Don
Sterling’s legal woes have of course been all over the news, and one topic that
has been much discussed is the fact that the Clippers are owned by a Family
Trust. It may be that this is a
revocable trust, commonly referred to as a “living” trust. Such trusts are often used instead of a Will
in order to avoid probate. Because
California is a community property state, in California typically such a trust
is created jointly by husband and wife, and both husband and wife act as
trustees.
Another
benefit of a living trust is that it can be used to manage property when
someone becomes incapacitated. Usually
the way this works is that the trust provides that if husband or wife become
incapacitated, they will cease to act as trustee and the other spouse (or
sometimes a third party, such as a child, close advisor, or professional
trustee) will step in to act as trustee and manage the trust property. This can be a major advantage to provide
continuity in the case of a business or other type of property that requires
ongoing active management.
The key to
making this type of trust provision work effectively is precisely that you
don’t have to go to court to have someone declared incompetent, because going
to court to get a person declared incompetent is a long, public and potentially
expensive process. Instead, the trust itself typically specifies
how someone may be determined to be incapacitated. For example, it might be by
the unanimous decision of two physicians, or by the unanimous decision of a
trusted friend and a physician. Such a provision
might be along the lines of the following:
A trustee shall be deemed to be
incapacitated if he or she is determined by two physicians (including such
person’s personal physician, if any), at least one of whom is a neurologist, to
be experiencing substantial difficulties in managing his or her financial
affairs and that such difficulties are not expected to be short-term.
We do not
know exactly what the wording was in the Sterling trust, although the gossip
site TMZ sports has reported that it was “an inability to conduct business
affairs in a reasonable and normal manner” as determined by two doctors. http://www.tmz.com/2014/05/30/donald-sterling-alzheimers-los-angeles-clippers-shelly/#ixzz33EKs9ypm
It
has also been reported that Mr. Sterling may be suffering from Alzheimer’s
disease. We do know that this determination
of incapacity has now become the focus of some controversy. On the one side is Mr. Sterling’s wife, Shelly,
who claims that Mr. Sterling is incapacitated, meaning that she alone as the
remaining trustee can decide whether or not to sell the Clippers. She has reportedly indeed agreed to sell the team
to Microsoft billionaire Steve Ballmer --presumably much to the relief of the
NBA, and for the staggering price of $2 billion! On the other
side Mr. Sterling’s lawyers disagree, claiming that Sterling has only a “modest
mental impairment” and is “slowing down,” but does not meet the definition of
incapacity in the trust. http://www.cnn.com/2014/05/30/us/nba-clippers-sterling/ Because the sale to Mr. Ballmer avoids a forced sale by
the NBA and is clearly at a tremendous price, it’s not entirely clear what Mr.
Sterling’s objection to the sale is at this point. Moreover, he had already sent a letter to the
NBA agreeing to the sale of the team.
Obviously
this story is still developing, but at this point it looks as if the definition
of incapacity in the Sterling Family trust did help to resolve a complex and difficult
business situation fairly quickly. Thus,
the Sterling case generally reaffirms the importance of including a definition
of incapacity in a trust instrument, recognizing that such a provision is not
an iron clad guarantee that the matter will avoid all dispute or remain entirely
out of court.
