Removing a Trustee: Trust Law May Tip Final Shot in Sterling Case
In April, a lifetime of controversial remarks landed Donald Sterling, owner of the Los Angeles Clippers professional basketball team, in hot water. The backlash over his comments led to a multi-million dollar fine and a lifetime ban from the NBA.
After the league took steps to force Donald and his wife Shelly to give up ownership of the Clippers, Shelly arranged an auction of the NBA team that brought a bid of $2 billion from Steve Ballmer, a former Microsoft CEO. According to Shelly, Donald told her "you really made a good deal."
Over the next few weeks, Donald initiated, then withdrew, then resumed a lawsuit against the NBA and retracted his support of the sale to Ballmer. Shelly pressed forward with the sale. She filed suit in Los Angeles Superior Court, asking for an order confirming that Donald was no longer a trustee of the Sterling Family Trust. She provided expert testimony from two doctors that Donald had mild cognitive impairment, and impaired memory and executive functioning, and was thus no longer capable of acting in his role as co-trustee.
The grounds for this intense legal battle were laid months ago, when Donald and Shelly signed on as co-trustees of the Sterling Family Trust. Donald had transferred 100 percent of the stock ownership of the Clippers into the Family Trust.
By signing the 72-page Trust document, Donald and Shelly agreed on two clauses that became keys to the case:
- If the mental capacity of either trustee become questionable, then that individual would undergo any tests doctors deemed "reasonably appropriate" to determine whether they lacked the capacity to continue managing the trust. The couple waived their patient confidentiality privileges for any exam results and gave one another access to all of their personal health information. [Section 7.5.c]
- Donald and Shelly also agreed to abide by the following rule: "[a]ny individual who is deemed incapacitated as defined [in Section 10.24 of the trust] shall cease to serve as Trustee of all trusts administered in this document."
The two clauses outline steps that Shelly took to remove Donald from his role as co-trustee, so that she could sell off the Clippers.
"When a trustee goes off his rocker"
If you have a trust, then it's likely that similar trustee incompetence clauses are in your documents.
To explain the function of these clauses, estate planning attorneys may use a colloquialism: "the purpose is to prevent disaster when the trustee goes off his rocker." Put more formally, these steps make it possible for another trustee (or a trust beneficiary) to easily and quickly remove a trustee who is incapacitated and no longer competent to manage trust assets.
In the Sterling Family Trust, Donald and Shelly agreed that a finding of incapacity would be made either by their regular attending physician, by two licensed physicians or by a court.
In May 2014, after Donald's behavior, media exposure and political problems had escalated, Shelly hired the two physicians she needed to take control of the trust: a neurologist, who diagnosed Alzheimer's, and a psychiatry professor from the University of California, Los Angeles (UCLA), who concluded that Donald had "mild cognitive impairment, with relatively greater impairment in memory and frontal executive functions consistent with early Alzheimer's disease, but could reflect other forms of brain disease."
The psychiatrist gave an opinion on May 27, 2014 that Donald was "substantially unable to manage his finances and resist fraud and undue influence, and is no longer competent to act as trustee of the trust." Shelly took control of the trust as sole trustee and moved to close on the auction that brought in the $2 billion bid for the Clippers from Ballmer.
A willing participant?
Superior Court Judge Michael Levanas found the doctors hired by Shelly were "compelling," and concluded that Shelly had made the appointments "based solely on her concern for Donald and not as a secret plan to remove him as a trustee of the trust." He also decided that Donald "willingly participated in the evaluations" of both doctors.
But Donald had changed his mind in the week after the evaluations, and removed his consent to the sale on May 29, 2014. The judge heard evidence that "[h]e became hostile and refused to sign." Shelly took the position that Donald was no longer a co-trustee. The judge agreed that Shelly "was acting as a sole trustee" when she entered into the binding agreement to sell the team to Ballmer on May 29th.
Judge Levanas was not exaggerating when he described the incompetent trustee clauses as providing broad powers to Shelly. "Donald was mandated to cooperate with the examinations regarding his capacity in [section] 7.5.c of the Trust. Donald voluntarily participated in both evaluations. There is no requirement that he be advised about the purpose of an examination."
The Judge rejected Donald's subsequent complaints about not being informed of the purpose of the mental capacity exams, saying "There was no professional duty that either doctor needed to advise Donald . . . about possible legal consequences of an examination. And, in fact, credible evidence is that such warning would make someone tense and could cause negative effects on the results. The credible evidence . . . is that you cannot prepare for this type of a neurological evaluation."
And the court found no credible evidence to support arguments by Donald's lawyers that he was "defrauded, subjected to undue influence or that Rochelle [Shelly] proceeded with unclean hands in obtaining the psychological psychiatric evaluations."
Trophy assets and taxes
We often have the right to change our mind in daily life. As a wealthy and powerful businessman, Donald Sterling had always enjoyed the ability to make decisions involving the Clippers, which his attorneys described as his "trophy asset."
But, based on the neurological and psychological exams that supported removing Donald as a co-trustee, the judge accepted Shelly's argument that her husband had lost his role as decision maker for the Clippers. The Sterling Family Trust document, and trust law, had bound Donald and Shelly in a legal relationship that compelled them to watch out for each other's financial interests.
Eliminating tax liability and avoiding probate court may be strong motivations for those who decide to use a trust in their estate planning. Trusts are usually written to reduce or eliminate income taxes and estate taxes.
Tax law was probably a top priority for Donald and Shelly when they signed the Sterling Family Trust, since huge profits from the sale of an appreciated asset like an NBA team can be sheltered from capital gains taxes, if the team is sold by the trust after the owner dies.
In the Sterlings' case, tax planning as a top priority was swept away in the media spectacle and court proceedings.
If the sale of the Clippers happens while Donald and Shelly are still alive, the government will become a one-third silent partner in the $2 billion deal. According to Donald's lawyers, the couple will pay a $650 million capital gains tax that would not have been due if the asset was kept in the Family Trust until after their passing.
The court did not find taxation to be a compelling interest, even though Donald's lawyers pleaded with the judge to consider the tax implications.
If Judge Levanas' decision stands when the final buzzer sounds, it will be Trust law that tips the case through the net, with intense media and political pressure from the sidelines.
Shelly's lawyers argued that Donald's only aim would be to wage "a campaign for the rest of his life against his bitter enemies, the NBA. And he wants to restore his dignity and honor." While the laws of business and commerce may allow a person to act on revenge and honor, Shelly's lawyers argued "[t]hose are not the kinds of considerations that should outweigh the benefit to this family trust of a two billion dollar sale."