Are You Responsible for Your Spouse’s Debts?

Are you responsible for your spouse’s debts? It depends. Generally, you are not responsible for any debts your spouse brings into the marriage.

As for debts incurred during the marriage, it depends on the state you live in and the type of debt. In an equitable division state such as South Carolina, both spouses are responsible for debt taken on jointly and for debt that benefits the marriage. In South Carolina and many other states, you would not be liable for debts incurred only by your spouse that don’t benefit the marriage.

There’s one important exception – the doctrine of necessaries.

The Doctrine of Necessaries in South Carolina

The doctrine of necessaries (also called the necessaries doctrine or sometimes the doctrine of necessities) comes from common law and is still valid in many states today, including South Carolina. It makes an individual liable for a spouse’s debts if the debts are related to medical care, food, shelter, or other “necessaries” for life. It also applies to parents who are liable for their minor children’s debts including medical bills.

The necessaries doctrine has been affirmed a number of times in South Carolina courts, including in the case Richland Memorial Hospital v Burton (1984) in the Supreme Court of South Carolina (here). Richland Memorial Hospital brought a collection action against Cary Burton, the husband of a deceased patient of the hospital, for debts incurred by his wife during her medical care. The trial court found Burton liable for the debts, and the SC Supreme Court ultimately affirmed.

This case is important because it brought equality to a common law that originally applied only to men and not to women.

Historical Inequality in the Doctrine of Necessaries

Originally, only husbands had the legal duty to support their wives and take on their debt. The necessaries doctrine comes from common law during a time when women did not have all the rights they do today, including property rights and the right to enter into contracts. A husband had a duty to support his wife, even taking on the debts she incurred before the marriage, and he also had the authority to use her property to satisfy her debts. Common law did not require a woman to take on her husband’s debts, because it didn’t make sense at the time.

Things began to change in the mid-1800s when Married Women’s Property Acts and similar acts were passed, state by state, across the country, giving women more legal authority and property rights. South Carolina later enacted Code 20-5-60 which relieved husbands of liability for their wives’ debts, except for her necessary support: “A husband shall not be liable for the debts his wife contracted prior to or after their marriage, except for her necessary support and that of their minor children residing with her.”

Still, while women gained more rights, the necessaries doctrine remained unchanged in many places for a long time, including South Carolina.

An Old Common Law in Modern Times

In Richland Memorial Hospital v Burton, Burton argued that the necessaries doctrine and SC Code Section 20-5-60 were unconstitutional because they violated the equal protection clauses of the South Carolina Constitution and the United States Constitution. The appellant and respondent conceded that the necessaries doctrine denied equal protection because it imposed an obligation on husbands it did not impose on wives. The court agreed.

But the court also agreed with Richland Hospital that the doctrine of necessaries remains a viable common law doctrine. The court determined that both husbands and wives were subject to the necessaries doctrine. From the court’s opinion: “We accordingly hold that the necessaries doctrine allows third parties providing necessaries to a husband or wife to bring an action against the individual’s spouse.”

In short, yes, in South Carolina you can be responsible for necessaries-related debts your spouse alone incurs – whether you’re a husband or a wife.

Estate Planning with Gem McDowell

For help with estate planning, call estate planning attorney Gem McDowell at the Gem McDowell Law Group. He and his team can help you with estate planning documents like wills, living wills, and trusts, and help make sure your estate plan is up to date and reflects your wishes and current laws. Call 843-284-1021 to schedule your free initial consultation today.

What is a Right of First Refusal and When Is It Enforceable?

The right of first refusal sounds simple on the surface. A right of first refusal (ROFR) gives the right-holder the opportunity to enter into a business transaction with another party before anyone else. It’s most commonly seen in real estate contracts, such as when a lessor signs a contract giving them the ROFR to put in an offer to purchase the property if it ever comes up for sale.

But as straightforward as it sounds on paper, it’s not always so straightforward in the real world. Contracts that include an ROFR must be clear and detailed in order to be enforceable.

The Supreme Court of South Carolina addressed this issue in the 2023 case Clarke v. Fine Housing, Inc. (here). We’ll look at the factors required for an enforceable right of first refusal in South Carolina and how they played out in this recent case.

The Pros and Cons of a Right of First Refusal

An ROFR can benefit both parties. In the example of a lessor with the ROFR to purchase the property, if and when it comes up for sale, they can be sure not to miss out on the opportunity to put in an offer. There’s no downside for the potential buyer; if they don’t want to buy the property, they simply refuse.

The property owner can benefit by having a potential buyer already lined up when it’s time to sell, which may help them in negotiations with other potential buyers. However, the downside for the property owner is that a ROFR can restrict their power of alienation, which is their ability to dispose of property.

“South Carolina law prohibits enforcement of unreasonable restraints on alienation of real property,” the court says in the Clarke opinion. The key word here is “unreasonable.” Whether a particular ROFR is enforceable depends on whether the restraints on alienation are considered unreasonable.

Unreasonable Restraints on Alienation of Property: What is Unreasonable?

In the Clarke opinion, the SC Supreme Court turns to the Restatement (Third) of Property. The Restatements of the Law (Third) are a comprehensive set of legal treatises widely referenced and relied upon by courts, judges, lawyers, and others across the U.S. On the subject of the ROFR, it says, “Reasonableness is determined by weighing the utility of the restraint against the injurious consequences of enforcing the restraint.”

The Supreme Court of South Carolina uses the factors listed in the Restatement (Third) of Property (Comment f) to determine, on a case-by-case basis, whether a right of first refusal is enforceable. The factors are:

The legitimacy of the purpose of the right,
The price at which the right may be exercised, and
The procedures for exercising the right

These factors are not exclusive.

Let’s look at each one of the factors and how they figure into the Clarke case.

Background of Clarke v Fine Housing (2023)

First, the pertinent background of 2023 Supreme Court of South Carolina case Clarke v. Fine Housing, Inc.: Barry Clarke owned a strip club in Charleston. In 1999, he entered into a lease agreement with the owners of another strip club across the street to use part of their unimproved land for parking. The lease contained the following language:

Section 5.2. Right of First Refusal: Lessor grants the Lessee the right of first refusal should it wish to sell.

Note that there’s no mention of price, timing, how to exercise the right, or any other specifics – not even which property this right of first refusal applies to.

In 2013, then-owner RRJR conveyed the property in question to Fine Housing, Inc. Clarke learned of the sale in 2014 after it was a done deal, having had no opportunity to exercise what he believed to be his enforceable right of first refusal (Right).

In 2015, Clarke brought this action for specific performance against Fine Housing and RRJR. The case eventually came before the Supreme Court of South Carolina, which agreed with the SC Court of Appeals that the Right was not enforceable because it constituted an unreasonable restraint on alienation.

Factors for an Enforceable Right of First Refusal

Here are the three factors the Supreme Court of South Carolina uses to determine enforceability of a right of first refusal on a case-by-case basis and how they show up in Clarke.

Factor 1: Legitimacy

In Clarke, Fine Housing didn’t challenge the legitimacy of the purpose of the Right, so the court didn’t address the issue.

Factor 2: Price

Price may or may not be an unreasonable restraint on alienation. If, for example, the ROFR were dependent on a fixed price, that could restrain alienation. If the price were to be matched to a third party’s offer, there would be less restraint.

In Clarke, Clarke argued that the Right left the price to be determined entirely by RRJR and required him to match any offer from a third party. He also argued that exercising the Right would have started a bidding war that would have benefitted RRJR.

The court agreed with Fine Housing that the absence of any method for determining the purchase price in the lease constituted an unreasonable restraint on alienation. Absence of specifics on how to determine price may not be as restraining as a fixed price, says the court, but it is still a restraint, and “a right of first refusal should contain some method for determining the price at which it may be exercised.” The lease Clarke signed had no method, and therefore this factor worked against him.

Factor 3: Procedures governing the exercise of the right

Comment f to the Restatement stresses the importance of provisions governing the exercise of the right, stating, “Lack of clarity may cause substantial harm by making it difficult to obtain financing and exposing potential buyers to threats of litigation. Lengthy periods for exercise of rights of first refusal will also substantially affect alienability of the property.”

Time is also an important consideration. How soon after the owner decides to sell does the right holder have to exercise their right? An extended period of time can be a restraint on the property owner, while a “reasonable” time frame does not impose unreasonable restraint and is generally enforceable.

In Clarke, Clarke argued that a ROFR does not require detailed instructions on how to exercise it to be valid, but this directly contradicts the Restatement (Third) of Property. He also argued that the lease provided satisfactory procedures regarding the exercise of the right. The court disagreed “because the Right contains no such procedures whatsoever.”

As for timing, Clarke argued that if there’s no mention of a timeline in the language of the agreement, then it must be done within a “reasonable time.” The court disagreed, saying that the point of the Restatement is to include a predetermined time limit so as to protect the property owner’s power of alienation, rather than having the owner rely on a “judicially implied ‘reasonable time.’”

Because of the total lack of provisions regarding timing and procedures on how to exercise the Right, the court found again in favor of restraint on alienation.

Additionally: Which Property?

The court also addressed a matter specific to Clarke: to which property did the Right ostensibly apply? The entire property that includes the unimproved land Clarke leased for parking, or the unimproved land only?

Clarke argued that the Right applied to the entire property, but the court disagreed because the language in the lease was not clear. That uncertainty constitutes an additional unreasonable restraint on alienation.

Takeaway: Rely on Clear, Specific Contracts

The SC Supreme Court affirmed the appeals court’s decision, finding in favor of Fine Housing and against Clarke, stating “The Right does not identify the property it encumbers, contain price provisions, or contain procedures governing the exercise of the Right. We conclude the Right is an unreasonable restraint on alienation. We therefore affirm the court of appeals’ holding that the Right is unenforceable.”

An important takeaway for anyone entering into a contract with a right of first refusal in South Carolina: Make sure the language in your contact is clear and specific and that it addresses the three factors discussed above. It must contain language on how the price should be determined and how the right should be exercised. Language that unreasonably restrains the property owner’s power of alienation may render it unenforceable, so the right cannot be construed too favorably to the would-be buyer.

Call Gem McDowell for Contracts, Strategic Business Advice, and Commercial Real Estate

Many legal disputes come down to the language in a contract. Is it clear? Is it enforceable? Would the courts side with you if the matter were ultimately litigated? It’s critical to get the contract right before signing it, so you lessen the chances of complications and litigation down the road.

For help with business contracts and commercial real estate, call business attorney Gem McDowell at the Gem McDowell Law Group. Gem has over 30 years of experience working with business owners to help them start, grow, and protect their businesses. He and his team can help you with contracts, corporate governance documents, strategic advice, and more. He also has extensive experience in commercial real estate transactions in South Carolina. Call the Gem McDowell Law Group today to schedule a free consultation at 843-284-1021.

What is Family Malpractice™, and Have You Committed It?

Have you committed Family Malpractice™?

If you’ve neglected your legal responsibilities regarding your family, then yes, you have.

What is Family Malpractice™?

You’ve heard of attorney malpractice, where an attorney’s misconduct causes problems for a client, and you’ve heard of medical malpractice, where a doctor’s error or negligence causes problems for a patient. Similarly, Family Malpractice™ is when an individual causes problems for his/her family members, usually because of failure to take action on a legal matter.

Problems that are created can be legal, financial, and/or familial in nature. I’ve seen a decedent’s heirs have to go through years of expensive and stressful legal battles over how to divide up assets. I’ve seen people take a huge financial hit because of how property was handled after the owner’s death. I’ve seen families torn apart and relationships permanently ruined due to Family Malpractice™.

While it’s not something you can be prosecuted for, Family Malpractice™ is something to avoid. You can easily do so by knowing some of the common pitfalls that put your family in peril legally and financially, and how to avoid these easily avoidable situations yourself.

When You Have Children but Have No Will, That’s Family Malpractice™

Do you know what happens in South Carolina if you die without a will, leaving behind a spouse and children? When I ask this question in consultations or at live, in-person seminars, most people believe that 100% of the deceased’s probate estate goes to the spouse. This is incorrect. By state statute, the deceased’s probate estate is divided evenly between the spouse, who gets 50%, and the children, who share the remaining 50% among themselves.

This sounds reasonable and fair. But, as straightforward as it sounds, this simple arrangement can cause a lot of problems, usually for the spouse. For instance, if a husband and father dies intestate (without a will), his half of the house is divided equally between his surviving wife and children. So his wife now owns 75% of the house and the children own the other 25%. If she’s not able to keep up with the house payments and wants to downsize, she can’t sell unless her children agree. They then have leverage and can demand more than the 25% of the sales price of the home, or else simply refuse to sell.

Who would do this to their own mother, you ask? Plenty of people, unfortunately. I’ve seen scenarios like these play out many times in my 30+ years of being an attorney. Situations like these can ruin a person financially in their later years and destroy family relationships irrevocably.

The situation becomes even more complicated in blended families where one or both spouses have children from a previous marriage. Imagine then, the surviving spouse may own 75% of the house and the children from a previous marriage own the other 25%. The children from the previous marriage are not required to cooperate with the surviving spouse. They can veto a sale, refinance, etc. They essentially control the property. That is not what the decedent wanted, and that decedent committed Family Malpractice™ with regards to the surviving spouse.

In short, the way an estate is passed along and divided up according to South Carolina law may not be what an individual wants, but if they die intestate, they don’t get a choice – and their heirs have to live with the consequences.

The solution: Have a will drawn up. This is vital if you have a family and especially if you have anything other than a small estate. Dying without a will can potentially create a lot of problems for your heirs that could have been avoided with a current estate plan.

When You Don’t Probate Your Deceased Mom or Dad’s Estate, That’s Family Malpractice™

The idea of a family home being passed down from generation to generation is something many people aspire to. Passing on wealth in the form of real property to your children, and to their children in turn, and so on, is a wonderful gift.

At least, it can be. It’s not uncommon for property passed on after death to become “heirs property,” which can cause a lot of problems for the heirs. This can happen when the surviving children of the original, now-deceased homeowner continue to live in the home but don’t go through the proper legal process to put the property in the new owners’ names. That is going through the probate process. If the same situation repeats for a few generations in a row, you can end up with literally dozens of people (typically, the grandchildren or great-grandchildren of the original owner) who all have legal claims to the property, all while the property is still technically in the original owner’s name.

Why is this such a problem? Because it’s very difficult to sell a house like this, when there are so many owners and a cloudy title. A buyer interested in the property risks having the deal fall through if one of the many owners decides they want more than their proportional share of the sales price or refuses to sell altogether. Getting the title cleared takes extra time and money. Meanwhile, the family members who own the house cannot sell and take the equity in the house, and they may be barred from accessing things that require clear title of ownership, like mortgages, loans, and government programs.

The solution: Ensure your deceased parent’s estate goes through probate. The probate process does not happen automatically; it’s something the executor named in the will must carry out. If there is no will, the probate court names an executor, usually a child or close relative of the deceased.

There are a few roadblocks keeping people from ensuring a deceased parent’s estate goes through probate. One is simply not knowing that it’s needed; they may incorrectly assume that the ownership of the house legally passes from the parent to the child(ren) without having to do anything. Another reason is an aversion to having to pay a lot to probate the estate. But in SC, probate fees are not very high. For instance, probate fees on an estate worth $1 million is just $1,845, which is paid out of the estate, as are attorney’s fees. Finally, some people want to avoid dealing with the government altogether. While this may be understandable, it’s not a good reason to avoid probate. Working with an experienced probate attorney you trust can help you and ensure that your estate is handled legally and fairly.

Read more about probate here on our blog.

When You Don’t Take the 1014(e) Step-Up in Basis, That’s Family Malpractice™

A step-up in basis occurs when the cost basis of an asset, like a home, is adjusted from the original cost basis to the current fair market value upon the death of the owner.

Let’s say your parents bought a house 20 years ago for $150,000, and when you inherited it upon their deaths, it was worth $350,000. If you don’t take the step-up in basis and proceed to sell it, you’ll have to pay capital gains tax on the difference, which is $200,000. If instead you do take the step-up in basis, and have the cost basis of the house increased to $350,000 (the fair market value at the time of your parents’ deaths), then you’ll only pay capital gains tax on the difference between $350,000 and whatever you sell it for in the future.

Depending on the value of the house, and how much that value has grown over time, that can mean saving a lot of money in taxes. When someone does not take this step-up in basis, it can lead to very large tax bills when the time comes to sell the property. There are a few reasons a person may fail to do so; they may not even know that the option exists, or they may mistakenly assume that it happens automatically.

The solution: Take the step-up in basis on property in an estate that you are executor of, or ensure that the executor of your parents’ estate does so. The probate attorney handling the estate can help you. As a probate attorney, my goal is to get the largest step-up in basis possible for my clients in order to reduce their tax liability in the future.

Work with Estate Planning Attorney Gem McDowell

Wills, probate, and step-up in basis are things that most people don’t think about because it’s outside the scope of daily life. But failing to take care of these matters is what I call Family Malpractice™, and it can lead to major legal and financial hassles in the future. Even more devastating, it can cause rifts between family members as they fight over assets in and out of court. Fortunately, these issues are completely avoidable. Work with an estate planning attorney and probate attorney to ensure your estate plan is solid and current and that you’re handling your deceased relatives’ estates correctly.

If you have questions about creating or revising your own estate plan in South Carolina, or you want advice or assistance handling the estate of a deceased relative, contact Gem McDowell at the Gem McDowell Law Group today. Gem has over 30 years of experience as an attorney and has helped countless families in South Carolina create estate plans, avoid mistakes, and fix problems. He and his team can help you understand and avoid committing Family Malpractice™ that can harm your family. Call him at his Mount Pleasant office today at 843-284-1021 to schedule a free consultation.

What Happens to Your Estate If You Die During a Divorce in South Carolina? Spousal Elective Share

Imagine this scenario:

Husband and Wife have been married for many years. One day, Wife files for divorce. At a hearing a few months later, the divorce is granted.

Husband dies about a week later.

A few days after that, the final divorce decree is signed by the judge, then filed with the clerk.

The tragic and unlikely timing of Husband’s death brings up some important questions.

Were Husband and Wife still married when he died because the decree wasn’t yet signed and filed?
Or were they already divorced because the divorce had been officially granted by the court?
Would Wife be entitled to part of Husband’s estate as a surviving spouse?

This exact situation happened in South Carolina in the late 90s and ended up before the South Carolina Court of Appeals in the 2000 case Hatchell-Freeman v Freeman. It’s an interesting case to know for anyone contemplating or going through a divorce in South Carolina as it answers the questions above.

Dying Before Divorce Is Finalized: Hatchell-Freeman v. Freeman (2000)

In the Hatchell-Freeman case (read it here), Angela Hatchell-Freeman filed for divorce on June 21, 1996. The divorce was granted at a hearing on September 27, 1996, and ten days later, on October 7, Husband died. The final order granting the divorce was signed on October 10, and the following day the order was filed.

In December, father of the decedent Gilbert Freeman filed a petition to be appointed personal representative of his late son’s estate, which the court granted. He did not list Hatchell-Freeman as an intestate heir or as “a person having a prior or equal right of appointment.”

In January, Hatchell-Freeman filed a notice of election by surviving spouse for her intestate share – aka “elective share,” which is a portion of the decedent’s estate the surviving spouse is entitled to by statute. The probate court ruled that she was entitled to elective share.

She also filed a petition to be appointed personal representative, which would mean removing Gilbert Freeman from the role. The probate court ruled that she had had “adequate” time to file – over three months since her husband’s death – and so denied her petition.

Both parties appealed.

The Circuit Court’s Findings

The circuit court affirmed the probate court’s finding that Hatchell-Freeman was the wife of the decedent at the time of his death and therefore entitled to her elective share.

However, it found that she had a superior right to serve as personal representative. Gilbert Freeman was removed from the role and replaced by Hatchell-Freeman.

Gilbert Freeman then appealed.

The SC Court of Appeals

The appeals court affirmed the circuit court’s findings.

It found that the couple was indeed married at the time of Husband’s death, making Hatchell-Freeman eligible to receive her elective share of the estate. The fact that the divorce had been granted at the final hearing before Husband’s death was irrelevant, as South Carolina Code 62-2-802(c) (1987) is clear: “A divorce or annulment is not final until signed by the court and filed in the office of the clerk of court.”

The court also affirmed the lower court’s decision to replace Gilbert Freeman with Hatchell-Freeman as personal representative. SC Code 62-3-203(a) (1999) lists in order which individual should be given priority for the role of personal representative, and when there is no will naming a personal representative (as in this case, since Husband died intestate), a surviving spouse has priority over other heirs.

Although it may not have been Husband’s intention for the woman he was divorcing to inherit any portion of his estate, that’s what happened. But was there something he could have done to prevent it?

(Technically) Married at Time of Death: Spousal Elective Share in South Carolina

As stated above, a surviving spouse is entitled to spousal elective share, which is a portion of the deceased spouse’s estate. The concept of elective share originates from English common law and is widespread across the US, with different laws governing elective share in different states.

In South Carolina, a surviving spouse may claim one third of the decedent’s probate estate. (“Probate estate” is defined in SC Code Section 62-2-202 as “the decedent’s property passing under the decedent’s will plus the decedent’s property passing by intestacy, reduced by funeral and administration expenses and enforceable claims.”) This is a minimum; the testator or testatrix can of course leave more than one third of their estate to their spouse in their will.

It doesn’t matter whether the decedent had a will or not; whether the couple was separated at the time of decedent’s death, divorce pending; or even whether the decedent had purposely left the surviving spouse out of the will in an attempt to disinherit them. The surviving spouse is legally entitled to their elective share.

In short, if you die before your divorce is signed and filed, your spouse is entitled to claim a portion of your estate under South Carolina law even if that’s not what you want. The only exception is if your spouse has waived their right to elective share, typically via a prenuptial or postnuptial agreement.

Reviewing and Revising Your Estate Plan During or After Life Events – Call Attorney Gem McDowell

If you’ve recently undergone a major life event like divorce, marriage, or birth of a child, you should consider contacting an estate planning attorney to review your last will, powers of attorney, and other estate planning documents. It’s a good opportunity to ensure that your estate plan is in line with your current wishes and life situation.

For help with estate planning, asset protection, and contracts including prenuptial agreements and postnuptial agreements, contact attorney Gem McDowell. He and his team at the Gem McDowell Law Group can help you with your estate planning needs before, during, and after a divorce. Call him at his Mt. Pleasant office at 843-284-1021 today to schedule a free consultation.

Employee or Independent Contractor? Employers Need to Know DOL’s Proposed Rule

This blog will be updated with relevant developments

Misclassification of workers by employers is a big problem, according to the Department of Labor (DOL).

“The misclassification of employees as independent contractors remains one of the most serious problems facing workers, businesses, and the broader economy,” it says in a 10/13/2022 notice of proposed rulemaking (NPRM) from the Wage and Hour Division of the DOL, discussed below.

To combat worker misclassification, the NPRM proposes modifications to regulations regarding how workers should be classified. This is a big deal because if the proposal is adopted – which it almost certainly will be – it would make it more difficult for workers to be classified as independent contracts and easier to be classified as employees, compared to current regulations.

Further, the DOL and the Internal Revenue Service (IRS) entered into a Memorandum of Understanding (MOU) in mid-2022, replacing a similar MOU from 2011, that lays out how the two agencies will work together to combat worker misclassification. More on this below, too.

These developments are of great importance to employers in South Carolina and across the country. It could mean reclassifying some workers that are currently independent contractors as employees, with all that entails.

Here’s what to know.

Proposed Rule by the DOL on Worker Classification

On October 13, 2022, the Wage and Hour Division of the DOL published a notice of proposed rulemaking (NPRM), Employee or Independent Contractor Classification Under the Fair Labor Standards Act (FLSA). You can read the NPRM in its entirety here on the Federal Register.

The rule would provide clear guidance on how to classify workers, making it “more consistent with judicial precedent” and with the FLSA’s “text and purpose,” says the DOL. Workers classified as employees have protections and benefits at the federal level under the FLSA, such as minimum wage and overtime pay, which independent contractors do not have.

The practical effect would most likely be that many workers who are now currently classified as independent contractors would need to be reclassified as employees. An article from the Small Business Administration on the topic notes that “In its Initial Regulatory Analysis, DOL estimates that millions of small businesses could hire and/or be independent contractors,” so this rule could affect a large number of people.

The Six Factors of the Economic Reality Test for Worker Classification

Classification would involve a totality-of-the-circumstances analysis using a multifactor economic reality test comprised of six specific factors and one additional, nonspecific factor. They are:

Opportunity for profit or loss depending on managerial skill
Investments by the worker and the employer
Degree of permanence of the work relationship
Nature and degree of control
Extent to which the work performed is an integral part of the employer’s business
Skill and initiative
Additional factors

In this blog we won’t go into too much detail about each of these factors, but here’s a little bit of explanation for each one. (For more discussion on the history and application of these tests, follow this link to go straight to factor #1 in the NPRM, which goes into great detail about all the factors.)

Opportunity for profit or loss depending on managerial skill. This considers several factors such as whether the worker determines their own pay, can accept or decline jobs at will, engages in marketing or advertising to secure more work, and has an opportunity for loss.
Investments by the worker and the employer. This should also consider how the worker’s investment (if any) compares to the employer’s investment in the business.
Degree of permanence of the work relationship. This should also consider whether the worker works for the employer exclusively or works for others, too.
Nature and degree of control. This considers factors such as scheduling, supervision over the performance of work, setting rates, and the worker’s ability to work for others.
Extent to which the work performed is an integral part of the employer’s business. This is not the same as the degree of contribution a worker makes; for example, one person in a call center of hundreds is still performing work that is essential to the business, even if that individual worker’s contribution is minimal.
Skill and initiative. Specialized skills and business-like initiative are factors that favor independent contractor status, while work that’s unskilled, requires no training, or requires training from the employer favors employee status.
Additional factors. Other factors, not enumerated here, may be considered if relevant to determining a worker’s classification.

No one factor is more important than the other, and no single factor is determinative on its own. Rather, this is a totality-of-the-circumstances approach to determine worker classification.

How is this rule different from current rule?

If finalized, which is very likely, this rule would rescind and replace the 2021 Independent Contractor Rule (2021 IC Rule). That rule was finalized in January 2021 shortly before President Trump left office and President Biden was inaugurated, and it was scheduled to take effect in March 2021.

The 2021 IC Rule focuses on two core factors to determine classification: 1, the nature and degree of control over the work, and 2, the worker’s opportunity for profit or loss. Additional factors may be considered if the first two are not clearly determinative. The purpose of this streamlined approach is to “promote certainty for stakeholders, reduce litigation, and encourage innovation in the economy,” according to the final rule published by the DOL.

The current NPRM notes that the approach of the 2021 IR is not in keeping with past approaches, which have included multifactor economic reality tests that looked at the totality of the circumstances, it does not “fully comport” with the FLSA’s text and purpose, and it goes against long standing case law.

In practice, the 2021 IC Rule makes it easier for workers to be classified as independent contractors rather than employees. The rule that’s currently being proposed would make it harder for workers to be classified as independent contractors.

DOL and IRS working together to identify employers misclassifying workers

The interest in codifying and enforcing rules on worker classification is not new.

The DOL and the IRS entered into a Memorandum of Understanding (MOU) in 2022, replacing a similar one from 2011, in which the agencies agree to collaborate and share information. This is less in the pursuit of protecting workers and ensuring they are afforded the protections under the FLSA due to them and more about collecting revenue.

The point of the collaboration is to “promote employer compliance with obligations to properly pay employees and to pay employment taxes.” The MOU outlines, among other things, how the DOL can evaluate businesses to refer to the IRS to look into whether workers have been misclassified. In addition, in reference to whether the DOL should refer a particular case to the IRS, it says “Given scarce IRS resources, the focus is where there is a likely source of collection.”

In short, the IRS appears to be looking for sources of revenue. (Another recent initiative announced by the IRS is a “proposed revenue procedure” called the Service Industry Tip Compliance Agreement program, a voluntary program for employers that would improve reporting of tips to the IRS.)

What this means for employers

Employers need to pay attention to if and when the DOL finalizes the rule proposed in October 2022 and ensure that they are correctly classifying their workers under the new rule once it takes effect. Some employers may be able to easily reclassify existing independent contractors as employees, if needed. Others may not have the resources to do so, because of the associated costs of employment taxes, workers’ compensation insurance, additional benefits, and so forth for employees. Employers may have to significantly change their relationship with their workers in order to meet the qualifications of being an independent contractor, or possibly let these workers go entirely.

The DOL notes in its NPRM that businesses that are already in compliance and are correctly classifying workers will benefit from this new rule, as businesses that misclassify employees as independent contractors gain a competitive advantage. This advantage will be eliminated or reduced if and when the new rule is finalized.

Additionally, an increase in the number of employers could mean an increase in unions and labor organizing. Labor unions generally are not allowed to organize independent contractors, but they can organize employees. The connection between worker classification and the drive to increase organizing and unions was made explicit on Joe Biden’s campaign website page for “Strengthening worker organizing, collective bargaining, and unions.” One of the promises was to “drive an aggressive, all-hands-on-deck enforcement effort that will dramatically reduce worker misclassification.”

Employers should also be aware that even if/when this rule from the DOL is passed, this is not the one and only way to determine whether a worker is an employee. The IRS has its own guidance on determining whether to provide a 1099 or a W-2 (read more on that here), and individual states may have their own rules or precedents, too; in South Carolina, the four-factor model is the standard (read more on that here).

Contact Business Attorney Gem McDowell for Advice and Guidance

If you’re an employer in South Carolina and are seeking legal advice, call Gem McDowell. He has over thirty years of experience helping South Carolina business owners start, grow, and thrive in their businesses. Changing classifications of workers could have a large impact on your business, as could noncompliance, and Gem can advise you on how to navigate this change.

Call Gem and his team at the Gem McDowell Law Group at the Mount Pleasant office at 843-284-1021. In addition to an office in Mount Pleasant near Charleston, Gem also has an office in Myrtle Beach for your convenience.

Involved in Real Estate or Passive Activities? Passive Activity Loss Rules to Know

Let’s say you’ve dipped your toe into the real estate game and flipped a house. Instead of making a killing on it, you took a big financial hit. When tax time comes around, can you take that loss against your regular income to reduce your taxes?

Generally, no. That’s because of passive activity loss rules.

In short, passive activity loss rules are anti-tax shelter rules. They prohibit taxpayers from using financial losses from passive activity to offset active income and thereby reduce their taxable income and pay less in taxes.

If you own rental property or are otherwise involved in any passive activity trade or business, you need to know about passive activity loss rules. We’ll look at these rules more closely along with the important definitions and exceptions you should know.

Passive Activity Loss Rules: Definitions and Overview

Below is a summary of some key points of the passive activity loss rules along with definition of terms (in bold). Note that this blog is not intended to be exhaustive, but just to familiarize you with the topic. We’ll be discussing rules from the IRS, specifically Topic No. 425 and Publication 925 (2021), which are derived from 26 U.S. Code § 469. The IRS rules are detailed and contain multiple exceptions, which we won’t go into here, as this is an overview. If you believe you’re subject to passive activity loss rules, speak with an accountant to help you with your taxes.

Passive activity loss rules prohibit a taxpayer from taking a deduction of losses incurred from passive activity to offset active (ordinary/earned) income.

While passive activity losses can’t be used to offset active income, they can be used to offset passive activity income. Losses that exceed passive activity gains in the same year can be carried over to the following tax year.

Passive activity rules apply to:

Individuals
Estates
Trusts (other than grantor trusts)
Personal service corporations, and
Closely held corporations

The IRS notes that grantor trusts, partnerships, and S corporations are not directly subject to these rules, but the individuals who own them are.

Active income includes wages, salaries, commissions, and any other income “that comes from performing a service.” This is the money you make from your job or business, whether you’re a W2 employee, 1099 contractor, or business owner actively involved in your business.

In contrast, passive income is income from a passive activity in which you’re not “materially” involved. The IRS defines two kinds of passive activity: 1) rental activities, and 2) trade or business activities the taxpayer did not actively contribute to.

Material participation means being involved in the business activity on a “regular, continuous, and substantial basis.” The IRS lays out seven “material participation tests” to help determine whether involvement is passive or active. The taxpayer only needs to satisfy one of the seven for their participation to be considered material and thus not have the activity considered “passive.”

To see all seven tests, go to IRS Publication 925, linked above; here are three:

Participation in the activity for more than 500 hours in the tax year
Participation in the activity for more than 100 hours in the tax year, and at least as much as any other individual (including individuals who don’t own any interest in the activity)
“Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year”

These material participation tests do not apply to rental activity (discussed below) or to working interests in oil and gas property, which have separate rules.

Active participation is a lower standard to meet than “material” participation. For example, taking decisions with regard to management of the business activity would qualify as active participation.

Passive Activity and Rental Activities

If you earn income from a rental property, then you know that it only takes a few major repairs or renovations or a couple months without tenants to put you in the red for the year.

That’s where passive activity loss rule comes in. These rules apply to you because the income from your rental property is considered passive activity, even if you are “materially” involved in the activity, as described above – unless you are a real estate professional.

To be considered real estate professional by the IRS, you must meet both of the following requirements:

“More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.”
“You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.”

Under the IRS’s definition, you do not need to be a licensed real estate agent, contractor, or other certified real estate professional to meet these requirements. Conversely, the IRS definition means that some people who are licensed in the field, like a part-time real estate agent, would not be considered a real estate professional, and their rental activity would be considered passive.

Real property trades or businesses include not only renting out a real property, but development, construction, acquisition, management, and more.

Special $25,000 allowance

If you are not a real estate professional, then your income is considered passive. Any loss you derive from rental activities may be “trapped” (meaning, you can’t take the loss on your taxes) unless you can offset gains from other passive activities – most of the time.

But there is one big exception to know about. The IRS allows up to $25,000 in passive losses to be used to offset ordinary income such as salary or wages as long as you are “actively participating.” In this specific context, active participation may include things like determining rental terms, approving new tenants, and making repairs or hiring someone to do them.

The full amount up to $25,000 is available for taxpayers whose modified adjusted gross income (MAGI) is $100,000 or less. It begins to phase out above a MAGI of $100,000 and is completely phased out at a MAGI of $150,000, meaning that you cannot offset any ordinary income from passive losses if your MAGI is over $150,000.

There are several facets to this special allowance that we won’t go into here, including different allowance amounts depending on filing status and exceptions to the phaseout rules; again, read more on IRS.gov for more detail.

Estate Planning and Trusts

Passive activity loss rules apply to trusts and estates, too. Remember to work with an accountant if you have questions about how passive activity loss rules affect your taxes. If you have questions about trusts and estate planning, or are the personal representative of someone who recently died and need advice, call estate planning attorney Gem McDowell.

Gem and his team at the Gem McDowell Law Group help individuals and families in South Carolina with trusts, wills, powers of attorney, and other estate planning documents to ensure they’re in control of their assets now and in the future. Call Gem and his team at his Mt. Pleasant office at 843-284-1021 today to schedule your free consultation.

Partnership Representatives: What Partners and LLC Members Need to Know Now

Are you a member of a partnership or a multi-member LLC that’s taxed like a partnership? If so, you need to know about partnership representatives.

A partnership representative is an individual or entity that represents a partnership in front of the IRS in all matters including audits.

The term and role are relatively new. Partnership representatives (PR) went into effect in 2018 after being created in the Bipartisan Budget Act of 2015 (BBA), which repealed and replaced the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). It replaces the role of the “tax matters partner” in TEFRA, though the two are not exactly the same (more on that below).

Importantly, the BBA also changed the way that the IRS can assess and collect taxes from a partnership due after an audit. Previously, those taxes were collected from the individual partners; now, they are collected at the partnership level – unless the partnership has opted out (more on that below, too). This process is more streamlined for the benefit of the IRS and may benefit partnerships, too.

All partnerships that file US tax returns and multi-member LLCs that are taxed as partnerships are affected. (For the sake of expediency, we’ll just use the term “partnership” throughout the rest of this blog as a shorthand for “partnerships and multi-member LLCs that are taxed as partnerships.”)

If your business is affected, here’s what you need to know.

Partnership Representatives

What is the role of the partnership representative?

In the IRS’s own words: “The partnership representative has the sole authority to act on behalf of the partnership for purposes of Bipartisan Budget Act (BBA) partnership audit procedures. The partnership and the partners are bound by the actions of the partnership representative under the BBA.” (Emphasis added.)

The IRS lists the following actions as things that a PR can do, noting that this list is not exhaustive:

Entering into a settlement agreement
Agreeing to a notice of final partnership adjustment (FPA)
Requesting modification of an imputed underpayment
Extending the modification period by agreement
Waiving the modification period
Agreeing do adjustments and waiving the FPA
Extending the statutory periods for making adjustments by agreement
Making a push out election

Ideally, the PR will have nothing to do, because as a business owner you want to have as little to do with the IRS as possible. But if your partnership is audited by the IRS, you want to be sure your PR is competent, honest, and trustworthy, because they have a lot of power to make binding decisions for the partnership and its partners.

Who can be a partnership representative?

A PR can be any individual or entity (including the partnership itself) that has a “substantial presence” in the US. An entity that’s a PR must appoint a designated individual to act on the entity’s behalf.

A “substantial presence,” as defined by the IRS for these purposes, is an individual or entity that has a US taxpayer identification number, a US street address, and a phone number with a US area code, and who is able to meet with the IRS in person in the US “at a reasonable time and place as determined by the IRS.”

A partnership must designate a PR on its tax return (IRS Form 1065 or 1066) each taxable year, as the PR does not carry over year to year. The designated PR can be changed in between tax returns by filling out IRS Form 8979.

Alternatively, eligible partnerships may opt out; more on that below.

Is a Partnership Representative the Same as a Tax Matters Partner?

A partnership representative is similar to a tax matters partner (TMP), but the two are not exactly the same.

What are the differences between a partnership representative and a tax matters partner?

Both a TMP and a PR represent a partnership in audits and other matters with the IRS. However, there are some important differences.

A TMP was required to be a partner of the partnership (or member of the LLC), while a PR can be any individual or entity that meets the requirements listed above. This is the most obvious difference between the two. This change allows partnerships to choose a different party, like a tax attorney or accountant, as their PR.

Also, a TMP represented the partnership to the IRS, but they did not have exclusive authority to do so; other partners could take part, too. A PR, on the other hand, has the sole and exclusive authority to do so.

Finally, the partnership and the partners are bound by the actions and decisions of the PR, as mentioned above. Previously, a TMP could bind the partnership but not the individual partners.

What this means for you, as a partner or member in LLC

If you’re a partner in a partnership or a member in a multi-member LLC that’s taxed as a partnership, here are some things to know and to consider.

You (may) have the option to elect out

Some partnerships are eligible to “elect out of the centralized partnership audit regime for a tax year,” to use the IRS’s words. By making the election to opt out, it means that any adjustments found during an audit will be processed at the partner level. By not electing to opt out, these adjustments will happen at the partnership level, which is now the default state.

To be eligible, a partnership cannot have more than 100 partners, each of which must be an individual, C corporation, foreign entity that would be treated as a C corporation if it were domestic, S corporation, or estate of a deceased partner.

A partnership that has opted out and then is notified of an audit may revoke their decision with the approval of the IRS.

Some advantages and disadvantages of opting out

The advantage of taking part in the BBA centralized partnership audit regime, i.e., not opting out, is that the situation is more streamlined for both the IRS and the partnership. Because an audit (or other matter) happens at the partnership level, individual partners do not have to (and cannot) deal with the IRS directly and do not have to amend their individual tax returns.

One disadvantage is that, depending on the nature of your partnership and your partners’ individual financial situations, it’s possible that assessing additional taxes at the partnership level could cost more than if it were done at the partner level.

Another disadvantage was mentioned before: the PR has a lot of power. In their role, they are authorized to make binding decisions unilaterally, which could lead to a situation that’s unfavorable to the partnership or some or all of the partners. The PR’s decision is binding, and individual partners do not have a right to appeal the PR’s decision(s) to the IRS.

Furthermore, under the BBA, the IRS only has to notify the partnership and partnership representative when initiating an administrative proceeding and thereafter only notify the PR. So it’s possible for an audit to occur without individual partners being aware it happened, even if in the past under TEFRA they would have known. (You can read more about the IRS’s BBA partnership audit process here.)

Discuss with the other partners/members and ensure your partnership agreement/operating agreement is updated

Some of the issues mentioned above can easily be handled by updating the partnership’s governance documents. This would allow your partnership to take part in the centralized partnership audit regime and designate a PR while providing more protections to the individual partners via your partnership agreement/operating agreement. For example, you could include a provision that the PR must notify all individual partners of audit proceedings, even if the IRS doesn’t require it.

Some issues to discuss:

Whether the partnership (if eligible) will opt out or how that will be decided each year
How the partnership will choose a PR each tax year
Whether the PR must inform individual partners of audit proceedings, findings, decisions, etc., and how
Whether and how partners have any say on decisions relating to an audit or other matter
What to do if disputes between partners arise during or after an audit or other matter

Discuss these issues with your business attorney and make changes, as needed, to your partnership agreement or operating agreement.

Choose your partnership representative wisely

If your partnership accepts the default and does not opt out (or is not eligible to), then be very judicious about whom you designate as your PR. Hopefully, you will never need one, but if that day comes, you’ll want someone you can trust with the future of your business.

Call Business Attorney Gem McDowell for Help and Legal Advice

Gem has over 30 years of legal experience in South Carolina and he is ready to help you and your business. He can advise you on how to handle the issue of partnership representatives in your partnership or LLC and help you think through potential difficult situations that you may not have thought of.

Gem and his team not only help business owners with corporate governance documents like partnership agreements and operating agreements, they can help your business grow and thrive, all while keeping your assets protected. Call Gem and his team at the Mt. Pleasant office at 843-284-1021 today to schedule a free consultation.

What is “Unconsionability” in the Law?

UPDATE 03.04.25: The discussion below centers on the Court of Appeals of South Carolina’s 2022 decision in the Huskins v. Mungo Homes case. Since then, the Supreme Court of South Carolina took up the case and rendered its decision in 2024. It skirted the issue of unconscionability entirely, stating that because the contract terms were found to violate public policy, they were unenforceable and the issue of whether they were unconscionable was moot. Read more about the 2024 Huskins decision and what it means here on our blog.

For a relatively recent Supreme Court of South Carolina case that discusses unconscionability (again in the context of a home builder’s one-sided contract), read the Damico v. Lennar Carolinas, LLC (2022) decision here.

Originally published Jan. 23, 2023:

What is “unconscionability” in the law, and how is it viewed by the high courts in South Carolina? In this blog we’ll look at the definition of unconscionability, its elements, and what unconscionability looks like in real-life cases, including the 2022 SC Court of Appeals case Huskins v Mungo Homes, LLC.

“Unconscionability” in the Law

“Unconscionability” is used by courts most often in the context of contract law. It refers to terms that are so egregiously unjust or one-sided that they are unreasonable and may shock the conscience of the court. Typically, it’s the party with greater bargaining power that creates a contract favoring themselves to the detriment of the other party. When a contract or one of its terms are found unconscionable, it is unenforceable.

“Unconscionable” is also used by courts to describe a party’s grossly unfair conduct. A party that behaves unconscionably may not benefit from their conduct.

Elements of Unconscionability in South Carolina

“Unconscionability has been recognized as the absence of meaningful choice on the part of one party due to one-sided contract provisions, together with terms that are so oppressive that no reasonable person would make them and no fair and honest person would accept them.” – South Carolina Court of Appeals quoting the SC Supreme Court decision Carolina Care Plan, Inc. v United HealthCare Servs., Inc. (2004) in the Huskins decision (emphasis added).

From this understanding of unconscionability, South Carolina courts look for two elements to determine whether something is unconscionable or not:

Absence of meaningful choice
Oppressive and one-sided terms

What would constitute a “meaningful choice” in the eyes of the court, and when are contract terms considered “oppressive and one-sided”? Let’s look at unconscionability in some real-life South Carolina cases.

Unconscionability in Real Life: Huskins v Mungo Homes, LLC

We’ve run into the concept of unconscionability in previous blogs:

To describe bad conduct in the context of minority member oppression (squeeze out/freeze out) in Wilson v Gandis (SC Supreme Court, 2019) (blog here)
Whether a prenuptial agreement in Hudson v Hudson (SC Court of Appeals, 2014) was unconscionable (blog here)
Whether an arbitration agreement in Arredondo v SNH SE Ashley River Tenant (SC Supreme Court, 2021) was unconscionable (blog here)

The 2022 SC Court of Appeals case Huskins v Mungo Homes, LLC (read the decision here) also looked at unconscionability in regards to an arbitration clause.

Briefly, a couple (the Huskinses) bought a house from Mungo Homes, LLC (Mungo), entering into a purchase agreement that included an arbitration clause and a limited warranty. Two years later, in July 2017, the Huskinses filed an action against Mungo over issues they had with the purchase agreement. (They did not allege any problem with the home itself.)

Mungo filed a motion to dismiss and to compel arbitration. The Huskinses argued that the arbitration clause was unconscionable and unenforceable. The appeals court looked at the two elements described above to determine unconscionability.

Element 1: Absence of Meaningful Choice

The appeals court found that the Huskinses did have an absence of meaningful choice. It found that the Huskinses:

Were average purchasers of residential real estate
Were not represented by independent counsel
Were not a substantial business concern to Mungo and therefore had no more bargaining power than the average homebuyer

The Huskinses did not have a viable alternative to the arbitration agreement in the purchase agreement; if they wanted Mungo to build their home, they had to sign it and agree to its terms.

Element 2: Oppressive and One-Sided Terms

The Huskinses argued that the arbitration agreement was unconscionable, in part, because of its last two sentences: “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 arising from either party’s termination of this Agreement shall be made within thirty (30) days of the written notice of termination. Any claim, dispute or other matter in question not asserted within said time periods shall be deemed waived and forever barred.”

South Carolina law provides a statutory period of three years for such claims, which is drastically different from 30 or 90 days.

Still, the circuit court found these limited terms were not one-sided and oppressive. The appeals court disagreed, citing SC Code Section 15-3-530(1), which provides a three-year statute of limitations for such claims, and Section 15-3-140, which explicitly states that no contract provision attempting to shorten the statutory period shall bar any such actions from being brought.

Furthermore, the appeals court states that while in theory the clause applies equally to both the Huskinses and Mungo, in reality it would disproportionately affect the Huskinses. The appeals court also found that it was not “geared towards achieving an unbiased decision by a neutral decision-maker,” as the Fourth Circuit Court of Appeals directs courts to consider when it comes to arbitration agreements.

The SC Court of Appeals therefore found that due to an absence of meaningful choice and the presence of oppressive and one-sided terms, this section of the arbitration agreement was unconscionable and unenforceable. (The court also found this section was severable, meaning the rest of the arbitration agreement and purchase agreement stood, and the circuit court’s order compelling arbitration was affirmed.)

Contract Law in South Carolina

Would your contracts hold up to such scrutiny in court? You need to know what’s in every contract you write and sign as a business representative and as an individual and to avoid terms that could be construed as unconscionable.

For help creating and understanding contracts, contact attorney Gem McDowell. He and his team at the Gem McDowell Law Group can help ensure your contracts are clear, fair, honest, enforceable, and don’t violate SC code or public policy. Call Gem at his Mt. Pleasant office at 843-284-1021 today to schedule a free consultation.

Risks for Personal Representatives: When Distributing Assets Becomes a Breach of Fiduciary Duty

Oftentimes, a personal representative (executor) in charge of settling a decedent’s estate is also a named heir who may be entitled to assets under the terms of the will. In real life, this looks like a daughter settling the estate of her deceased father, or a husband handling the estate of his deceased wife, or something similar.

This can lead to potentially complicated situations. A personal representative has a fiduciary duty to the estate, meaning they are legally required to act in the best interest of the estate and its heirs. But they may be faced with the possibility of distributing assets to themselves in a way that benefits them to the detriment of another beneficiary, which would be a breach of their fiduciary duty. (To learn more about the rights, roles, responsibilities, and risks of being a personal representative in South Carolina, read more on our blog here.)

How does a personal representative know if the way they are distributing the estate’s assets is fair or if they are giving themselves an advantage in breach of fiduciary duty? Sometimes it’s not entirely clear. This was the central issue in the 2022 South Carolina Supreme Court case Bennett vs Estate of James Kelly King (read here). The court ultimately went against the conclusions of the probate court, circuit court, and appeals court. How did that happen, and what does it mean for personal representatives in South Carolina?

The Background: A Blended Family, a Valid but Old Will, and Complications

This case is admittedly convoluted, but it’s important to get into the details of the background and the will itself in order to understand the law and the way the courts interpreted it.

Testatrix Jacquelin K. Stevenson (Testatrix) died in September 2007, leaving behind six children: two sons and two daughters from her marriage to Thomas Stevenson, a son by former marriage, and a stepdaughter.

The practical question at the heart of this case is who should receive ownership of the family’s vacation house in Lake Summit, NC. The parties are Testatrix’s two daughters from her marriage to Thomas Stevenson, Jacquelin S. Bennett and Kathleen S. Turner (Petitioners), and her stepdaughter Genevieve Stevenson Felder (Respondent).

The intended distributions of the will

Testatrix had a valid will dated October 1996 that directed distributions of her existing assets at the time in the following way:

The house on Wadmalaw Island, SC to her two daughters with Thomas Stevenson (Petitioners)
The house in Lake Summit, NC to her two sons with Thomas Stevenson
A bequest of $400,000 to her son James Kelly King
A bequest of $400,000 to her stepdaughter (Respondent)
Any property in the residuary estate to be divided “in equal shares” among the six children

Clear enough. But complications arose quickly afterwards.

First, her sons with Thomas Stevenson, Thomas Stevenson III and Daniel Stevenson II, stole millions from the estate as co-trustees from 1996 to 2006. As a result, the Petitioners were named co-personal representatives, the sons were cut out from receiving anything from the estate including the Lake Summit house, and there wasn’t enough cash in the estate to pay the bequests of $400,000 each to King and Petitioner. (King’s interest in the residuary estate was later bought out by Petitioners and Respondent, which is why he is not involved in this action.)

Additionally, Testatrix had acquired two more properties since she executed her will in 1996, one on Edisto known as “Bailey’s Island” and one in Mt. Pleasant known as “Paradise Island.” Both of these properties were undeveloped at the time of her passing.

The terms of the will

Section 10 of the will gives broad discretion to the personal representatives to make distributions “[w]ithout the consent of any beneficiary… in cash or in specific property, real or personal, or an undivided interest, or partly in cash and partly in such property… without making pro-rata distributions of specific assets.” In other words, as long as the distribution was fair according to the will, the personal representatives could distribute the assets as they saw fit without permission from the heirs.

The residuary clause stated “[a]ll the rest, residue and remainder of my property and estate… I give, devise and bequeath to [all six children] in equal shares.” The two properties acquired after the execution of the will (Bailey’s and Paradise) went into the residuary estate, as did the Lake Summit property, since the two sons were barred from inheriting it after stealing from the estate. The Wadmalaw Island went to the Petitioners, as originally directed in the will.

The proposed distribution by Petitioners

As personal representatives, Petitioners had the estate’s properties appraised and made the following distribution proposal for the assets in the residuary estate:

Lake Summit, NC appraised at $1,100,000, to split between the two Petitioners
Bailey’s Island appraised at $725,000, to split between Petitioners and Respondent, with Respondent owning the majority of it
Paradise Island appraised at $390,000, to split between Petitioners and Respondent

No parties dispute the appraised values of the properties or that the proposed distribution would give equal monetary value to the heirs. Instead, Respondent objected to the way the Lake Summit property was distributed, with ownership going to Petitioners and no share going to Respondent.

Probate Court, Circuit Court, and Appeals Court

The matter went before three lower courts before going before the supreme court. All three came to the same ultimate conclusion that the proposed distribution was not fair and equitable and must be altered.

Probate Court

The matter first went before a probate court, where Respondent argued that the proposed distribution was not fair and equitable. Respondent argued that Petitioners needed to take certain intangibles into account when deciding how to divide the assets, such as the fact that the Lake Summit property was both a family vacation home that had been in the family for decades and a rental property that produced income, while the Bailey’s Island and Paradise Island properties were undeveloped lots.

The Petitioners argued that the appraised values of the properties already took these facts into account, that the proposed distribution was equal, and that Section 10.6 of the will explicitly gave them broad powers to distribute the estate’s assets as they saw fit.

The probate court ruled that each of the three parties should receive an equal ownership in all three properties. It relied on the language in the residuary clause that stated property should be distributed “in equal shares,” interpreting this to mean that all parties should have equal ownership. Petitioners made a motion to reconsider, arguing that 10.6 gave them broad discretionary powers, which the probate court denied. It interpreted Testatrix’s intention as section 10 giving those broad powers only to the distribution of specific assets, not assets in the residuary estate.

Circuit Court

The circuit court upheld the probate court’s finding. It stated that even considering the broad powers granted by section 10 of the will, Petitioners had to treat all beneficiaries fairly and equitably, and they must take “non-economic considerations such as sentimental value, utility, and other intangible factors” into their proposed distribution. It also stated that the proposed distribution “fails the test of equity and good faith” because the Petitioners were favoring themselves by “cherry pick[ing]” the assets they wanted, rather than distributing them equally. It held that the Petitioners were in breach of fiduciary duty.

Appeals Court

The appeals court affirmed the circuit court’s decision. In an unpublished opinion, it held that a “plain reading of the Will supports the probate court’s contention that Article 10.6 referred to the Will’s grant of specific property, not the Residuary Estate.”

The Supreme Court of South Carolina Reverses and Remands

The case went before the SC Supreme Court, which went against the probate court, circuit court, and appeals court, ultimately reversing and remanding to the probate court.

The issue before the court was “Whether the court of appeals erred in affirming the probate court’s decision to reject the personal representative’s proposal and instead dividing the Lake Summit property in pro-rata ownership shares?”

The court’s discussion centered around two issues: Testatrix’s intentions and how Section 10.6 applies to the will; and breach of fiduciary duty.

Testatrix’s intentions and how section 10.6 applies

The court states that rather than picking out and reading individual provisions in a will “in isolation” or “elevating” them above the rest, the entire document should be read in a way such that disparate sections are “harmonized.”

In this case, that means that Section 10.6 is “equally important and must be honored,” and it remains in effect even for assets that go through the residuary estate. The probate court’s conclusion that section 10.6 applied only to specific bequests and not to assets in the residuary estate is “exactly backwards,” says the court. Nothing in the will nor in South Carolina’s jurisprudence limits these powers to specific bequests only.

Further, it’s in the distribution of the residuary estate assets where section 10.6 would matter most, since the personal representatives were bound to carry out the specific bequests as directed and would only be able to exercise their broad discretionary powers distributing other assets. “Indeed, section 10.6 would be meaningless if the broad powers of the personal representatives did not apply to the residuary estate,” writes the court.

The language of the will is clear in giving personal representatives broad powers to carry out its terms, including the ability to make distributions “without the consent of any beneficiary” and “without making pro-rata distributions” (i.e., equal shares) “of specific assets.”

Ultimately, Petitioners here have the power to make the distributions as proposed, and “absent a breach of fiduciary duty, their proposed distribution should be upheld.”

So the next question is, was there a breach of fiduciary duty?

Breach of fiduciary duty

The supreme court says no.

First, the court notes that none of the three courts were specific in what constituted the breach of duty on the part of Petitioners.

The burden of proof is on the party bringing a claim of breach of fiduciary duty. But, the court says, the burden of proof was (incorrectly) reversed in this case, when the circuit court affirmed the probate court, and then when the appeals court stated that the proposed distribution “would be inequitable because there is no reasonable purpose for their proposal.”

But it is not up to Petitioners to prove they have a “reasonable purpose” for their proposal; instead, the supreme court writes, “the burden was on the Respondent to show that the proposed distribution was unfair or inequitable, which she did not do and likely could not do in light of her stipulation that the proposed distribution was of equal monetary value.” It states that Respondent was “entitled to nothing more than a monetary equal distribution of the residual estate.” This is a different interpretation than the lower courts had of the phrase “equal share” in the will’s residuary clause.

The court also notes that the behavior of the Petitioners here “looks nothing like” that of personal representatives who have been found to be in breach of fiduciary duty. It cites two such cases: Turpin v Lowther, 2013, in which a personal representative secretly negotiated with a third party to purchase a property which beneficiaries had an interest in; and Moore v Benson, 2010, in which a trustee took funds from her father’s retirement account and used it to buy his property.

Finally, the court says it doesn’t accept the argument that sentimental value and other intangibles must be taken into consideration when distributing an estate’s assets, as “this would place an untenable burden of personal representatives and provide an unworkable framework going forward.”

But it says that even if the court accepted that argument, the claim still fails – Respondent (Testatrix’s stepdaughter from her second husband’s prior marriage) was an adult when the family acquired the Lake Summit property, while Petitioners (daughters of Testatrix and her second husband) spent summers there growing up. If sentimental value accounted for anything, it would favor Petitioners over Respondent.

In conclusion, the supreme court reverses the appeals court and remands to probate court to approve the Petitioners’ proposed distribution.

Key Takeaways: Good Lessons for Personal Representatives and Testators

There are some good lessons here in the supreme court’s decision for personal representatives in South Carolina.

Do not take intangibles into account when distributing assets. Attaching a monetary value to things like sentimental value is not necessary and creates an untenable burden for personal representatives, the supreme court found.

Adhere to the terms of the will when distributing assets to yourself. As a fiduciary, you can be found in breach of fiduciary duty if you give yourself an advantage to the detriment of another beneficiary when distributing assets to yourself. Reduce the likelihood of a claim against you by being even-handed and above board and by following the terms of the will to the letter.

Act in good faith. It is possible to be found in breach of fiduciary duty due to an innocent mistake, but it’s much more likely in instances of malicious intent. Act in good faith in your dealings as a personal representative and never forget your duty to do what is in the best interest of the estate and its heirs.

South Carolina testators can learn some lessons here, too.

Keep your will current. Update your last will after major life events like the birth of a child, death, or divorce; after acquiring significant property; and after relevant changes in the law. An entirely new will is often not needed, as many matters can be addressed in a codicil to the will. (Had Testatrix directed where the Bailey’s Island and Paradise Island properties should go in her will, this entire situation might have been avoided.)

Be specific to ensure your will reflects your wishes. The more specific the language in your will is, the less the courts have to guess what your intentions were, if it ever goes to court. (What did Testatrix mean by “equal shares” in the residuary clause? Did she mean equal ownership, as the lower courts interpreted it, or would equal monetary value suffice, as the supreme court interpreted it?)

Create or Update Your Last Will in South Carolina

If you don’t have a current will, now is the time to get one. A last will is a gift to your family that can help avoid conflict once you’re gone, and it ensures that your estate will be settled according to your wishes rather that the state’s procedures.

Call estate planning attorney Gem McDowell. He and his team at the Gem McDowell Law Group help people in South Carolina create estate planning documents including last wills, trusts, and powers of attorney. He can advise you on how best to protect your assets and maintain family relations after you’re gone. If you need help settling an estate in South Carolina, Gem is an experienced probate attorney as well. Call Gem at his Mt. Pleasant office at 843-284-1021 today.

I’m a Personal Representative – Now What? Rights, Roles, Responsibilities, and Risks

An important part of creating a last will is naming a personal representative (executor) to handle matters once the testator or testatrix has died.

But what does a personal representative in South Carolina do? If you’ve been named a personal representative in a last will in South Carolina, or someone has asked if you’d be willing to take the role, you should know what’s expected.

Personal representatives have certain rights, roles, and responsibilities under the law, and face potential risks, which we’ll cover here. But first, we’ll look at when you may want to hire a probate attorney to help you perform your duties.

Do I Need to Hire a Probate Attorney in South Carolina?

In South Carolina, there is no legal requirement for a personal representative to hire an attorney in order to settle an estate. However, you may want to.

Settling the decedent’s estate may be a small, straightforward job or a long, complicated one. If you’re the personal representative of a small estate with few heirs, you may feel comfortable completing the job yourself.

But if the estate is large and complex, or if there are several heirs and beneficiaries with contentious personalities and relationships, you should strongly consider working with a probate attorney to help you carry out all the duties listed below. A probate attorney knows what to do, saves you time, and helps you avoid mistakes that could be costly to the estate or even to you, personally (more on that below). And if you expect family drama, a probate attorney can help keep familial relations congenial while acting as a “buffer” between you and the conflict.

Since probate attorneys are paid out of the estate, it doesn’t cost you anything out of pocket; however, it does also mean the value of the estate will be diminished somewhat.

Learn more about probate in South Carolina here.

Rights of the Personal Representative in South Carolina

The personal representative has many more responsibilities than rights, but one right they do have under South Carolina law is the right to compensation paid out of the estate. SC Code § 62-3-719 states that a personal representative is entitled to a minimum of $50, regardless of the estate’s value, up to a maximum of 5% of the estate’s value. In some cases, the court may approve additional compensation “for extraordinary services.” The personal representative may waive their right to compensation.

The personal representative also has a right to be reimbursed for expenses they incur settling the estate.

Role of the Personal Representative

The role of the personal representative is to distribute the estate of the deceased person according to the terms of their will. (If there is no will, the court appoints an administrator to handle the estate. Read more about dying intestate – without a will – in South Carolina here.)

The tasks for a personal representative in South Carolina to carry out include:

Locating and listing decedent’s assets including bank accounts, securities, and real property
Settling outstanding debts and giving notice to potential creditors of the decedent’s death
Paying outstanding taxes and bills, including funeral expenses
Distributing assets according to the terms of the will to heirs and beneficiaries
Filing lawsuits if necessary
Closing out the estate

To an extent, the will may partially define the role of the personal representative. It may be very prescriptive in how the personal representative is in carrying out their role, or it may give them more leeway in how to distribute assets. But regardless of how much leeway the will gives a personal representative, the tasks they must carry out remain the same.

Responsibilities and Risks of the Personal Representative

All personal representatives have a legal responsibility to act in the best interests of the estate and its heirs and beneficiaries rather than themselves. A personal representative is a fiduciary, with a fiduciary duty to the estate and its heirs and beneficiaries.

Since the personal representative is often an heir to the estate, this can lead to sticky situations where they are responsible for distributing assets to themselves in a way that’s fair and doesn’t benefit themselves at the expense of another heir.

When is a personal representative within their rights to distribute desirable assets to themselves, and when does that cross over into the territory of breach of fiduciary duty? That’s a judgment call that sometimes must be decided by the court. See this blog on the SC Supreme Court case of Bennett vs Estate of King, 2022, for a real-life example.

Breach of fiduciary duty encompasses clearly wrong actions like intentionally stealing money from the estate. But there need not be malicious intent; something like failing to pay outstanding taxes on time or distributing assets before all creditors are paid can be considered a breach of fiduciary duty, too.

A beneficiary or unpaid creditor who has suffered a loss from the personal representative’s actions or mismanagement of the estate may bring a civil claim against them. A personal representative may be found personally liable for damages caused, meaning you as the personal representative could be responsible for using your own money to make up for any mistakes and mismanagement. For this reason alone, working with a probate attorney is a good idea, since it minimizes your risk of personal liability.

Estate Planning in South Carolina

For help settling an estate in South Carolina, contact estate planning and probate attorney Gem McDowell. Gem and his team at the Gem McDowell Law Group help people across South Carolina with probate and estate planning, including creating last wills, trusts, and powers of attorney, for estates large and small. Call Gem at his Mt. Pleasant office at 843-284-1021 today.

What Are Enterprise Goodwill and Personal Goodwill and Are They Marital Assets in SC?

The value of a business is determined by a number of factors, including its income, physical assets like buildings and equipment, and intangible assets like goodwill.

But what exactly is “goodwill” in business, and what’s the difference between personal goodwill and enterprise goodwill? And is goodwill subject to division as marital property in divorce proceedings (as discussed by the SC Court of Appeals in Bostick v Bostick, 2022)?

Personal Goodwill vs. Enterprise Goodwill

“Goodwill” is an intangible business asset. Goodwill can encompass many things, depending on the nature of the business, including branding and brand recognition, customer relations, employee relations, and intellectual property (trademarks, copyrights, patents, and trade secrets).

Goodwill can be divided into two types, personal and enterprise.

Personal goodwill is inextricably tied to an individual or individuals, often the business owner(s). The individual’s exceptional knowledge or skills, experience, reputation, and relationships with customers, employees, and suppliers may all be factors in a company’s personal goodwill valuation.

Enterprise goodwill is tied to the business itself rather than to an individual, such as its brand, location, convenience for customers, unique offerings, intellectual property, and the like.

Say a highly regarded chef sells one restaurant and leaves to start another. If the regular customers follow the chef to the new restaurant, that’s an example of personal goodwill. Once the chef has gone, the restaurant has lost that intangible asset (the personal goodwill tied to the chef) that brought in business and made money. But it still boasts a great location, convenient opening hours, and a unique menu, all of which will outlast the presence of the founding chef and continue to bring in revenue; that’s enterprise goodwill.

Determining the dollar value of a company’s personal goodwill and/or enterprise goodwill can be a challenge for business owners.

Is Goodwill a Marital Asset Divisible in Divorce? Bostick v Bostick Background

Another issue some business owners face is whether their company’s personal goodwill and enterprise goodwill are marital assets that can be divided in a divorce. This varies by state. The South Carolina Court of Appeals weighed in on the issue in the case Bostick v Bostick in March 2022 (read the opinion here).

Josie M. Bostick and Earl A. Bostick, Sr., were married in 1971 and began divorce proceedings in 2017. During their marriage, Earl was a dentist with a successful practice in two locations, Ridgeland and Bluffton. Earl retired before the divorce was finalized and sold the Ridgeland practice to the Bosticks’ son for $569,000 plus $51,113.15 in accounts receivable. The contract divided the $569,000 in two parts: $144,860 for purchased assets and $424,140 for goodwill. The contract also required Earl to be available for up to 60 days after the sale to help transition, and it contained a covenant not to compete.

How this money should be divided in the divorce was a point of disagreement. The family court determined that the hard assets and accounts receivable were marital assets to be divided 50/50, as the Bosticks had previously agreed. But it held that the goodwill was a nonmarital asset because it was personal goodwill and was therefore Earl’s alone. The court based this decision on Moore v Moore (2015), which ruled that enterprise goodwill is a marital asset subject to division, while personal goodwill belongs solely to the professional and is not subject to division.

Josie contended the family court erred in this decision. The appeals court agreed.

Was it Personal or Enterprise Goodwill?

The SC Court of Appeals notes that if the dental practice were an “ongoing concern,” then “the majority, if not all” of the goodwill would be personal, but it was known that Earl was leaving the practice and the profession altogether. The court does note that the agreement for Earl to be available for 60 days after the sale and the covenant not to compete do weigh in favor of personal goodwill but concludes that there was no evidence that the entire amount should be considered personal goodwill.

Plus, Earl had previously sold his Bluffton location, and the revenue from that sale – which also included a goodwill portion – was put on his side of the ledger for purposes of equitable distribution. The court says it sees no reason to treat the sale of this second location any differently.

“Therefore, we conclude the family court erred in not treating the entirety of the sales price as marital property,” says the court.

(Note that there is a possibility this decision could be appealed and go to the SC Supreme Court.)

Buying, Selling, and Growing Your Business in South Carolina

No matter what stage of business ownership you’re in, you can use the guidance and advice of an experienced business attorney like Gem McDowell. With over 30 years of experience helping clients in South Carolina, Gem is a problem solver who is ready to help you whether you need advice and assistance buying or selling an existing business, starting up a new one, or helping your business thrive while protecting your interests.

Call Gem and his team at his Mt. Pleasant, SC office at 843-284-1021 to schedule a free consultation.

Same-Sex Marriage in South Carolina After Obergefell

The US Supreme Court made history with the 2015 decision Obergefell v Hodges, ruling that same-sex couples have a right to marry under the Fourteenth Amendment of the Constitution.

Before the Obergefell decision, states made their own laws regarding same-sex marriage. After the decision, all states were required to allow same-sex couples to marry and to recognize such unions that were performed in other states.

This is the background to the 2021 South Carolina Supreme Court decision in Swicegood v Thompson (read the court’s short decision here) regarding same-sex common law marriages and whether Obergefell applies retroactively.

The SC Court of Appeals Cites SC Law Prohibiting Same-Sex Marriage Post-Obergefell

Swicegood v Thompson first went before a family court in 2014 which ultimately found that the Obergefell decision does apply retroactively, and that that Cathy J. Swicegood and Polly A. Thompson, who were domestic partners for over 13 years, did establish a common-law marriage.

When the case came before the SC Court of Appeals in 2020, it found that Swicegood and Thompson had failed to establish a common law marriage because:

South Carolina Code Section 20-1-15 prohibited same-sex marriage, which prevents the formation of a common law marriage between same-sex couples, and
Swicegood and Thompson did not have the intent and mutual agreement necessary to enter a legally binding common law marriage.

As to the first point, the appeals court did recognize that the Obergerfell decision must be applied retroactively. Still, it found that SC Code Section 20-1-15 constituted a “pre-existing, separate, independent rule of state law, having nothing to do with retroactivity,” which formed an “independent legal basis” for the finding that Swicegood and Thompson didn’t establish a common law marriage.

The appeals court’s decision is significantly longer than the supreme court’s and contains the background of the case and its discussion of the law. You can find that here.

The SC Supreme Court Declares the SC Law Void

Upon appeal, the SC Supreme Court vacated in part and affirmed in part the appeals court’s decision.

It noted that in Obergefell, the US Supreme Court held that “same sex couples may exercise the fundamental right to marry,” and all state laws challenged in that case were “invalid to the extend they exclude same sex couples from civil marriage on the same terms and conditions as opposite sex couples.”

The Obergefell decision rendered SC Code Section 20-1-15 void ab initio (“void from the beginning”) and should be treated like it never existed. That means it cannot serve as an impediment to the recognition of a same-sex marriage predating Obergefell, so that part of the appeals court’s decision was vacated. However, the supreme court did affirm, without further discussion, that no common law marriage was established between Swicegood and Thompson.

The State of Same-Sex Marriage and Common Law Marriage in South Carolina

While the law prohibiting same-sex marriage is still on the books in South Carolina, as of the Obergefell decision by the US Supreme Court and the Swicegood decision discussed here by the SC Supreme Court, the right to same-sex marriage in the state of South Carolina is protected.

Common-law marriage, on the other hand, was abolished in South Carolina in July 2019. Read more about that here.

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