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Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

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Tuesday, May 13, 2014

Saved By the Trust? Sterling Family Trust May Fail to Safeguard Clippers Sale

Sterling

Donald Sterling’s recent ban from the NBA has led others to speculate about the Clippers’ formal ownership.  Since the Clippers are likely owned by a family trust, it is possible the trust could have prevented the NBA from selling the team out from under Sterling.  The NBA says it does not matter who owns the franchise; Sterling is banned and all owners will be forced out of the association.  However, it is possible that if Sterling’s trust was set up to let him run the Clippers, questions arise as to whether his estate plan failed:

  • Why is the Grantor Running the Team? Generally, irrevocable trusts keep the grantor separated from the underlying property in order to demonstrate that ownership and control have been transferred.  This is important in trusts designed to protect the assets from litigation, contractual obligations and any other ploys the NBA may use to pull the team away from Sterling. 
  • A Trust with Frail Estate Tax Protection? If this is a revocable living trust, Sterling and his wife may still own the team and other assets.  However, revocable trusts do not shove out assets of the taxable estate—they work to push smaller inheritances around the probate system.  Contrastingly, an irrevocable trust requires a high wall between the assets and the grantor who gave the team up.  “While you can still interact with your former property, the rules prevent cavalier mingling of spheres.”  Treating an irrevocable trust akin to a revocable trust may have given Sterling a way to have his team and run it, but it could cost his heirs upwards of $750 million in tax if he crossed the line.
  • What About Shelly Sterling? Mrs. Sterling has argued that under California’s marital property laws she legally owns half of all property Donald acquired during their marriage, including the Clippers.  Until a divorce decree is acquired, the team belongs to the trust.  Yet, depending upon where the trust is situated, a divorce court may be able to assign its property to a spouse in order to satisfy a judgment.  Regardless, the NBA says Donald’s egregious conduct led them to take the Clippers.  Once they discovered Shelly co-owns the team, they said all ownership interests are to be stripped. 

See Scott Martin, Sterling Family Trust May Not Save Clippers From Forced Sale, The Trust Advisor, May 12, 2014.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

http://lawprofessors.typepad.com/trusts_estates_prof/2014/05/saved-by-the-trust-sterling-family-trust-may-fail-to-safeguard-clippers-sale.html

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