On Monday July 28, Judge Michael Levanas of the Los Angeles County Superior Court ruled in favor of Shelly Sterling, the estranged wife of Los Angeles Clippers owner Donald Sterling, and prevented Donald from blocking the $2 billion sale of the team to former Microsoft executive Steve Ballmer.
The central issue before the court was whether Shelly acted appropriately in removing her husband as co-trustee of the trust that owned the team for reasons of mental incapacity. Two doctors independently diagnosed Donald as being in the early stages of Alzheimer’s disease, triggering a clause in the trust that allowed for Donald’s removal.
In the wake of this decision, there’s been a great deal of rumbling in the advisory community about how to draft documents to better protect our clients from being removed in similar fashion. Putting aside Donald’s (not inconsiderable) personal indiscretions, it’s easy to see why some advisors would be disturbed to see a man forcibly removed from a position of great power by his own estranged wife on the basis of a fuzzy definition of incapacity. And, any arguments for paying more attention to one’s estate planning documents, drafting durable powers of attorney or even engaging in more sophisticated techniques, like employing a trust protector, are ones I can certainly get behind. However, one question lost in the hubbub is: Did the incapacity clause work as intended? And I believe the answer here is “yes.”
Planning for a client’s incapacity falls at an awkward nexus of duties for advisors. Our overarching responsibility is to protect and serve our clients’ wishes, but there inevitably comes a point when clients may have to be protected from themselves. The incapacity clause in the Sterling trust could certainly have been drafted with more specificity as to what exactly “incapacity” entailed, but how much of our concern in this area is the result of 20/20 hindsight?
No document, no matter how often and carefully it’s updated, can perfectly handle every potential situation, particularly when you’re dealing with an issue as volatile as incapacity. The purpose of such clauses is to remove a client from a decision-making position when his ability to make those decisions has been compromised. There’s always going to be a fight when it’s time to actually do the deed. In this case, arguing the relative differences between the early and late stages of Alzheimer’s doesn’t see the forest for the trees. Donald’s capacity was compromised (regardless of the progression of the disease), and the clause kicked in and removed him. At a certain point, one has to take a step back from the minutiae and take comfort in intention. In the case of the Sterling trust, my opinion is that removing a client with Alzheimer’s from control of a multi-billion dollar asset is the very definition of “working as intended.”
