Lessons from The Sterling Family Trust: When can a trustee be removed?

by Kaamil Khan

One of the biggest news stories of this summer was the Donald Sterling fiasco. Mr. Sterling is the former owner of the Los Angeles Clippers, a professional basketball team. The Clippers are actually owned by a trust, the Sterling Family Trust, of which Mr. Sterling was the trustee and the beneficiary. This means that while the trust was created for his benefit, he was still responsible for properly managing its assets on his behalf as well as other beneficiaries, such as his wife.

As mentioned on the Estate Planning Section, a trustee is a fiduciary agent. This means there is a duty on this person to care for the trust assets in a responsible, prudent, and effective fashion. Basically, the trustee must not be wasteful or neglect to manage the trust. Even when the same person, such as Mr. Sterling, serves as the trustee and primary beneficiary of a trust, the law requires that this person still fulfill his fiduciary responsibilities. This is because trusts are created for the benefit of certain individuals (i.e. the beneficiaries) and the trustee is merely “holding this property in trust” on their behalf.

Mr. Sterling was in the news again recently because he has been declared by his doctors to be suffering from Alzheimer’s Disease. The Sterling Family Trust provided that if a trustee is declared “incompetent,” he or she will be removed as trustee. This means that if a trustee is unable to manage his affairs or that of the trust, his term as trustee ends. Mr. Sterling’s diagnosis was enough by itself to trigger this provision of the Family Trust and result in his dismissal as trustee.

Most trusts contain similar provisions so this removal of Mr. Sterling as trustee is not incredibly unique or rare. In Virginia, even if your trust lacks such language, Section 64.2-759 allows for a trustee to be removed in similar circumstances. Provision (B)(3) states that a trustee will be relieved of his duties where he is deemed “unfit[]…to administer the trust effectively,” situations such as Mr. Sterling’s. This Section also provides for the removal of a trustee if he or she has committed a serious breach of his fiduciary duty to the beneficiaries, is unwilling or persistently fails to administer the trust in an effective manner, or if all of the beneficiaries request that the trustee be removed. This law is in place to protect the property of the trust and the beneficiaries who are to benefit from these assets.

A trust is a valuable estate planning tool for older individuals such as aging parents. They can designate themselves as the trustee and the beneficiary of the trust while also designating successor trustees, such as children, at the same time. Once the original creators of the trust become older or less capable of handling their day to day responsibilities, the trust can provide for the seamless transition of the children into the administration and management responsibilities of the trust. This allows for the children to provide and care for the parents in their old age while the parents still benefit as the primary beneficiaries of the trust. With the right language, there would be no need for multiple doctor or physician examinations of the parents before such a transfer of responsibilities, such as what happened with Mr. Sterling.

If you have questions about whether a trust may be an effective option for you or someone else in your family, contact K.M. Khan Law today.