One of the biggest benefits of creating a revocable, living Trust is that it allows your successor Trustee to manage your affairs if you lose capacity.  Sounds good, but who decides when your capacity is kaput?

That will be the question for the Court to decide on Monday, July 7^th when a Los Angeles County Superior Court judge will decide if Shelly Sterling has the right to act as sole Trustee.

Mr. Sterling’s problem comes from the family Trust he and his wife created to hold their interests in the Los Angeles Clippers Basketball franchise.  The Trust apparently has a provision common to nearly every revocable, living Trust that allows Mrs. Sterling to act as sole Trustee (meaning the sole Trust manager) if Donald Sterling is “incapacitated.”  Most Trusts provisions state that incapacity can be determined by the diagnosis of a single physician.  In Mr. Sterling’s case, he was evaluated by a neurologist who determined that he was suffering from mild cognitive impairment due to mild dementia (as reported in the media).  That was enough for the physician to declare Mr. Sterling incompetent to act as Co-Trustee.

If the physician’s diagnosis controls, then Mrs. Sterling, as sole Trustee, can sell the Clippers to whomever she likes.  If the physician’s diagnosis is refuted by a competing neurologist, then Mr. Sterling may still be able to act as Co-Trustee—and thereby block the Clippers sale.

It’s not everyday that a $2 billion transaction turns on a lowly Trust incapacity clause, but whether your estate is large or small, the issue is important to you.

So why have an incapacity clause in a Trust at all?  It is meant to prevent people from having to go to Court to declare a Trustee incapacitated.  And the only way to “safely” determine incapacity is to have a mental exam completed by a competent physician.  But that procedure has its problems and limitations—especially where the elder refuses to cooperate.  The problem with mild dementia is that people often won’t, or can’t, admit they have a problem.  That results in a dispute as to capacity.

The irony is that the Sterlings are now in Court over a provision designed to keep them out of court.