With new stories emerging daily involving Donald Sterling and the Los Angeles Clippers, the latest twist in the plot is that Sterling had recently been declared ‘mentally incapacitated’ by experts, making him unfit to negotiate the sale of the team, leading his wife Shelly, to be declared the sole trustee of the family’s trust. This news is significant because according to ESPN.com’s Ramona Shelburne, The Sterling Family Trust had rules and guidelines about mental incapacitation that would leave Shelly Sterling to negotiate the sale of the team without needing her husbands approval. Although it is currently being reported that the Clippers have been sold to former Microsoft CEO, Steve Ballmer, for $2 billion, it’s likely that Donald Sterling will still challenge the sale of the team without his approval. Let’s take a look at why a trust can be an effective method of estate planning whether you are a billionaire like the Sterling’s or not.
What is a trust?
In general, a trust is a written expression of your desires regarding the management of your assets during your lifetime, in the case that you become incapacitated. In addition, a trust may also include details involving the distribution of your assets upon your death, at which time a designated Trustee will make the proper distributions of your trust according to the instructions left in the trust. In the case of the Sterling’s, experts have deemed Donald Sterling mentally incapacitated therefore his wife, as the sole trustee, will take control of his assets, including the team.
What does it mean to be “mentally incapacitated”?
When entering into contracts, a basic rule is that both sides must possess a minimum required mental capacity to enter into a contract, which is known as contractual capacity. The same is true for people creating wills and trusts; this is known as testamentary capacity. Laws governing estate planning are governed by state law and in most states, testamentary capacity is generally held to a lower standard than contractual capacity. California’s testamentary capacity standard is codified in Probate Code Section 6100.5 which provides that a testator has the capacity to make a will if he or she can:
- Understand the nature of the testamentary act;
- Understand and recollect the nature of his or her property; and
- Remember and understand the his or her relations to immediate family members and those whose interests are affected by the Will.
The capacity for documents other than Wills in California is codified by Probate Code Section 812 and requires the that the individual be able to communicate, understand, and appreciate:
- The rights, duties, and responsibilities created or affected by his or her decision;
- The probable consequences of the decision; and
- The significant risks of, the benefits of, and reasonable alternatives to the decision.
Because selling the team requires contractual capacity as opposed to testamentary capacity, Donald Sterling would be held to the higher standard.
On what grounds can a trust be challenged?
It’s likely that Sterling will challenge the opinion of experts and possibly the validity of the trust. Without being able to read the trust, it is unclear under what circumstances it may be held invalid. Trusts may be challenged on a number of grounds including fraud, duress, mistake, or undue influence. Ironically, the trust may also be challenged on the grounds that that Sterling lacked the mental capacity at the time the trust was created. It’s likely however, that The Sterling Family Trust was created many years ago making it difficult to prove he lacked the mental capacity at that time. To do so would require evidence including medical reports and witness testimony that Sterling was in fact mentally incapacitated. Another possible challenge can be made if the trust had been amended anytime after it was created, especially if it was done recently. Sterling could argue that he was unfit to make those changes and therefore the trust document is invalid. The catch in that situation is that it’s likely a court would hold that only the amended portions will be declared invalid rather than the entire document. Although these scenarios are unlikely, the saga of Sterling and the Clippers has shown that almost anything is possible.