Donald Sterling and the L.A. Clippers: There’s Even More to the Story

Kim NewDonald Sterling was the controlling owner of the L.A. Clippers who made racially insensitive comments that went viral earlier this year.  After a hefty fine from the NBA, a lifetime ban, and a threat to force him to sell his controlling interest, Mr. Sterling, at age 80, still refused to sell his ownership interest in the team.  However, it was not the NBA that forced the sale of the team, it was his wife, Rochelle Sterling (“Shelly”), and the interplay of their estate plan that forced the sale and turned this scenario akin to a made-for-TV movie.

The Sterlings, California residents, created a lifetime revocable trust and funded it with all of their assets, including a controlling stake in the Clippers.  Both of the Sterlings were Co-Trustees and primary beneficiaries.  The revocable trust is the core document of an estate plan in many states, including California.  It controls assets during a person’s lifetime and manages the disposition of those assets at death without the need for the probate process.  As Co-Trustees, Donald and Shelly made decisions jointly with regard to their assets.

About the same time as the racial comments came to light, Shelly had Donald evaluated by two doctors for a determination of his mental capacity.  The doctors concluded Donald indeed suffered from diminished cognitive ability and was exhibiting signs of Alzheimer’s disease.  Pursuant to the Sterling’s revocable trust agreement, Donald could no longer serve as Co-Trustee with such diminished capacity, leaving Shelly as the sole Trustee with sole power to administer the trust’s assets.

Shelly negotiated the sale of the Clippers to former Microsoft CEO Steve Ballmer for $2 billion, despite the protests from Donald.  Donald sued to enjoin the sale and sought damages from Shelly and the NBA.  He argued that he had the proper capacity to remain Trustee, and that Shelly failed to follow the proper protocol in his medical evaluation; therefore, she was not sole Trustee and did not have authority to sell the Clippers

The dispute went to Probate Court in California where the Judge heard arguments as to whether Donald was properly removed as Co-Trustee based on his mental capacity and whether Shelly had authority to sell the Clippers under the terms of the Trust agreement.  In late July, the Probate Court Judge ruled entirely in favor of Shelly and held the sale of the Clippers could proceed even if Donald appealed the ruling.  The Judge dismissed the claim that the capacity argument was merely a scheme by Shelly to sell the Clippers.

This case received a lot of attention for Donald Sterling’s racially charged comments, but the case also deserves a lot of attention for highlighting the issues of incapacity and estate planning.  As the population ages, reports of dementia, Alzheimer’s disease and other forms of diminished mental capacity are on the rise.  Planning for someone else to manage your personal and financial affairs in the event of such illnesses or accident is a crucial part of an effective estate plan.  Who you choose to act on your behalf and how it is determined that you are “incapacitated” are equally important.  Although the events surrounding the sale of the Clippers were not as Donald and Shelly likely anticipated when creating their Revocable Trust, the Trust functioned exactly how it was intended.  Upon the death or incapacity of either Donald or Shelly, the survivor or remaining Trustee would serve as sole Trustee and continue to manage their joint assets, no court intervention needed.

A General Durable Power of Attorney and a Healthcare Power of Attorney or Directive are two key documents that plan for incapacity.  Without these in place, a time-consuming and costly court action will be required to name a Guardian or Conservator to manage the affairs of someone who is incapacitated.

Talk to your estate planning attorney about getting these documents in place for your family.  If you already have Powers of Attorney, give them a quick review, and make sure they still express your wishes and appropriately plan for the determination of incapacity.

 

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

Russ Thornton Interviews Kim Hoipkemier

Kim New

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General Power of Attorney

A General Power of Attorney is a written document that grants a broad range of specific powers over your financial and personal affairs to someone you trust (referred to as your “agent” or “attorney-in-fact”).  Specific provisions can establish when and how the appointment of the Power of Attorney takes effect, the duration and the manner in which it can be terminated, and may describe or limit the powers granted to such agent.

A General Power of Attorney is “durable” since it remains in force at all times, even during periods of disability or incapacity.  One could elect for it to be “springing”, which means the General Power of Attorney does not come into effect until the maker is disabled or incapacitated. This is popular as a means of avoiding “blank check” issues.   All Powers of Attorney terminate upon the death of the maker.  A Power of Attorney is an extremely important document that can be used to avoid the appointment of a conservator by a court when a person becomes incapacitated.

 

For more information regarding estate planning, business law or tax controversy and compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

 In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

Musings from the CEO

In my last column, I discussed the current fate of estate and gift tax law.  The emphasis is on the prospective most significant increase in tax rates and lowering of individual exemptions that we have seen in our lifetime.  For those individuals with large estates, this creates a sense of urgency for estate planning to be done between now and the end of 2012.

Today, I’d like to bring it down a notch and discuss more traditional estate planning concepts that apply to a broader cross section of individuals/clients.

I am a firm believer in trusts, hence the moniker a “trust and estate lawyer”!  For the vast majority of our clients that means leaving their estates to their spouse, but directly to trusts that are created by their Wills.  These trusts are most often controlled by, and for the benefit of, the surviving spouse.  When property eventually goes to children, we believe that in most cases it is far more beneficial to have trusts created for your children, regardless of age, that will last for their lifetime.

If the document creating the trust (Will or trust agreement) is properly drafted, your spouse or child can be the trustee of his or her trust, effectively exerting all of the control over assets that they would have had if they inherited property outright.  However, the estate tax savings for future generations, the potential avoidance of generation skipping tax, the income tax flexibility, the protection from creditors, the protection from divorce, the preservation in the family, and the avoidance of probate are some of the reasons that it is desirable to allow the property to flow from generation to generation in trusts, as long as there are any significant assets worth protecting.

The 2010 tax law introduced the concept of “portability”.  This simply means that if one spouse dies and his or her estate does not use all of their estate tax exemption, the remaining unused portion can be carried over to the surviving spouse to be used in that estate.  There are numerous limitations and weaknesses in relying on portability, and we suggest that clients continue to have Wills that leave property to surviving spouses in trust(s), generally a combination of a Credit Shelter Trust and a QTIP Marital Trust.

Life insurance trusts are very common in many estate plans.  It almost always seems to be a good idea to get life insurance out of estates now.  As we get older, our clients acquire a lot of insurance for estate liquidity purposes.  If we maintain insurability, it is always good to have these policies reviewed to make sure that you are allocating resources as prudently as possible.  There may be situations where it would be prudent to prepay premiums.

Another method of reducing an otherwise taxable estate would be to consider a Roth conversion of a traditional IRA as a technique to get taxes out of a taxable estate, in a situation that would otherwise involve an asset (the traditional IRA) that will be subject to both income taxes and estate taxes upon the death of the owner.

Clients with more modest estates need to combine estate planning with Medicaid planning.  What can be done to protect assets if one of the spouses has to go into a nursing home?  First of all, both spouses should have a current Health Care Directive as a necessary part of their estate planning documents.  Considerations should be made to move investments to the name of the healthier spouse.  The healthier spouse’s Will can create a special needs trust in the event that he or she predeceases the spouse with health and living assistance concerns.

A part of estate planning should consider the need for long term care insurance.  The sweet spot to acquire long term care insurance seems to be when a couple is still in their 50’s.

The couple can consider a lifetime QTIP Marital Trust.  This would combine estate tax planning with Medicaid planning.  The lifetime QTIP is a method to protect the home in the event of Medicaid stepping in.  We also have a technique referred to as an Irrevocable Income Only Trust (IIOT) which can be established to start the five year look back rule for Medicaid.  Finally, once a spouse is moved to a nursing home, continued planning should be done for the independent spouse.

Besides Wills that create trusts for the surviving spouse and lifetime trusts for descendants, the Irrevocable Life Insurance Trust to remove life insurance proceeds from anyone’s taxable estate, the Health Care Directive, and any “special” trusts created for Medicaid planning, everyone should have a comprehensive General Power of Attorney.  These power of attorney forms should be “durable” so that the document remains in force after disability or incapacity.  In Georgia, these documents can be drafted so that they do not spring into effect until they are needed.

Remember that the more you plan, the more you save and the smoother the probate process will be for your loved ones.  The old adage is that “…we haven’t got an estate tax, what we have is, you pay an estate tax if you want to; if you don’t want to, you don’t have to.”

If you have any questions about estate planning, please contact Hoffman & Associates at (404) 255-7400.