Donald Sterling and the Los Angeles Clippers have been in and out of the news for several months now.  There was some conclusion last week when Mrs. Shelly Sterling was successful in her attempt to take control of the Sterling Family Trust as sole Trustee.  This opens the door to Mrs. Sterling being able complete the sale of the Los Angeles Clippers basketball franchise to Steve Ballmer.  As an estate planning attorney it is a little bit exciting to have news relevant to our practice.

I obviously haven’t read the Sterling trust, but most trusts allow for a Trustee to be removed upon evidence of incapacity.  Our trust’s standard incapacity language requires one doctor’s note regarding a Trustee’s physical or mental incapacity.   In the case of the Sterling Family Trust, both Shelly and Donald must have both been Co-Trustees despite their separation.  According to news stories that I’ve read, Mrs. Shelly Sterling obtained notes from Donald Sterling’s physician(s) that he was incapacitated and demonstrating symptoms of Alzheimer’s disease.  After obtaining these doctors’ notes, Shelly took the position that she could serve as sole Trustee of the Family Trust and was therefore able to control the sale of the Clippers.

The question before the court was apparently whether Shelly Sterling was properly in place as the sole Trustee after obtaining the doctors’ notes.  The judge found the doctors’ notes credible and the judge also found that Shelly Sterling was acting in good faith and that she was not secretly trying to take over control of the team and the family trust.

So what are we to learn from the Sterling situation?  Well, in the context of estate planning, it may be worth reviewing your own trust and what the incapacity section requires for another person to take over as Trustee.  There’s a delicate balance required.  You want to allow a Successor or Co-Trustee to take control without too much effort and without great delay, but you also don’t want to make it so easy that someone can take control without determining that there is true incapacity.  We usually discuss this incapacity clause with our clients and let them decide whether one doctor’s note is sufficient or if they want to require two doctors’ notes.  An interesting alternative is to require a majority or unanimous decision of an “incapacity panel” made up of family members and perhaps a primary physician.  This allows some discretion by the panel (usually made up of family members) to remove a Trustee without the formality of a doctor’s note and this could also allow for easy reinstatement of a Trustee if there was only temporary incapacity.

Some Trust agreements require the establishment of an Exemption Sub-Trust.  This was very common in Trust agreements prior to the dramatic increase in the equivalent exemption for federal estate tax purposes.  The principal advantage of an Exemption Sub-Trust that if it is correctly administered during the life of the surviving spouse, at the time of the death of the surviving spouse all of the assets of the Exemption Sub-Trust pass to the beneficiaries federal estate-tax free. This is true even though all of the income (and principal if need be pursuant to an ascertainable standard such as for health, education, maintenance and support) from the Exemption Sub-Trust is used for the benefit of the surviving spouse during his or her lifetime.

When the first spouse dies, the Successor Trustees must determine what Trust assets should be used to fund the Exemption Sub-Trust.  This is a very important determination.  In light of the fact that the Exemption Sub-Trust assets remaining at the time of the death of surviving spouse will not be subject to federal estate tax regardless of value, in the past the general rule was that assets with high appreciation potential should be used to fund the Exemption Sub-Trust.  In other words, the appreciation potential of an asset was the primary factor.  This was to avoid federal estate tax when the surviving spouse die, which federal estate tax is due 9 months after the date of death calculated at a 40% tax rate.

However, the equivalent exemption for federal estate tax purposes for deaths occurring in 2014 is $5,340,000.00.  The equivalent exemption is indexed for inflation, so it will continue to increase each year in the future. With the large equivalent exemption now in effect and to continue to increase in the future, another primary consideration in funding an Exemption Sub-Trust is the income tax basis of an asset.  Assets in the Exemption Sub-Trust have an income tax basis equal to the fair market value on the date of death of the first spouse to die, and there is no “step up in basis” to the value of the asset on the date of death of the surviving spouse. Accordingly, an asset in the Exemption Sub-Trust that has significantly increased in value since the death of the first spouse will, upon sale, have significant taxable gain for income tax purposes. Therefore, when funding the Exemption Sub-Trust, if it appears that there is very little likelihood of any federal estate tax upon the death of the surviving spouse because the surviving spouse’s taxable estate will be less than the projected equivalent exemption, it is prudent not to fund the Exemption Sub-Trust with assets with high appreciation potential assets but leave them in the taxable estate of the surviving spouse.  That way when the surviving spouse dies, those assets will receive a step up in basis equal to the fair market value as of the date of death of the surviving spouse. A sale of such asset shortly after the death of the surviving spouse in all likelihood will trigger very little, if any, taxable gain for income tax purposes plus there is no federal estate tax. Accordingly, the beneficiaries have the best of tax worlds, no federal estate tax and a step up in basis for income tax purposes.

At the law office of JEFFREY BURR, we have many years of experience assisting and advising corporate and individual Successor Trustees in the administration of a Trust after the death of a Trustor, including the funding of Exemption and other sub-trusts.

-Attorney John R. Mugan

An attorney cannot reveal information relating to the representation of a client unless the client gives informed consent or the disclosure is impliedly authorized in order to carry out the representation of the client.  This duty of non-disclosure is often referred to as the attorney-client privilege. But what happens to this privilege when the client dies?  For example, an attorney assists a client in his or her estate planning, specifically the preparation and execution of the client’s revocable trust agreement, last will and testament and related estate planning documents.  During the course of the representation, disclosures are made by the client to the attorney regarding the assets and liabilities of the client, the family dynamics, and the intent of the client. Does the confidentiality of this information survive the death of the client and continue on?  The short answer is yes, with certain exceptions.

The general rule in Nevada is that the attorney-client privilege survives the death of a client. However, the personal representative of the estate of the deceased client is entitled to any information from the attorney as a matter of necessity since the personal representative is charged with duties that include the carrying out the terms of the last will and testament, preserving and safeguarding the assets of the estate, and filing a written inventory of the estate assets.  Essentially, the personal representative steps into the shoes of the deceased client. The attorney-client privilege passes to the personal representative of the estate of the deceased client and can be asserted by the personal representative.

The attorney-client privilege also passes to the successor trustee of the revocable trust of the deceased client and can be asserted by the successor trustee.  The successor trustee is again entitled to any information from the attorney as a matter of necessity. Also under Nevada law, a beneficiary of a trust is entitled to a copy of the relevant portions of a trust agreement regarding his or her bequest in most cases.

One very common exception is when the validity of the terms of the last will and testament or of a revocable trust is challenged.  For example, a party brings an action alleging that the last will and testament or the revocable trust is invalid because the decedent was unduly influenced in the making of the will or trust. There is no privilege as to a communication relevant to an issue between parties who claim through the same deceased client.  A related exception is that there is no privilege as to a communication relevant to an issue concerning an attested document such as a last will and testament to which the attorney is an attesting witness.  These exceptions are practical necessities to enable a party to establish the validity or invalidity of a will or trust of a decedent.

In summary, an estate planning client can rest assured that information furnished to an attorney remains confidential after his or her death with certain, practical exceptions.

-Attorney John R. Mugan

Assume John Smith established the John Smith Revocable Trust during his life with himself as the Trustee of the Trust.  There are Trust assets with a bank or other financial institution, the records of which list the trustee as John Smith.  John Smith dies, and under the terms of the Trust agreement Mary Jones is the successor trustee of the Trust. How does Mary Jones as successor trustee gain custody and control of the Trust assets?

In this situation, sometimes a bank or financial institution will request a copy of the complete Trust agreement, along with a death certificate of the deceased trustee. However, one of the advantages of a revocable trust is confidentiality, namely never making the complete Trust agreement a matter of public record like you are required to do so with a Last Will and Testament in an estate proceeding.  A copy of the complete Trust agreement will contain the dispositive provisions (who the beneficiaries are and what their shares are) and may contain other provisions such as the disinheritance of a child.  This information is not the concern or business of the bank or financial institution.  All the bank or financial institution should be concerned with is the successor trustee provisions of the Trust.  The response to the bank is an Affidavit of Successor Trustee, sometimes referred to as a Certificate Of Incumbency.  This is a document which Mary Jones as successor trustee would sign that states in part that: (1) John Smith established the John Smith Revocable Trust and the date of the Trust agreement; (2) John Smith died and his date of death; (3) Mary Jones is the successor trustee under the terms of the Trust agreement, and (4) Mary Jones accepts the trusteeship and agrees to serve as trustee. A death certificate of John Smith is attached to the Affidavit.  The Affidavit can then be shown to the bank or financial institution as proof of the death of John Smith and further proof of Mary Jones being the successor trustee of the Trust.  The bank or financial institution will make a copy of the Affidavit or scan it into its records, and remove the name of John Smith as trustee and list the name of Mary Jones as the trustee on its records of the Trust assets.  The bank or financial institution will then do whatever the new trustee, Mary Jones, instructs them to do regarding the Trust assets.

What about real estate is owned by the Trust?  A search of the public records regarding the real estate will list John Smith as the trustee.  Accordingly, if Mary Jones as the successor trustee tries to distribute or sell the real estate or place a mortgage or deed of trust thereon, the title company and bank would check the public records and want John Smith as trustee to sign the relevant documents.  This is impossible since he is deceased.  In a case where the Trust owned real estate, you add to the Affidavit of Successor Trustee a statement that the Trust owned the real estate and set out certain pertinent information regarding the real estate including its legal description.  You then record the Affidavit with the county recorder in which the real estate is located.  Upon recording, the county officials (recorder, treasurer, assessor, etc.) will change the public records regarding the real estate by removing John Smith as trustee and listing Mary Jones as the trustee. Any search of the public records after the recording of the Affidavit will show that Mary Jones is the successor trustee and the one who has legal title to the real estate.

In summary, a successor trustee can obtain control and custody of the Trust assets when the prior trustee dies through an Affidavit of Successor without having to disclose all of the terms of the Trust agreement.

Attorney John Mugan