AAII, the American Association of Individual Investors

Donald Sterling’s Lesson: Read the Estate Documents

The seemingly boilerplate clauses in estate planning documents can lead to unintended consequences. Donald Sterling’s loss of control over his trust, and thereby the Los Angeles Clippers basketball team, provided a good example of just how important it is to understand everything written into an estate plan.

Donald Sterling forfeited control of the trust holding the Los Angeles Clippers basketball team after experts determined he was mentally incompetent. The trust agreement called for Donald’s estranged wife, Shelly, to take over as trustee in such circumstances. Shelly subsequently sold the Clippers over Donald’s objections after a Los Angeles court upheld the legality of the trust documents.

In commentary published on an American Institute of CPAs newsletter, estate planning expert Patricia Annino says there are several lessons to be learned from the Sterling court case. They include:

  • The importance of reviewing all “boilerplate’ clauses. Instructions that may seem benign when a person is healthy and competent may be of big significance in the future. It is very important to plan for disability and incapacity.
  • Think through who will serve as the successor trustee. In the case of the Sterlings, Shelly was never removed as the successor trustee even after the couple became estranged. It may also make sense to consider having two successor trustees instead of just one.
  • Ensure checks and balances exist. The trustee may want to have his or her doctor be one of the medical professionals designated to make the determination of incapacitation. It is also a good idea to think about who the successor trustees should be accountable to—the spouse, children, etc. Naming a guardian of person and property in the durable power of attorney document gives legal authority to the guardian to defend a trustee accused of being incapacitated.
  • Regularly review estate planning documents. Since disability and incapacity often happen gradually, a regular review can allow for adjustments to be made.

Source: “The Importance of Boilerplate Trust Clauses: Sterling, the Clippers, and Incapacity,” Patricia Annino, CPA Insider, July 28, 2014