Donald 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.
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.