Boilerplate trust clauses

BY PATRICIA M. ANNINO, J.D., LL.M.

Many 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.

Editor’s note: This checklist is adapted from the article “The Importance of Boilerplate Trust Clauses: Sterling, the Clippers, and Incapacity,” CPA Insider, July 28, 2014, available at tinyurl.com/kqkuqd3 .

—By Patricia M. Annino, J.D., LL.M. ( pannino@princelobel.com ), chair of the Estate Planning practice at Prince Lobel Tye LLP in Boston.

SPONSORED REPORT

Revenue recognition: A complex effort

Implementing the new standard requires careful judgment. Learn how to make significant accounting judgments and document them and collaborate with peers for consistent application.

VIDEO

How to Excel pivot a general ledger

The general ledger is a vast historical data archive of your company's financial activities, including revenue, expenses, adjustments, and account balances. J. Carlton Collins, CPA, shows how to prepare data for, and mine data with, PivotTables.

QUIZ

News quiz: Taking an economic snapshot and looking to the future

Recent news included IRS actions that affect individuals and partnerships and a possibly influential move by a Big Four accounting firm.Take this short quiz to see how much you know about the news.