The importance of boilerplate trust clauses: Sterling, the Clippers, and incapacity
NBA team owner Donald Sterling is in a court battle in part because of a trust clause that most clients likely gloss over.
July 28, 2014
Many clients sign estate planning documents without paying much attention to the clauses they contain. That is no surprise; the documents are complex, and death and disability are issues that no one wants to face.
While they may not be fun to contemplate, these clauses have real consequences. One clause in particular that few clients pay attention to is how that client’s incapacity could be determined—and therefore how the client could be stripped of the authority to serve in a fiduciary or trustee capacity. A high-profile case on this topic is playing out in California probate court. At issue will be whether Shelly Sterling, the estranged wife of Los Angeles Clippers owner Donald Sterling, had the authority to sell the NBA team to Steve Ballmer for $2 billion.
The Clippers were owned in a trust. Shelly Sterling gained control of the trust by assuming the role of sole trustee. This gave her the authority to negotiate the sale of the franchise. The trust agreement contained a provision (which Donald Sterling agreed to when he signed the trust) that authorized his removal as trustee based on expert determination he lacked mental capacity.
Shelly Sterling assumed the role of sole trustee after two doctors determined that Donald Sterling was mentally incapacitated and no longer able to conduct his legal or business affairs. Papers filed in the court include medical records that allege that Donald Sterling has mild cognitive impairment consistent with early Alzheimer’s disease or some other form of brain disease, and is at risk of making potentially serious errors of judgment. The trust documents apparently did not prevent Shelly Sterling from assuming sole trustee power even if the couple were estranged.
Donald Sterling and his attorneys are challenging his wife’s authority to sell the team and are taking the position that he is mentally competent to handle his financial and business affairs. Regardless of how the matter plays out, the Sterlings are in court in part because of a boilerplate trust clause that many clients would simply have glossed over.
There are several lessons that an estate planning team, including personal financial planners and attorneys, can learn from this case—and pass on to clients. They include:
Life is a movie (with sequels), not a snapshot. The donor, as director of the movie, needs to understand that the course will not be linear and that care should be taken in the “casting” of those who will play important roles.
Patricia M. Annino, J.D., LL.M., is a nationally recognized authority on estate planning and taxation who chairs the Estate Planning practice at Prince Lobel Tye LLP in Boston.
The CPA’s Guide to Financial and Estate Planning, which is free to section members, can help planners address estate planning issues such as these. The guide can be accessed here.