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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.
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.
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.
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.