Legal Implications of the Sterling Trust Dispute

While the attention of most Miami basketball fans was focused on the Heat’s bid for a third consecutive title, Clippers fans look forward to a new owner in Microsoft CEO Steve Ballmer.  Donald Sterling is challenging the proposed sale from a family trust to Ballmer, however, and the outcome of that challenge hinges on a question of trust law and interpretation.  According to published reports, Sterling’s wife Shelly Sterling approved the sale as sole trustee after removing her husband from the trustee role based on mental incapacity as determined by two neurologists.  This recent development adds trust law to race relations and wiretap rules as important lessons from the Sterling/Clippers saga.

One of the great advantages of owning assets in trust, whether revocable or irrevocable, is the flexibility that these vehicles provide in the case of incapacity of the trustee.  An individual who owns his or her property outright may dissipate family wealth through poor judgment if mental capacity diminishes, and the family is often left with no recourse other than to pursue a court ordered guardianship.  Individuals subject to a guardianship proceeding often feel that the entire process is a betrayal by loved ones resulting in a public loss of dignity, and the proceedings can be drawn out, expensive and contentious (especially if some family members support the proceedings and others do not).  Once the guardianship has been established, the individual is deemed a “ward” whose assets are subject to guardian control and court supervision.

An individual who has placed his or her assets in trust may avoid many of the disadvantages of guardianship.  A well drafted trust will provide a mechanism for removal from the trustee role (essentially passing control of the trust assets to a successor trustee) based on a determination of incapacity by one or more doctors or by some other procedure.  This mechanism allows concerned family members to protect assets while avoiding the expense, embarrassment and acrimony that a guardianship proceeding often entails.

As is evident from Donald Sterling’s challenge of his removal as trustee, the protections against incapacity built into a trust document do not always avoid acrimony and lawsuits.  However, these protections are almost always preferable to outright ownership.  If Shelly Sterling ultimately prevails she will have dealt with her husband’s problems quickly, efficiently and apparently quite profitably.  Since none of us can be assured of retaining our capacity, there is a lesson for all of us in this unfortunate story.