Donald Sterling's battle holds harsh lessons for advisers

A court battle over L.A. Clippers owner's trust can teach advisers about tax and estate planning

Jul 30, 2014 @ 12:59 pm

By Darla Mercado

Donald Sterling has emerged from probate court, heralding not only the impending sale of the Los Angeles Clippers professional basketball franchise but also bringing some harsh tax and estate planning lessons for advisers.

Mr. Sterling, 80, lost his bid to block the sale of the team last Monday, when Judge Michael Levanas of the Los Angeles County Superior Court ruled in favor of the owner's estranged wife, Shelly Sterling. A $2 billion deal to sell the Clippers to Steve Ballmer, the former chief executive of Microsoft Corp., hinged on the outcome of the judge's decision.

At the center of the probate court battle was the question of whether Ms. Sterling acted properly in removing her husband as co-trustee of the family trust that owns the Clippers. She took the action after doctors allegedly found that her husband had begun exhibiting signs of Alzheimer's disease, according to The Associated Press.

In April, the National Basketball Association banned Mr. Sterling for life and fined him $2.5 million for making racist comments. After the NBA threatened to auction the team, Mr. Sterling gave his wife approval to put together a deal for a sale. He then balked at Mr. Ballmer's offer and subsequently revoked the trust, according to the AP. Mr. Sterling's lawyers had argued that his revocation scuttled the transaction.

In his ruling, Mr. Levanas decided that the doctors who gave the billionaire the diagnosis of mental incapacity acted appropriately, and he dismissed Mr. Sterling's claim that this was part of a scheme cooked up by his wife and her attorney to take control of the Clippers.

It's not every day that financial advisers and accountants are called in to referee billion-dollar disputes over the ownership of a basketball team, but nevertheless there are plenty of valuable takeaways from the Sterlings' duel in probate court.

For one thing, while many people establish estate plans with the goal of protecting assets in the event of their death, few venture into planning for incapacity.

“With capacity, it's always gradual. You can have symptoms of Alzheimer's, and it might not mean you're incapacitated,” said Charles F. Schultz, a certified public accountant at McGladrey. “When you're feeling hale and hearty, and you're putting in language about incapacity, nobody thinks it's going to happen to them.”

Specificity is key. Advisers and accountants need to make sure that clients have an incapacity clause in their trust documents and that there is a true measured trigger that will kick it off. The clause must be precise and agreeable to all parties, said Mr. Schultz.

Clients should also bear in mind that they are ultimately in charge of drafting the standard used to determine whether they are unfit for overseeing the trust, as well as the terms for a transfer of power.

“In the planning stage, you can identify the people you trust,” said Peter G. Lennington, an attorney at an eponymous firm in St. Paul, Minn. “If you're willing, you can enable them to vote to say that in their considered opinion, if they don't think you're good for the job, then you're not good and you resign.”

Acknowledge the realities of marriage when drafting a trust. Just because your client's spouse might do well overseeing his or her personal affairs doesn't mean that that same individual would do well managing a business the client owns.

Make sure that the right people are handling the right assets by creating a separate financial durable power of attorney for the business, and have a special trustee handle that special asset.

“A key document we like to see is the financial durable power of attorney,” said Mr. Schultz. “This is pretty much an example that a lot of people face, particularly if you're a business owner and you're the one who built or actively managed the entity while you had capacity.”

By having that separate power of attorney and a special trustee for a specific asset, the client can assign someone who would run the business the way he would have if he had the capacity to do so.

At the same time, clients often fail to consider what could happen if they lose their capacity and then regain it — say if the client falls into a coma and eventually emerges from it. Mr. Schultz recommended having language that allows for that possibility and permits the client to take the reins after recovery.

Going back to the dynamics of a marriage, while clients visit their adviser when there's a divorce, they probably should have a conversation with them if the marriage becomes strained enough that the spouses are estranged from each other. It may warrant an update to estate plans.

“If you're no longer living with your spouse, you don't want to leave the person you're estranged from as the trustee of the trust,” said Charles Douglas, editor of the National Association of Estate Planners and Council's Journal of Estate and Tax Planning.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 02

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

Why some retirement plan advisers think Fidelity is invading their turf

InvestmentNews editor Frederick P. Gabriel Jr. and reporter Greg Iacurci talk about this week's cover story that looks at whether Fidelity Investments is stepping on the toes of retirement plan advisers.

Latest news & opinion

Broker protocol: Indecision over recruiting agreement is rampant

Ruckus over recruiting agreement has even wirehouse lifers wondering if it's time

Cetera reportedly exploring $1.5 billion sale

The company confirmed it's talking to investment bankers to 'explore how to best optimize [its] capital structure at lower costs.'

SEC Chairman Jay Clayton outlines goals for a new fiduciary standard

Rule should provide clarity on role of adviser, enhanced investor protection and regulatory coordination.

Advisers bemoan LPL's technology platform change

Those in a private LinkedIn chat room were sounding off about fears the independent broker-dealer will require a move to ClientWorks before it is fully ready.

Speculation mounts on whether others will follow UBS' latest move to prevent brokers from leaving

UBS brokers must sign a 12-month non-solicit agreement if they want their 2017 bonuses.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print