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The KRASA LAW, Inc. Estate Planning Blog

Friday, June 27, 2014

What the Donald Sterling Episode Teaches Us about Living Trusts

One of the most popular stories in sports over the past few months has been the controversy surrounding Donald Sterling, the (former?) owner of the National Basketball Association’s Los Angeles Clippers. Mr. Sterling was caught on tape making offensive comments. The NBA reacted by assessing a $2.5 Million fine, banning him for life from the league, and initiating a process to strip him of his ownership.

Although the NBA was confident that it had the power to strip Mr. Sterling of his ownership, the league preferred to save a costly and messy public process by hoping to convince Mr. Sterling to acquiesce and agree to sell the team on his own. Despite the fact Mr. Sterling reportedly vowed to never consent to such a sale, suddenly and without warning, it was reported that the team in fact had been sold to former Microsoft CEO Steve Ballmer for $2 Billion. The twist was that Mr. Sterling was not a party to the deal but that his estranged wife, Shelly Sterling, sold the team out from under him. How did that happen?

Evidently the team was owned by the Sterlings’ revocable living trust. A revocable living trust is a common and powerful estate planning tool. Among a multitude of benefits, it provides a mechanism for smooth management of one’s assets in the event of mental incapacity and upon death. Most people recognize the importance of establishing a procedure whereby their assets can be managed by trusted individuals of their choosing in the event of their mental incapacity.

It appears that during a better time in the Sterlings’ marriage, they established a revocable living trust, naming themselves as the initial co-trustees (co-managers) of the trust. Upon the mental incapacity of one spouse, they each trusted sole management authority in the remaining spouse.

One of the key decisions they had to make was how to determine if one spouse lost mental capacity. Some clients elect to choose a “disability panel,” a group of trusted individuals who will make their own private, independent determination of the trust-maker’s mental incapacity. Other clients prefer to instruct that a physician must meet with the trust-maker and then write a letter stating his/her determination that the trust-maker is mentally incapacitated. Other clients prefer that two doctors make the determination so that there is a second, corroborating medical opinion.

With regard to the Sterlings’ living trust, it appears that they chose a method whereby two physicians make the determination of incapacity. Apparently there had been concern for quite some time about Mr. Sterling’s mental capacity. Those close to him felt that he might be suffering from dementia. In fact, one report even suggested that Mr. Sterling’s questionable mental capacity was the reason for the recording of his comments in the first place. The Huffington Post reported that Mr. Sterling made voluntary visits to two neurologists who concluded that he lacked the ability to manage his finances. As a result, under the terms of the trust, Shelly Sterling apparently became the sole trustee of the revocable living trust and had the sole authority to manage the trust’s assets, including selling the Clippers.

Shelly Sterling then struck a deal with Steve Ballmer to sell the team. Her lawyers cited the conclusions of the two neurologists that Mr. Sterling lacked mental capacity to manage his finances for the justification that she could unilaterally enter into an agreement with Mr. Ballmer. Donald Sterling’s attorneys apparently dispute the conclusions of the two neurologists and insist that he still has mental capacity to manage his assets. As a result, he would need to be a party to any transaction involving the sale of the Clippers. The validity of the sale to Mr. Ballmer is still being sorted out by the attorneys and the court and it appears that a key issue will be whether or not Donald Sterling in fact has mental capacity to manage his finances.

This episode raises the question of whether the revocable living trust helped or hurt the situation.

From Shelly Sterling’s perspective, the trust definitely helped the situation. A major asset was under the co-control of somebody who no longer had the mental capacity to manage finances and a very generous, record-setting offer to purchase the team would have been in jeopardy if not for the incapacity provisions of the trust.

From Donald Sterling’s perspective, it’s not quite as clear. While it is true that the trust, combined with the two neurologist’s evaluations, ostensibly allowed his estranged wife to sell the team without his consent, blame can’t really be placed on the trust itself. The trust provided what most would agree is a pretty high standard for determining incapacity: the opinion of two medical doctors. If the trust did not exist, the opinions of the two neurologists would have still existed and Shelly Sterling’s lawyers would have instead initiated conservatorship proceedings.

Perhaps the lesson of this episode from Donald Sterling’s perspective is that he should have updated his trust when circumstances changed. Despite the fact that he became estranged from his wife and they lived at separate residences, he apparently never thought to change his trust to name a third party of his choosing as his successor co-trustee in the event of his mental incapacity instead of keeping the provisions that Shelly would become sole trustee. At least with that change, he would have had somebody with the authority as an equal co-trustee with Shelly who presumably would have advocated his interests.

KRASA LAW is located at 704-D Forest Avenue, Pacific Grove, California, and Kyle may be reached at 831-920-0205.

This article is for general information purposes only.  Reading this article does not establish an attorney / client relationship.  Because the law is so complex and because everybody's situation is different, you should consult with an attorney licensed to practice law in your community before acting upon any of the information contained in this article. 

 


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