analyses, Manuals, and More
Under the definitions above, it’s easy to see how something like a special formula, recipe, piece of code, product design, or manufacturing process could be a trade secret.
But things like financial analyses, training manuals, marketing strategies, customer lists, and personnel information can also be considered trade secrets, falling under the “compilation” part of the definition. As long as the information derives economic value due to its confidential nature, and the company takes reasonable steps to maintain secrecy, it may be considered a trade secret.
What to Do When Trade Secrets Are Stolen
When trade secrets are misappropriated, the owner of the intellectual property (usually a company) can bring a civil suit against the suspected thief. In some circumstances, criminal charges may be brought by the government; this is more common at the federal rather than the state level, and typically only in situations involving economic espionage or significant financial harm.
In civil suits, plaintiffs often seek injunctive relief to prevent the trade secrets from being further disseminated. This is important because once a trade secret is widely known, it ceases to be a trade secret and is not protected under trade secrets laws. Plaintiffs may seek monetary damages as well, usually as lost profits or unjust enrichment of the defendant.
Jennings-Dill, Inc. v. Eric Israel: Personnel Information as Trade Secrets
That’s what happened in Jennings-Dill, Inc. v. Eric Israel. The appeals court case mainly focuses on when it’s appropriate to grant injunctive relief, which we won’t go into here, but the background facts center on company personnel information as trade secrets.
Eric Israel worked for Jennings-Dill, Inc. (JDI), a commercial plumbing and gas piping company in Greenville, SC, for eleven years before resigning in the summer of 2021. In his role as superintendent, Israel was given a company iPad with access to confidential information. He was subject to company policy which, among other things, forbids employees with a company iPad from copying sensitive data.
Around the time of his resignation, Israel downloaded files from the company iPad with confidential information including personal contact details and pay rates for all JDI employees.
JDI alleges that Israel used that information to solicit JDI employees to leave JDI and come work for Israel’s new employer. One JDI employee testified that within three weeks of Israel’s resignation, twelve of the 29 employees in the plumbing division left the company. This adversely affected JDI, it said, as it had to withdraw from projects worth over $2.5 million and would need a long time to recruit and train new plumbers.
JDI took legal action, seeking a preliminary injunction preventing Israel from using or disclosing confidential information and trade secrets from the documents he downloaded. JDI stated it considers the compilation of employee names, contact information, and pay rates to be a trade secret because it has economic value, is not readily available to the public, and gives JDI a competitive advantage.
The circuit court granted JDI’s request for injunctive relief, which the South Carolina Court of Appeals upheld after Israel appealed. The case did not go to trial – the parties ended up agreeing on a five-year-long permanent injunction preventing Israel from using JDI’s confidential information (PDF here) – but the fact that the preliminary injunction was granted before the full facts of the case were heard shows how South Carolina courts view the importance of protecting trade secrets.
Contact Business Attorney Gem McDowell
If you believe your company’s trade secrets have been misappropriated, speak to an intellectual property attorney in your state, preferably one with experience handling trade secrets cases.
For help with other legal business matters in South Carolina, including starting, running, buying, or selling a business, contact Gem McDowell of the Gem McDowell Law Group. He and his team help business owners avoid costly mistakes and make smart decisions in order to grow their businesses and thrive. Call Gem and his team at the Myrtle Beach or Mount Pleasant, SC office today to schedule a free consultation at 843-284-1021.
Rights to Land You Don’t Own? Prescriptive Easements and Braswell v. Amick.
A farmer in Newberry County, SC, purchased land that was cut off from the main road. To access his land, he habitually used a dirt road on land owned by a neighbor. This went on for years. At first, the neighbor on the adjacent parcel gave the farmer permission to use the dirt road, but after many years, he no longer wanted the farmer using the road.
Should the farmer have the right to use the neighbor’s land to access his own farm? Or does the neighbor have the right to deny the farmer access to the dirt road on his land?
What do you think?
Easements: Rights to Land You Don’t Own
The scenario above is real, and it’s at the center of the 2024 South Carolina Court of Appeals case Braswell v. Amick (read it here).
The court ruled that the farmer, James L. Braswell, Sr., does have the right to use the dirt road partially located on land owned by his neighbor, James F. Amick.
But why should someone have rights to another’s land? Because of easements. In this case, a prescriptive easement, to be exact.
An easement is the right a party has to land owned by another for a specific purpose. Many common easements, such as utility easements, are typically established by contract, deed, or other legal instrument.
In contrast, a prescriptive easement is not established through documentation but through habitual land use. The party claiming the easement must show open, continuous, and adverse use of the land for a certain period of time to establish the easement.
We previously covered prescriptive easements in a blog here on the Supreme Court of South Carolina case Simmons v. Berkeley Electric Cooperative (2016). The Braswell case aligns with and reinforces the Simmons decision. (Note that the Braswell opinion goes into exceptional detail, but this blog will only address the pertinent background and facts.)
Factors to Establish a Prescriptive Easement in South Carolina
In the Simmons opinion, the court laid out the following requirements for establishing a prescriptive easement in South Carolina:
“In order to establish a prescriptive easement, the claimant must identify the thing enjoyed, and show his use has been open, notorious, continuous, uninterrupted, and contrary to the true property owner’s rights for a period of twenty years.”
Open means the use has not been stealthy or done in an attempt to hide use from the landowner.
Notorious means the use was known by the landowner or widely known in the neighborhood.
Continuous and uninterrupted means use that’s consistent over a long period of time (in South Carolina, that’s 20 years) without large pauses or gaps in use.
Contrary to the true property owner’s rights means use that is somehow disruptive, obtrusive, or otherwise unwanted by the true property owner.
Once a prescriptive easement has been established, the property owner cannot interfere with the other party’s specific rights to the land. For example, the true property owner could not block a road that the other party has rights to under a prescriptive easement.
Braswell v. Amick Background and Decision
For years, Braswell, his sons, his employees, and others accessed the Braswell Property by taking a dirt road partially located on the Amick Property. Amick was okay with this at first, and even gave Braswell a key to the gate he installed on the dirt road after buying the property. Later, he no longer wanted anyone on his property, saying that Braswell started “abusing the situation.”
Braswell then sought a judgment declaring a right-of-way over Amick’s property from Highway 76 to his (Braswell’s) farm. Amick denied the existence of the right-of-way.
The circuit court found in Braswell’s favor. Amick appealed and brought up two main issues the appeals court addressed:
- Was Braswell’s use “open” and “notorious”?
- Can the 20 years of continuous, uninterrupted use include time when the land in question was leased?
Let’s look at both in turn.
Issue 1: Was Braswell’s use “open” and “notorious”?
Amick contended that the circuit court erred by not applying the test set forth in Simmons correctly.
In its opinion, the appeals court says that while the exact words “open” and “notorious” were not used in the circuit court’s order, the circuit court did address whether Braswell used the land in an “adverse” manner under a claim of right contrary to Amick. It determined that he did, and adverse use implies open and notorious use. Therefore, the fact that the lower court failed to use the words “open” and “notorious” does not constitute a reversible error.
Unfortunately for Amick, it was the fact that he objected to Braswell’s use of his land after so many years that allowed Braswell to make the claim of adverse use. If Amick had given full permission to Braswell to use the dirt road, Amick could have raised a defense of permissive use, which would have undermined the requirement of using the land contrary to the true owner’s rights.
Issue 2: Can the 20 years of continuous, uninterrupted use include time when the land in question was leased?
Braswell leased land for a time from Sula Miller in order to run his farm before purchasing the land in 1972. Amick contended that during that time, Miller presumably gave Braswell the right to use the land he now claims a right-of-way on. Therefore, that time period cannot be counted towards the 20 years of “continuous, uninterrupted” use as required to establish a prescriptive easement, since use during that time was not adverse, argued Amick.
The appeals court disagreed. It ruled that Braswell did satisfy the requirement of 20 years of “continuous, uninterrupted” land use to establish a prescriptive easement, as there was no evidence of permissive use at the time in the record. The court also cited previous case law (specifically, Simmons and Kelley v. Snyder [SC Court of Appeals, 2012]) rulings that the 20-year time period can be satisfied by “tacking” together periods of adverse land use on the same land as long as those periods were continuous and uninterrupted.
Additionally, aerial photos from the 1980s show a dirt road on the present day Amick Property running to the present day Braswell Property, countering Amick’s testimony that the land was overgrown and inaccessible for a period of time. “These photographs support Braswell’s claim and the circuit court’s finding that Braswell was able to continuously use the road,” says the court.
You Must Be Proactive in Preventing Prescriptive Easements from Being Established
Ultimately, the SC Court of Appeals affirmed the lower court’s decision in favor of Braswell. He now has the right to use the dirt road partially located on Amick’s land, and Amick can’t stop him from doing so.
If you are looking to establish a prescriptive easement, you can see the factors (listed above) that are required in South Carolina. You can also see that in recent years, some important decisions coming out of South Carolina’s courts have been favorable to parties seeking a prescriptive easement.
But if you are a landowner who wants to prevent a prescriptive easement from being established, you need to be proactive when you see parties using your land. Some options:
- Stop the land use: Post “no trespassing” signs, erect fences or other physical barriers, send written notices to the party using your land to stop, and/or speak with an attorney about legal actions you can take
- Give permission: Allow the party to use the land so the land use is permissive rather than adverse; be sure to document this in writing and provide a copy to the party using your land
- Sell the land: Consider selling part of the land outright to the party using it
(Note: This list is not exhaustive and does not constitute legal advice.)
Once a prescriptive easement is established, it’s hard to have it reversed. An easement on your property can mean loss of privacy, loss of control, inconvenience, and disruption for you. It can also affect your property’s value and your ability to sell it in the future by complicating or clouding the title and turning potential buyers off.
Call Attorney Gem McDowell for Legal Help and Advice
For help with commercial land transactions, contracts, and more, contact Gem and his team at the Gem McDowell Law Group. He helps individuals, families, and businesses in South Carolina from his offices in Myrtle Beach and Mount Pleasant, SC. Gem is a problem solver who can help you avoid mistakes and protect your interests. Schedule an appointment or a complimentary consultation by calling 843-284-1021 today.
Stuck with the Terms: Adhesion Contracts After the Landmark 2024 Huskins Ruling
Adhesion contracts are “take-it-or-leave-it” contracts where the contract-writing party dictates the terms and the contract-signing party has little to no room to negotiate. It’s often a large company writing the contract and an individual consumer signing it. We recently covered the topic in our blog “Can I Get Out of a One-Sided Contract? Adhesion Contracts and Unconscionability in South Carolina,” which you can read here.
The conclusion of that blog was that you usually cannot get out of a contact you signed, and that even if a particular term or clause is not enforceable, the court may simply sever it and enforce the rest of the contract.
But the recent 2024 South Carolina Supreme Court decision in Huskins v. Mungo Homes, LLC, (read the decision here) changes things.
The Future of Adhesion Contracts in South Carolina
Up to now, parties drafting an adhesion contract in South Carolina had nothing to lose by including terms that were highly favorable to themselves and unfavorable to the signing party. At best, the parties would adhere to the terms as written and unchallenged, to the benefit of the contract-writing party. At worst, a court might sever the offending term(s) and enforce the rest of the agreement – again, to the benefit of the contract-writing party.
But now, parties insisting on adhesion contracts must be prepared to abide by the contract as written, even to their detriment. In Huskins (2024), the court rejected the idea of severing contract terms that violate public policy in the absence of a severability clause.
This decision will likely affect how companies (in particular, home builders) write their contracts and how courts interpret adhesion contracts in the state moving forward.
That’s the decision and its implications in a nutshell. To understand the court’s reasoning behind this decision, read on.
Brief Background of Huskins v Mungo Homes
Amanda and Jay Huskins (the Huskins) signed a purchase agreement when they bought a house from Mungo Homes, LLC (Mungo) in June 2015. The purchase agreement included the following arbitration clause:
“Each and every demand for arbitration shall be made within ninety (90) days after the claim, dispute or other matter in question has arisen, except that any claim, dispute or matter in question not asserted within said time periods shall be deemed waived and forever barred.”
This clause clearly violates South Carolina law, which typically gives a statute of limitations of three years for such claims, not just 90 days. It also violates South Carolina Code Section 15-3-140 (2005), which renders void contract clauses that attempt to shorten the statute of limitations for claims.
The Huskins filed a complaint over provisions in the purchase agreement, including the arbitration agreement, which they argued violated public policy. The circuit court disagreed; it sided with Mungo and granted its motion to dismiss the complaint and compel arbitration.
On appeal, the appeals court AFFIRMED AS MODIFIED the circuit court’s decision (find that decision here). While it held that the clause limiting claims to 90 days was unconscionable and unenforceable, it also held that the offending section could be severed, allowing the rest of the arbitration agreement to stand.
The South Carolina Supreme Court took up the case in 2024 and REVERSED AND REMANDED the appeals court’s decision. It voided the entire arbitration agreement and remanded the case back to the circuit court.
The Court’s Reasoning
The supreme court went into depth on a number of issues:
Lack of Severability Clause
The court noted that the Mungo Homes contract did not contain a severability clause “or any hint that the parties intended for the arbitration agreement to stand if any part of it fell.”
South Carolina courts are not allowed to rewrite contracts, the court says, and instead are to enforce contracts according to their terms as written: “This is true even when the parties include a severability term. When they do not add such a term, we are reluctant to force one upon them.”
Violation of Public Policy
The appeals court found the clause limiting claims to 90 days was unconscionable and unenforceable.
The supreme court instead found the clause unenforceable because it’s illegal as a matter of public policy. “Because it is unenforceable, we need not decide whether it is also unconscionable. The only question we are left with is whether we should sever the illegal term and let the remainder of the arbitration agreement stand.”
Not Obtained in Good Faith
Courts have routinely stricken illegal parts from contracts and upheld the legal parts. This practice came to the U.S. from English common law and is part of the Restatement (Second) of Contracts.
The Restatement says a court may strike a contract term that’s unenforceable because it violates public policy and enforce the rest as long as:
- The part deemed unenforceable is not an “essential” part of the exchange, and
- The party that wants to enforce the term “obtained it in good faith and in accordance with reasonable standards of fair dealing”
Comments on the Restatement (Second) of Contracts section 184 says “a court will not aid a party who has taken advantage of his dominant bargaining power to extract from the other party a promise that is clearly so broad as to offend public policy by redrafting the agreement so as to make a part of the promise enforceable.”
Was the Mungo Homes contract term “obtained in good faith an in accordance with reasonable standards of fair dealing”?
The South Carolina Supreme Court says three reasons help in determining intent:
- The lack of severability clause
- The existence of a merger clause stating the contract “embodies the entire agreement” which can only be modified or amended in writing by the Huskins and Mungo
- The fact that it is, at Mungo’s own admission, an adhesion contract
On the third point, the court says: “Mungo wrote the contract and deemed its terms nonnegotiable. Huskins could not even edit it. This forceful proof of Mungo’s intent that the contract not be tinkered with convinces us that we should not rewrite it now.” As an adhesion contract, it’s “highly doubtful” the parties intended severability.
“Skirting” of Public Policy
The contract term shortening the time to 90 days from what’s typically three years is not an ancillary matter, but “a brash push” to use arbitration to do something that South Carolina statute forbids.
The court says that rather than including the arbitration provision as an alternative method to resolve disputes, Mungo included it to cut down the number of disputes entirely by drastically reducing the time frame in which to bring a claim. “We conclude Mungo’s manipulative skirting of South Carolina public policy goes to the core of the arbitration agreement and weighs heavily against severance.”
For Help with Contracts and More
The “take-it-or-leave-it” nature of the purchase agreement originally put the Huskins at a disadvantage, but now “Mungo is stuck with its choice,” in the words of the court.
This case highlights the importance of contracts. You must understand the terms of the contracts you sign. And if you’re the party writing the contract, avoid including terms that violate public policy and consider including a severability clause.
For help with contracts and other business-related legal matters such as creating governance documents, buying or selling a business, or starting a new business in South Carolina, contact Gem McDowell. Gem and his team at the Gem McDowell Law Group help business owners across the state solve problems, avoid mistakes, and grow their businesses, with offices in Myrtle Beach and Mount Pleasant, SC. Call today to schedule your free consultation.
What Is the Legal Rate of Interest in South Carolina in 2025?
On January 6, 2025, the Supreme Court of South Carolina issued an order regarding interest rates on money decrees and judgments for the upcoming year. The legal rate of interest for money decrees and judgments in South Carolina is 11.50% compounded annually for the period between January 15, 2025 and January 14, 2026. (Read the original order in PDF format.)
The rate “is equal to the prime rate as listed in the first edition of the Wall Street Journal published for each calendar year for which the damages are awarded, plus four percentage points, compounded annually,” according to South Carolina Code § 34-31-20 (B) (2020). The law also provides that the SC Supreme Court updates the interest rate every year by January 15th.
Compare with the legal rate of interest in 2024.
Mortgage Due-on-Sale Clauses: What Homeowners Need to Know About Garn-St. Germain
Due-on-sale clauses are common in mortgages. A due-on-sale clause allows a lender to demand payment in full on the balance of the loan when the mortgaged property is sold, transferred, or otherwise affected. Fortunately for everyday homeowners, there are exceptions to when a due-on-sale clause can be enforced, thanks to what’s known as the Garn-St. Germain Act.
The Garn-St. Germain Depository Act of 1982 mainly addressed deregulation of savings and loans institutions and took other measures to modernize the financial sector. But it also provided protection for homeowners by forbidding lenders from requiring payment in full in many common circumstances, such as:
- Inheritance by a relative
- Transfer to a spouse or child
- Divorce or legal separation
- Taking out a second mortgage or similar loan
- Renting out the property
If you own interest in a property subject to a mortgage, you should know about due-on-sales clauses and when they can and cannot be enforced. Read on for more specifics on the exceptions listed above and others.
When Mortgage Due-on-Sale Clauses Cannot Be Enforced
The exceptions listed in the Garn-St. Germain Act apply to “residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home […]” (*Find 12 U.S. Code section 1701j-3(d) copied in full at the bottom of this post or online here [PDF].)
Situations in which a mortgage’s due-on-sale clause cannot be enforced under the Garn-St. Germain Act:
Transfer of the interest in a property to a family member upon death of the borrower. This is a common situation, as property is often inherited by a spouse, child, or other relative either through a will or other estate planning document or via intestacy laws (i.e., when there is no will). Heirs do not have to worry about satisfying a due-on-sales clause in this case.
Transfer to the surviving joint tenant(s) in a joint tenancy upon the death of the borrower. This situation is common among married and partnered couples in South Carolina who own property as joint tenants with rights of survivorship. When one dies, the property is then wholly owned by the surviving spouse or partner. Lenders cannot enforce a due-on-sales clause when this transfer happens “by devise, descent, or operation of law” – that is, through a will, intestacy laws, or automatically by law.
Note that the statute includes a type of tenant that South Carolina does not recognize, “tenant by the entirety.” Read more about tenancy types in SC on our blog here.
Transfer to a spouse or child. You can transfer your interest in the property to a spouse or child while still alive without having to worry about the due-on-sale clause being enforced.
Transfer to the borrower’s spouse upon divorce or legal separation. If you transfer your interest in the property to your (soon-to-be) ex as the result of the dissolution of marriage, legal separation agreement, or incidental property settlement agreement, the due-on-sale clause cannot be enforced.
Taking out certain loans secured by the property. You can take out a loan that’s subordinate to the primary mortgage without triggering the due-on-sale clause as long as it doesn’t relate to a transfer of rights of occupancy. This includes a second mortgage, a HELOC, or other similar lien or encumbrance.
Renting out the property for no more than a three-year term without the option to purchase. A renter may live in the property for more than three years but should not sign a single lease with a term longer than three years or the lender may be allowed to enforce the due-on-sale clause. Additionally, including an option to buy on a lease of any length means the due-on-sale clause may be enforceable.
Transfer into an inter vivos trust where the borrower remains a beneficiary and the rights of occupancy stay the same. A transfer into an inter vivos trust (also called a living trust) is protected from triggering the due-on-sale clause as long as you are and remain a beneficiary of the trust and occupancy rights don’t change.
Financing household appliances with a purchase money security interest. Getting financing for expensive household appliances through a store’s financing program is often done through a purchase money security interest (PMSI). This specific exception in the Garn-St. Germain Act stops lenders from enforcing due-on-sale clauses when a PMSI is created for household appliances.
In addition to the eight circumstances listed above, due-on-sale clauses are also barred from being enforced upon “any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.”
When Mortgage Due-on-Sale Clauses CAN Be Enforced
We just went over the circumstances in which a lender cannot enforce a mortgage’s due-on-sale clause. But there are still many common situations in which the due-on-sale clause could be enforced, depending on your mortgage’s terms, which you should be aware of. Just some examples include:
- Inheritance of your interest in the property upon your death by a non-relative beneficiary, including a long-term girlfriend/boyfriend
- Transfer during your life to someone other than a spouse or child, such as a parent, sibling, or girlfriend/boyfriend
- Transfer into a trust, except under the specific circumstances described above
- Renting out the property with a lease that lasts longer than three years and/or provides an option to buy
This list is not exhaustive. If in doubt, speak to your mortgage lender and to an attorney about your situation.
What happens if the due-on-sale clause is enforced? In the worst-case scenario, the lender can begin foreclosure proceedings on the house if the borrower can’t pay. More likely, the new owner(s) can take out a new mortgage that will satisfy the old mortgage. Still, this may not be ideal, especially at times when interest rates are high.
Estate Planning, Problem Solving, and More – Call Gem McDowell
Many people do not read mortgage documents thoroughly before signing, so it can come as an unwelcome surprise to have the mortgage lender demand payment in full on the loan citing a due-on-sale clause. That’s why it’s important to know about the due-on-sale clause and when it can and can’t be enforced.
Smart estate planning can help you avoid unwelcome surprises, save your family headaches, and carry out your wishes now and after you’re gone. For help with wills, trusts, powers of attorney, and more, call estate planning attorney Gem McDowell. He and his team help individuals and families in South Carolina create up-to-date estate plans for smart planning and peace of mind. Schedule your free consultation or appointment at the Myrtle Beach or Mt. Pleasant, SC office by calling 843-284-1021 today.
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*Text from the Garn-St. Germain Depository Act of 1982, 12 U.S. Code Section 1701j-3 https://www.govinfo.gov/content/pkg/USCODE-2011-title12/pdf/USCODE-2011-title12-chap13-sec1701j-3.pdf, subsection (d):
(d) Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—
(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2) the creation of a purchase money security interest for household appliances;
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
(5) a transfer to a relative resulting from the death of a borrower;
(6) a transfer where the spouse or children of the borrower become an owner of the property;
(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.
The Omitted Spouse: When the Spouse is Left Out of the Will
What happens if you leave your spouse out of your will? Or your spouse leaves you out of his or her will?
This happens more often than you think. Many couples get married after one or both partners already executed a last will, meaning the new spouse has been unintentionally left out.
But that doesn’t mean the surviving spouse receives nothing. The law provides for the omitted spouse so that he or she is not unintentionally disinherited.
What the Omitted Spouse is Entitled To
Under South Carolina Code section 62-2-301, an omitted spouse is entitled to the same share of the testator’s estate that would have been received had the testator died without a will.
South Carolina intestacy laws determine the share of inheritance in such cases. If the testator dies with no children, the spouse inherits everything (i.e., all the assets subject to probate). If the testator dies with a spouse and children, the surviving spouse is entitled to 50% of the estate. The remaining 50% is divided according to the terms of the will.
The omitted spouse does not automatically receive the assets but must claim his or her share within a certain time frame.
When the Omitted Spouse Provision Does Not Apply – Spousal Elective Share
The purpose of the omitted spouse is to provide for a spouse left out of the will unintentionally.
But what if the spouse was left out of the will intentionally?
Under the same law cited above, if it appears that the omission was intentional or if the testator provided for the spouse through transfers outside of the will, then the omitted spouse provision does not apply.
The surviving spouse may still make a claim for elective share, however. A surviving spouse is entitled to one third of the testator’s probate estate in South Carolina even if the testator intentionally left the spouse out of the will. That’s because the only way to legally disinherit a spouse in South Carolina is to have both partners knowingly sign a waiver of elective share. (Read more about disinheriting a spouse and spousal elective share here on our blog.)
The Solution: An Intentional and Current Estate Plan
Laws regarding omitted spouses and elective share have helped many people who would otherwise have been disinherited. But having a purposeful, up-to-date will and estate plan is better than relying on the law to carry out your wishes.
For help with last wills, trusts, powers of attorney, and other estate planning documents, call estate planning attorney at the Gem McDowell Law Group. Gem and his team help individuals and families in South Carolina create estate plans that take into account unique circumstances, carry out personal wishes, and give peace of mind.
Whether you’ve never had an estate plan drawn up before or your existing plan is in need of a review, Gem and his team can help. Call today to schedule a free consultation virtually or at the Myrtle Beach or Mt. Pleasant, SC, at 843-284-1021.
Can I get Out of a One-Sided Contract? Adhesion Contracts and Unconscionability in South Carolina
UPDATE 03/04/25: In 2024, the Supreme Court of South Carolina took up Huskins v. Mungo Homes where it addressed the issue of adhesion contracts. The takeaway: South Carolina courts will no longer sever illegal or unenforceable terms that violate public policy from an agreement lacking a severability clause, potentially rendering the entire agreement, or substantial sections of it, void. Read more about this important decision here on our blog.
Originally posted Nov. 22, 2024:
Unless you live off the grid, you have almost certainly signed a very long contract full of dense legalese. You probably didn’t even read it. You certainly didn’t attempt to negotiate better terms for yourself. You just signed your name and hoped for the best.
These types of one-sided, boilerplate contracts are known as adhesion contracts, and they’re very common. If you want to lease a car, buy a new build home, enjoy streaming content, or enjoy any other number of products or services, you’ll encounter one. It’s a take-it-or-leave-it situation: accept the contract as is or simply don’t enjoy the product or service.
But what if you discover after signing that you’ve made a big mistake and want out? Can you get out of a one-sided adhesion contract?
Maybe. One way to get out of such a contract is for a court to find the contract terms so one-sided and oppressive they’re considered unconscionable. Today we’ll look at where South Carolina courts draw the line between enforceable and unenforceable with respect to adhesion contracts, and see what the South Carolina Court of Appeals said on the topic in Mart vs. Great Southern Homes, Inc. (2023).
Elements of Unconscionability in South Carolina
A court can find a contract, a clause, or behavior “unconscionable” when it’s so egregious that it shocks the conscience of the court. We’ve covered unconscionability in depth on this blog before when looking at Huskins v Mungo Homes, LLC (2022); read that blog here.
In South Carolina, two elements are required for unconscionability with respect to contract law:
- Absence of meaningful choice
- Oppressive and one-sided terms
Both elements need to be present for a court to find a contract or its terms unconscionable.
When a clause is found to be unconscionable, the court has the discretion to sever that clause and enforce the rest of the contract as is; render the entire contract unenforceable; or limit the application of the unconscionable clause. (See South Carolina code Section 36-2-302).
Adhesion Contracts in South Carolina and Unconscionability
The question is whether adhesion contracts contain:
- Absence of meaningful choice AND
- Oppressive and one-sided terms
By their nature, adhesion contracts entail an absence of meaningful choice. The party signing the contract (typically an individual consumer) does not have the opportunity to negotiate terms with the party writing and presenting the contract (typically a large company).
Adhesion contracts are also one-sided by nature. Terms favor the party providing the contract and disfavor the signing party.
The final element to satisfy for unconscionability is “oppressive.”
What’s Considered “Oppressive”?
The 2023 South Carolina Court of Appeals case Mart v. Great Southern Homes, Inc. (find it here) mainly focuses on whether arbitration can be compelled when a single contract contains conflicting arbitration clauses. (The court says yes.) At the end of its decision, the court also briefly addressed the issue of adhesion contracts and unconscionability.
Quoting the South Carolina Supreme Court case Damico v. Lennar Carolinas, LLC (2022), it wrote “a take-it-or-leave it contract of adhesion is not necessarily unconscionable, even though it may indicate one party lacked a meaningful choice. […] Rather, to constitute unconscionability, the contract terms must be so oppressive that no reasonable person would make them and no fair and honest person would accept them.” (emphasis added)
And: “The distinction between a contract of adhesion and unconscionability is worth emphasizing: adhesive contracts are not unconscionable in and of themselves so long as the terms are even-handed.” (emphasis in the original)
In the Mart opinion, the court provides some examples of unconscionable and therefore unenforceable terms from other cases involving home builders:
- Smith v. D.R. Horton, Inc. (SC Supreme Court, 2016, here): D.R. Horton’s attempts to disclaim implied warranty claims and prohibit monetary damages of any kind; contract terms left relief “to the whim” of D.H. Horton
- Damico (SC Supreme Court, 2022, here): Lennar’s contract gave Lennar “sole election” to choose the parties for arbitration, potentially forcing purchasers to separately litigate against subcontractors in circuit court
- Huskins (SC Court of Appeals, 2022, here): The Mungo Homes contract shortened the statutory limitation period to bring a claim from three years (as provided for in state law) to a maximum of ninety days
UPDATE: The SC Supreme Court found that the term was unenforceable as it violated public law, and therefore the issue of unconscionability was moot. Read more about the 2024 Huskins decision from the Supreme Court of South Carolina here on our blog.
These terms go beyond normal contract terms in favoring the contract-writing party such that the courts ultimately found them “oppressive.”
Be Careful What You Sign
So, can you get out of an adhesion contract? Maybe – but probably not. Even if you’re successful in proving in court that certain contract terms are unconscionable, the court may simply sever those terms and allow the rest of the contract to stand.
The bottom line: If you don’t want to be held to the terms of the contract, simply don’t sign it in the first place. You can’t count on getting out of a contract after the fact.
(And don’t forget that many contracts, including many EUAs and contracts you agree to digitally, give you the opportunity to opt out of arbitration in writing within 30 days, as we previously covered in this blog on arbitration.)
For help with contracts, business law, estate planning, and probate, contact Gem McDowell at the Gem McDowell Law Group. Gem and his team help individuals, families, and businesses in South Carolina from offices in Myrtle Beach and Mount Pleasant. Gem has over thirty years of experience and can help you and your family or your business protect your interests, avoid mistakes, and achieve peace of mind. Call today to schedule your initial consultation at 843-284-1021.
I Want to Be Cremated; Does My Family Have to Follow My Wishes?
The short answer is “Yes, IF…”
Yes, If You Complete a Pre-Need Cremation Authorization Form
South Carolina law (Chapter 8 Title 32) provides that an individual may pre-authorize their own cremation. This pre-authorization is a legally binding agreement between the individual and his or her chosen crematory that gives the crematory permission to cremate the individual’s remains.
You can download the PDF of this form here or find it on the South Carolina Labor Licensing Regulation website here (scroll down to the “Forms” section, click on “Cremation Forms,” and select “Cremation Authorization – Pre-Need”).
This form must be signed in ink by the individual requesting cremation services in the presence of two witnesses. It remains enforceable unless and until the individual provides written notice to the funeral establishment and the crematory.
Are Cremation Wishes in a Last Will Legally Binding?
No. Many people choose to include their last wishes relating to funeral arrangements, burials, cremation, and so on, in their last will, but they are not legally binding. If you live in South Carolina and your wish is to be cremated, you should consider filling out the pre-need cremation authorization form linked above.
Get Help with Estate Planning in South Carolina
What will happen to your assets and your remains when you die? Decide for yourself by creating an up-to-date estate plan to help ensure your last wishes are known and followed after you’re gone.
For help with last wills, living wills, trusts, powers of attorney, and more, call Gem McDowell at the Gem McDowell Law Group in Myrtle Beach and Mt. Pleasant, SC. Gem and his team help individuals and families in South Carolina review and create comprehensive estate plans for peace of mind. Call 843-284-1021 today to schedule a free consultation or get in touch through this form.
What is a Trust Protector and When Do You Need a Trust Protector?
If you know anything about trusts, you have likely heard of the roles of settlor (aka grantor), beneficiary, and trustee. But there’s another role to know about: the trust protector.
Let’s look at what a trust protector is, who can be a trust protector, and the advantages and disadvantages of appointing one for your trust.
What is a Trust Protector and What Does a Trust Protector Do?
A trust protector, or simply “protector,” is an individual or entity whose primary role is to ensure the trust is being carried out in accordance with the settlor’s original wishes. Trust protectors were most commonly seen in asset-protecting offshore trusts in the 1980s and 1990s, but they have since become more popular for all kinds of trusts in the U.S. and many other nations.
What does a trust protector protect against? Depending on the circumstances, the trust protector may protect the trust from various threats or risks including trustee misconduct, mismanagement, or incapacity; disputes among beneficiaries and/or trustee(s); changing laws that adversely affect the trust; ill-advised financial decisions; and more.
Common powers and responsibilities may allow a trust protector to:
- Oversee trust administration to ensure it’s in compliance with applicable laws and with the settlor’s wishes
- Require trustee to get trust protector’s consent before taking certain actions such as investing or distributing funds
- Modify the trustee’s powers
- Remove or replace trustees
- Change the beneficiary or beneficiaries
- Adjust as needed in response to changing circumstances
A trust protector may have all or some of the powers listed above, and more. The exact powers and responsibilities are enumerated either in the trust instrument itself or in a separate document.
Who Can Be a Trust Protector?
In theory, anyone of legal age who is mentally competent can be appointed trust protector, other than a trustee. Even the settlor/grantor may serve as the trust protector (and often does). Entities such as banks, law firms, and corporations may also serve as trust protectors.
In practice, it can be challenging to find the right individual or entity to effectively fill the role. The ideal candidate should have the right experience and knowledge, including knowing relevant state and federal laws, tax and reporting requirements, and the trustee’s powers and responsibilities, for a start. A trust protector should also be an impartial third party with no conflict of interest, meaning the individual or entity should not have any financial stake in the trust or how it’s handled.
Above all, a trust protector should be someone the settlor can rely on to carry out their wishes, which is why settlors often select a family friend or close acquaintance whom they trust implicitly.
Does Every Trust Need a Trust Protector? Advantages of Appointing a Trust Protector
No, not every trust needs one, but we strongly recommend a trust protector in the following situations:
- A troubled beneficiary. If the beneficiary has issues with drugs, alcohol, or excessive spending, a trust protector – such as a family friend or counselor – can be helpful in finding the right trustee to handle the trust. The two can work together to ensure the trust is not misused.
- Specific investments. A grantor may wish to appoint a trust protector to help direct the investment of trust assets in a particular “family way” that the trustee might not be familiar with.
Outside of these specific circumstances, here are just some of the main advantages of having a trust protector that any trust can benefit from:
Flexibility to respond to changing circumstances. Changes in family/beneficiary situations, tax code, and estate planning laws can adversely affect a trust. Trust protectors have powers trustees don’t (and legally cannot) have that allow them to alter the trust in response to new circumstances. This can reduce tax liabilities and ensure the trust reflects the settlor’s wishes long after the settlor is gone.
Oversight over the trustee. Trust protectors can also serve as an additional layer of protection against mismanagement by the trustee(s). This is more important than ever, as the powers of trustees have grown over time. Oversight by a third party (the trust protector) can help prevent intentional or unintentional mishandling by the trustee(s) that can harm the beneficiaries’ interests and endanger the trust.
Conflict resolution. Trust protectors can also act as informal mediators when disputes arise. Beneficiaries may fight among themselves, and trustees and beneficiaries often have competing goals, which can lead to strife and litigation. (Read about how one such conflict ended up in the SC Court of Appeals here on our blog.) A skilled trust protector can step in at the first signs of conflict and resolve the matter amicably, potentially avoiding litigation and strained relationships.
Depending on your circumstances and goals, you may gain additional advantages by appointing a trust protector for your trust. This is something to speak with your estate planning attorney about.
What if you didn’t appoint a trust protector in the original trust document? That’s not a problem. A settlor can add a trust protector later.
Downsides of Having a Trust Protector
What are the risks and disadvantages of having a trust protector? Some possible downsides include:
Higher fees. Not all trust protectors are compensated for their role, but some are. Trust protectors who are fiduciaries (with a fiduciary duty to the beneficiary or beneficiaries) are typically compensated. Depending on the terms of the trust, having a trust protector can be expensive and can diminish the trust’s assets.
Potential for challenges. Trusts have been around for centuries, and by now the roles and responsibilities of the grantor/settlor, trustee, and beneficiary are clear. But the role of trust protector is relatively new, and relevant case law in South Carolina is sparse. The potential for lawsuits and legal challenges over a trust protector’s actions shouldn’t be ignored.
Needless complexity. A trust protector may end up bringing conflict, indecision, or poor judgment to the situation. This is why it’s crucial to take the time to select the right trust protector. No trust protector at all is better than an ineffective and incompetent one.
For Help with Trusts and Estate Planning, Call the Gem McDowell Law Group
Trusts are excellent instruments for estate planning, but they can be complex. For help creating or amending a trust, or for advice on appointing a trust protector for your trust, talk with Gem McDowell. Gem helps individuals and families in South Carolina create estate plans tailored to their unique circumstances and wishes. He’s also a problem solver who can help you tackle tricky family or inheritance situations and avoid mistakes.
Call Gem and his team at their Myrtle Beach or Mount Pleasant, SC office today to schedule your free, no-obligation consultation at (843) 284-1021, or reach out to us through this form.
Changing the Rules Mid-Game: What the Connelly v U.S. Decision Means for Closely Held Corporations
If you are a shareholder in a closely held corporation, you need to know about the June 2024 decision from the U.S. Supreme Court case Connelly v. United States (2024). This decision (find it here) could have dramatic consequences for your business and for you, personally, as a shareholder.
Here’s the central issue:
Should life insurance proceeds paid to a closely held corporation to buy out a deceased shareholder’s portion of the business be counted as a non-offsettable asset for the purposes of calculating the decedent’s federal estate taxes?
The U.S. Supreme Court says YES.
The issue is somewhat convoluted. The upshot is that this decision allows the IRS, in some circumstances, to essentially “tax” a portion of previously untaxable life insurance proceeds without directly taxing them. Instead, it’s done by counting the life insurance proceeds as a business asset that cannot be offset, thus increasing the deceased shareholder’s share of the company at time of death and increasing their taxable estate – and possibly creating a federal estate tax liability.
This is a drastic change from what has previously been done. It’s like changing the rules while you’re in the middle of the game; you were expecting to pass Go and collect $200, but now you owe $300.
Below, we’ll look at the background of Connelly and the court’s reasoning, then discuss what it could mean for you and the other shareholders in your closely held corporation.
Note that today’s blog is just an introduction to the topic. Since this decision is so new, it’s not clear how things will shake out; it will take some time for business owners and their attorneys to determine the best course of action moving forward. But for now, we wanted to put this on your radar. We recommend speaking with your own business attorney and/or estate planning attorney about the potential consequences for you if you are an owner in a closely held corporation. (And if you do not yet have a business attorney or estate planning attorney in South Carolina, call us at the Gem McDowell Law Group at 843-284-1021 to talk.)
Connelly vs United States (2024) Summary
Briefly: Michael and Thomas Connelly were brothers and together owned a building supply company, Crown C Supply (Crown). They had an agreement to ensure the business would stay in the family if either brother died. The surviving brother would have the option to purchase the shares first, and if not, then Crown would be required to purchase the deceased brother’s shares. The corporation purchased life insurance policies of $3.5 million on each brother to this end.
Michael died in 2013 owning 77.18% of the business (385.9 of 500 shares) at death, with his brother Thomas owning the remaining 22.82%. Thomas declined to buy the shares, so Crown redeemed them for $3 million, an amount agreed upon by Michael’s son and Thomas.
Michael’s federal tax return for the year of his death was audited by the IRS. As part of the audit, an accounting firm valued the business at Michael’s death at $3.86 million, with his 77.18% share amounting to approximately $3 million. The analyst followed the holding of Estate of Blount v Commissioner of Internal Revenue (2005) that stated life insurance proceeds should be deducted from the value of a corporation when the proceeds are “offset by an obligation to pay those proceeds to the estate in a stock buyout.”
But the IRS argued that Crown’s obligation to buy back the stock did not offset the life insurance proceeds. The $3 million in life insurance proceeds should be added to the assets of the business, the IRS argued, making the total value of Crown at Michael’s death $3.86 million + $3 million = $6.86 million. Michael’s 77.18% share of this larger amount would be approximately $5.3 million, and based on this, the IRS said Michael’s estate owed an additional $889,914 in taxes.
Michael’s estate paid these taxes, and Thomas, as Michael’s executor, later sued the United States for a refund. The case went before the Supreme Court in March 2024.
The Supreme Court’s Reasoning
In its decision, the court states two points that “all agree” on:
- The value of a decedent’s shares in a closely held corporation must reflect the corporation’s fair market value for the purposes of calculating federal estate tax; and
- Life insurance proceeds payable to a corporation are an asset that increase the corporation’s fair market value.
The question, then, is whether the obligation to pay out those life insurance proceeds offset the asset, effectively canceling itself out.
The Supreme Court’s answer: No.
The reasoning: “An obligation to redeem shares at fair market value does not offset the value of the life-insurance proceeds set aside for the redemption because a share redemption at fair market value does not affect any shareholder’s economic interest.” The court says that no willing buyer would treat the obligation as a factor that reduced the value of the shares.
Also, for the calculating estate taxes, the point is to assess how much an owner’s shares are worth at the time of death. In this case, it was before Crown paid out the $3 million to buy Michael’s shares. Therefore, that $3 million should be added to the value of the business’s assets and income generating potential, valued at $3.86 million.
This decision will likely affect millions of business owners and trillions of dollars. Depending on your personal and business circumstances, it could affect you, too.
What This Means for You: Federal Estate Taxes
The most important thing to know about federal estate taxes is that the laws affecting them can and do change regularly. (This is one big reason it’s important to have your estate plan reviewed regularly to ensure it’s up to date with current law. Read about the unintended consequences of an out-of-date estate plan here on our blog.)
The majority of individuals subject to U.S. taxes who die in 2024 will not be subject to federal estate taxes; only about 0.2% were expected to in 2023, according to a Tax Policy Center estimate. Currently, if an individual dies in 2024 with a taxable estate valued below $13,610,000, no federal estate tax needs to be paid. This amount doubles to $27,220,000 for married couples filing jointly.
But the “applicable exclusion amount” (also called the “unified tax credit” or “unified credit”) has not always been so high. For many years, it was just $600,000. The current unified tax credit amount is set to expire at the end of 2025, after which it will revert to a lower amount (expected to be around $7 million), unless Congress passes more legislation changing it first.
When Michael Connelly died in 2013, the unified tax credit amount according to the IRS was $5,250,000. Valuing his share of the business at death at $5.3 million rather than $3 million meant he had a larger taxable estate and owed additional federal taxes.
What does this mean for you? This makes estate planning tricky. You can’t know for sure when you’ll die or what the applicable exclusion amount will be that year. Depending on the value of your business and your personal assets, your estate may owe federal estate taxes you weren’t anticipating. The bottom line: If you have a buy-sell agreement and it is funded with life insurance, have it reviewed by an attorney ASAP.
What This Means for You: Succession Planning Going Forward
It’s common for shareholders in a family-owned closely held corporation to have buy-sell agreements that would keep the business in the family should a shareholder die. (Read more about buy-sell agreements on our blog here.) To that end, life insurance policies are often taken out on the shareholders to ensure funds are available to buy out the deceased shareholder’s shares at death.
For years, many business owners have had the corporation itself buy and maintain those life insurance policies on each shareholder. The proceeds went directly to the corporation and were not taxed. Additionally, they did not increase the value of the business, and thus the value of the deceased shareholder’s portion, at the time of the shareholder’s death.
Until now.
What does this mean for you? Now that this has changed after Connelly, shareholders in a closely held corporation may reconsider having the corporation purchase and maintain life insurance policies on its owners.
One option suggested in the Connelly opinion is for the shareholders to take out life insurance policies on each other in a “cross-purchase agreement.” The court acknowledges that this comes with its own set of problems, however, including different tax consequences and the necessity for each shareholder to maintain policies on the other shareholders.
Another potential option is to set up a separate LLC to maintain life insurance policies on the shareholders. In the event of a shareholder death, the LLC – not the corporation itself – would buy out the decedent’s share. This is one possible new solution to this new problem, but it is not yet tried and tested.
Finally, shareholders may continue to have the corporation purchase and maintain life insurance policies with the knowledge that each shareholder should create an estate plan for their personal assets that helps avoid federal estate taxes.
Watch This Space
As the dust settles from this decision, we’ll keep on top of it and come back with more information and advice.
Just remember – the law is not set in stone. Congress passes new legislation and courts render decisions regularly that can affect individuals and business owners. It can be hard to keep up with all the changes, which is why it’s important to have an attorney you can rely on to help keep your estate plan current and your business thriving.
Call Gem at the Gem McDowell Law Group in Myrtle Beach and Mt. Pleasant, SC. He and his team help South Carolina individuals and families create and review estate plans to protect assets and avoid family disputes. He also helps with the creation, purchase, sale, protection, and growth of South Carolina businesses through the creation of corporate governance documents, contracts, problem solving, and more. Call 843-284-1021 today to schedule a free consultation or fill out this form. We look forward to hearing from you.
