Establishing the Most Effective Instruments to Evaluate Trustees Can Be a $2 Billion Issue

HIGHLIGHTS:

  • The dispute between Donald and Shelly Sterling focused on the issue of whether Shelly Sterling followed the steps required in the trust to remove her husband as trustee on the grounds of his incapacity. The Sterling case raised other interesting issues as to the relevant degree of capacity required for certain actions and the time at which the measure of capacity was taken.
  • Most trusts and many operating agreements for limited liability companies and partnership agreements contain trustee removal and succession powers. Each and every provision in a trust instrument may be crucial under certain circumstances and should be given careful consideration to avoid future disputes.

The ideal individual trustee has a wide variety of real world experience and judgment that can only be acquired over decades. Thus, many trustees are middle-aged or older at the start of their tenure. While some people remain vibrant and cognitively intact as they live beyond middle-age, it is likely that some older trustees will experience lapses of memory, progressive stages of dementia, Alzheimer's disease or other forms of mental incapacity that will impair their ability to discharge their fiduciary duties or render them altogether incapable of acting as a trustee. Therefore, the provisions within trust instruments that govern the removal of incapacitated trustees are becoming more important and deserving of considerable attention. Although there are no templates that will solve all the problems associated with trustee incapacity, the starting point is to consider the issues that may arise and alternative ways that they can be addressed.

The Sterling Trust Dispute: Were the Correct Steps Followed?

The dispute between Donald and Shelly Sterling was a case in point. Its resolution determined the control of the trust that owned the Los Angeles Clippers and whether this National Basketball Association franchise could be sold to Steven Ballmer for a reported $2 billion. At issue was whether Shelly Sterling followed the steps required in the trust to remove her husband as trustee on the grounds of his incapacity. The precise language of the Sterling Trust was not released publicly, however, reports indicate that Shelly Sterling was able to rely on the determination of two "experts" to ascertain if Donald Sterling lacked the capacity to remain as a trustee. Most trusts and many operating agreements for limited liability companies and partnership agreements contain trustee removal and succession powers. Some instruments contain provisions allowing for removal "without cause," while others require a showing of cause, the most common of which is incapacity. Some instruments also provide for removal based upon circumstances such as conviction of a crime, substance abuse or other matters the donor deems determinative of fiduciary fitness.

If the instrument is silent about incapacity, or unclear about what constitutes incapacity, controversy is inevitable. For example, many instruments simply use the term "disabled" without providing a definition or method of determination. In either case, the course of action for removing an allegedly incapacitated trustee would be for an interested party to initiate a court proceeding to determine incapacity that directly bears on the trustee's ability to discharge his or her fiduciary duties, causing harm to the trust. A trustee who disagrees with the notion that he or she is incapacitated may not cooperate with such a proceeding, including challenging the need for a physical and/or mental examination, release of his or her medical records, and if found to be incapacitated by the court, the trustee may challenge that finding.

Removing a Trustee Via Non-Judicial Procedure

Many trust instruments now include a non-judicial procedure for removing a trustee. Some instruments leave the decision about incapacity to the remaining trustees or other persons, such as the spouse and children or combination of friends, spouse and children, without the need to obtain medical evidence of incapacity. Other instruments require a determination of incapacity to be made by one or more professionals, sometimes including the trustee's primary care physician. Because it is often difficult to obtain expert determinations of incapacity, many attorneys advise against requiring expert certification. What is often lacking in these instruments is an authorization under the Health Insurance Portability and Accountability Act (HIPAA) by the trustee permitting the experts to examine and release information about the status of the person's capacity to third parties. Without a HIPAA authorization, physicians will be reluctant to disclose confidential information, and the parties may find themselves in court to obtain an order for release of medical information.

Concerned about the potential disruption to trust business that a court proceeding for trustee removal might cause, some donors specify that if a trustee does not provide certification of his or her capacity within a certain time period upon the request by an interested person, that trustee will be deemed to have resigned. That eliminates the need for lay persons to review medical information that may be inconclusive, and it also eliminates the possible inadvertent disclosure of medical information that is unrelated to the determination of capacity. For those considering this type of language, it may be prudent to limit the frequency for such requests to once a year to avoid a situation where disgruntled beneficiaries harass a trustee by repeated requests for certification of the trustee's capacity.

Still other donors believe they are avoiding potential disputes by including provisions stating that a trustee who reaches a certain threshold age is automatically deemed to have resigned as trustee. While simple to administer, such a provision does not address a trustee's failing capacity before reaching the specified age, or the possibility that the trustee may remain vigorous and desirable well beyond the specified age.

The Issue of Regaining Capacity

Once a determination of incapacity has been made, whether by a court or according to the terms of the governing instrument, a corollary question is whether the trustee is able to resume his or her duties if capacity is once again regained. Some instruments expressly provide for reinstatement, but most are silent. With the provision of a mechanism for appointment of a successor trustee, by implication, a trustee has no ability to be reinstated upon having regained capacity, unless the trustee is the donor.

Questions About Trustee Authority Will Impede Conducting the Trust's Business

Regardless of the mechanism for determining when a trustee has ceased to serve due to incapacity, the steps required by the trust instrument must be followed precisely so that there is no question of the authority of the remaining or successor trustees. This is important so that the business of the trust can move forward without question as to who has the authority to conduct business and third parties can be comfortable relying on the authority of the trustee. However, as evidenced in the Sterling dispute, even if the trust terms identify a non-judicial mechanism to transfer authority/trusteeship, the incapacitated person may challenge that determination.

The Value and Limitations of Expert Testimony

In a courtroom challenge to capacity, the result often turns on expert testimony. In many cases, lay persons with the most interaction and knowledge of the person's cognitive function are biased in some fashion. For example, they may gain under the instrument if the person is incapacitated, (e.g., taking control as the sole trustee; their caregiving job may be at issue; and a gift or transaction with the incapacitated person during this period of time may be questioned if the court finds incapacity). These interests weigh against the credibility the court will give to such lay witnesses.

While experts are critical to utilize, there are limitations on the expert's opinion as well. First, a simple diagnosis of dementia or Alzheimer's disease is insufficient to confirm that a person lacks capacity to make decisions. Technically, one can have dementia for years and still legally be able to make decisions. Each case of dementia is different in the time it takes to lead to legal incapacity. In the long run, many persons with dementia will most likely become legally incapacitated, but the time it takes from the date of diagnosis to legal incapacity is different for each person. Second, the expert typically has not spent much time with the incapacitated person making it harder to evaluate his or her cognitive skills. There are batteries of cognitive tests used by medical professionals to evaluate a person's capabilities, but there is no one test and no one score that necessarily confirms incapacity. Therefore, it is ultimately up to the court to listen to the witnesses, weigh their credibility and motives, and evaluate whether the trustee in question still has the legal capacity to serve and make informed, well-reasoned and prudent decisions.

The Sterling case raised other interesting issues as to the relevant degree of capacity required for certain actions and the time at which the measure of capacity was taken. On the one hand, Shelly Sterling claimed that she followed the terms of the trust instrument and Donald Sterling lacked capacity to remain a trustee. The contract between Shelly Sterling and Steve Ballmer that specified Ballmer was to pay $2 billion to purchase the Clippers required either that Donald Sterling sign off on the deal or that Shelly Sterling obtain a final and non-appealable court order approving it. The judge, in his initial musings from the bench, agreed with Shelly Sterling, inquiring why any of the parties were even before the court since the terms of the trust provided a mechanism for removal that was followed. However, in December 2013, she and Donald Sterling, according to Donald Sterling's lawyer, amended their trust to remove a provision that would have allowed Donald Sterling to bring in his own experts to contest findings of capacity as part of the non-judicial removal mechanism under the trust terms. This raised the question of whether Donald Sterling's capacity changed sufficiently between December 2013, when Shelly Sterling implicitly acknowledged, by participating in an amendment to the trust instrument, that he had capacity to amend the trust to a few months later when she deemed him incapacitated to serve as a co-trustee. Depending on the jurisdiction in which the parties reside, the answer might be "yes" – one might have capacity for purposes of amending or revoking a testamentary instrument, but not have capacity to make financial decisions.

Trustee Incapacity Litigation Is Increasing

While the amount at stake in the Sterling case and the publicity it attracted may be unusual, litigation surrounding a trustee's incapacity is becoming all too common. Such disputes offer valuable lessons to those establishing trusts and those who have trusts in place that may be amended. Each and every provision in a trust instrument may be crucial under certain circumstances and should be given careful consideration.