Realities of Boilerplate Trust Clauses

estate planningMany clients sign estate planning documents without paying much attention to the clauses they contain. One clause that few clients pay attention to is the one governing how that client’s incapacity could be determined—and therefore how the client could be removed from serving as a fiduciary or trustee. A high-profile case on this topic recently played out in California probate court between former Los Angeles Clippers owner Donald Sterling and his estranged wife, Shelly. Here are several lessons from that case, whose outcome ultimately allowed Shelly Sterling to sell the team:

Review all “boilerplate” clauses in estate planning documents. Make sure that clauses that may seem benign when the donor is healthy and competent would also apply later.

Plan for disability or incapacity. This planning should be as important to a client as planning for death. Thinking through who will serve as successor trustee if the donor/trustee is removed for reasons of incapacity is important. Nuances, such as whether spousal estrangement should disqualify a party from serving as sole trustee, really do matter. (The Clippers were owned in a trust. The trust agreement contained a provision, which Donald Sterling agreed to when he signed the trust, that authorized his removal as trustee based on an expert’s determination that he lacked mental capacity.)

Put in place checks and balances to avoid conflicts. Conflicts may arise down the road. For example, should someone who has a vested economic benefit in the outcome of such a critical decision be able to overrule the donor? Should Donald Sterling have designated someone to replace him so there would always be two trustees? Shelly Sterling assumed the role of sole trustee after two doctors determined that Donald Sterling was mentally incapacitated and no longer able to conduct his legal or business affairs.

Think carefully about who can determine incapacity. Should a donor such as Donald Sterling have mandated that his own personal physician be one of the physicians who had to determine whether he was incapacitated?

Consider the consequences of a legally estranged spouse. When legal estrangement with a spouse happens, it is good practice to review all financial structures and estate planning documents—especially the control provisions. Did Donald Sterling affirmatively decide that his wife would have control if he was unable to serve as trustee, or did that happen by default? The trust documents apparently did not prevent Shelly Sterling from assuming sole trustee power even if the couple were estranged.

Identify to whom the trustees should be accountable. Besides the spouse, who else should the trustees account to? Children? Independent advisers?

Designate who will serve as guardian of person and property if protective proceedings commence. That designation would be included in a client’s durable power of attorney. Being named guardian gives a person legal standing in most states to defend the client in an incapacity hearing.

Regularly review estate planning. The Sterling case underscores the importance of regular review. Disability or incapacity does not occur at once—it can creep in over time. Continuous (or at least annual) attention to planning is a safety mechanism that catches inconsistencies early and allows adjustments.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released her new book, “It’s More Than Money, Protect Your Legacy” available at Amazon.com. To download Annino’s FREE eBook, Estate Planning 101 visit, http://www.patriciaannino.com.

The Importance of Boilerplate Trust Clauses: Sterling, the Clippers, and Incapacity

Shelly and Donald Sterling Image, estate planningNBA team owner Donald Sterling was recently in a highly publicized court battle, in part, because of a trust clause that most clients likely gloss over.

Many clients sign estate planning documents without paying much attention to the clauses they contain. That is no surprise; the documents are complex, and death and disability are issues that no one wants to face.

While they may not be fun to contemplate, these clauses have real consequences. One clause in particular that few clients pay attention to is how that client’s incapacity could be determined—and therefore how the client could be stripped of the authority to serve in a fiduciary or trustee capacity. A high-profile case on this topic is playing out in California probate court. At issue was whether Shelly Sterling, the estranged wife of Los Angeles Clippers owner, Donald Sterling, had the authority to sell the NBA team to Steve Ballmer for $2 billion.

The Clippers were owned in a trust. Shelly Sterling gained control of the trust by assuming the role of sole trustee. This gave her the authority to negotiate the sale of the franchise. The trust agreement contained a provision (which Donald Sterling agreed to when he signed the trust) that authorized his removal as trustee based on expert determination he lacked mental capacity.

Trustee troubles

Shelly Sterling assumed the role of sole trustee after two doctors determined that Donald Sterling was mentally incapacitated and no longer able to conduct his legal or business affairs. Papers filed in the court include medical records that allege that Donald Sterling has mild cognitive impairment consistent with early Alzheimer’s disease or some other form of brain disease, and is at risk of making potentially serious errors of judgment.

The trust documents apparently did not prevent Shelly Sterling from assuming sole trustee power even if the couple were estranged.

Donald Sterling and his attorneys were challenging his wife’s authority to sell the team and are taking the position that he is mentally competent to handle his financial and business affairs. Regardless of how the matter played out, the Sterlings are in court in part because of a boilerplate trust clause that many clients would simply have glossed over.

Lessons learned

There are several lessons that an estate planning team, including personal financial planners and attorneys, can learn from this case—and pass on to clients. They include:

  • Clients should review all the “boilerplate” clauses in a document to make sure that clauses that may seem benign when the donor is healthy and competent would also apply later.
  • Planning for disability or incapacity should be as important to a client as planning for death.
  • Thinking through who will serve as successor trustee if the donor/trustee is removed as trustee for reasons of incapacity is important. Nuances, such as whether spousal estrangement should disqualify a party from serving as sole trustee, really do matter.
  • What checks and balances should a client put in place to avoid conflicts that may arise down the road?

For example, should someone who has a vested economic benefit in the outcome of such a critical decision be able to overrule the donor? Should Donald Sterling have designated someone to replace him so there would always be two trustees?

  • Should a donor such as Donald Sterling have mandated that his own personal physician be one of thephysicians who had to determine him to be incapacitated?
  • When legal estrangement with a spouse happens, it is good practice to review all financial structures and estate planning documents—especially the control provisions. Did Donald Sterling affirmatively decide that his wife would have control if he was unable to serve as trustee or did that happen by default?
  • Think through to whom the trustees should be accountable—the spouse and who else? Children? Independent advisers?
  • Who will serve as guardian of person and property if protective proceedings commence? That designation would be included in a client’s durable power of attorney. Being named guardian gives a person legal standing in most states to defend the client in an incapacity hearing.
  • This case underscores the importance of regular review. Disability or incapacity does not occur at once—it can creep in over time. Continuous (or at least annual) attention to planning is a safety mechanism that catches inconsistencies early on and allows adjustments to be made.

Life is a movie (with sequels), not a snapshot. The donor, as director of the movie, needs to understand that the course will not be linear and that care should be taken in the “casting” of those who will play important roles.

 

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released her new book, “It’s More Than Money, Protect Your Legacy” available at Amazon.com. To download Annino’s FREE eBook, Estate Planning 101 visit, http://www.patriciaannino.com.

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