(A more complete version of this article originally appeared in the June issue of Trusts & Estates magazine. As a Wealth Management Letter reader, you can subscribe to Trusts & Estates for just $99. That’s a savings of 64% off the regular Trusts & Estates rate of $275. To take advantage of this special introductory offer, email email@example.com.)
Estate planning for professional athletes can be a whole different ballgame. For most clients, estate planning takes into account wealth that will be, or has been, accumulated over many years. It is the financial advisor's job to protect that wealth. The lawyer's job is to arrange for the orderly disposition of property after these clients die and to ensure that their families' needs will be met as far as those assets can possibly allow.
But, of course, pro athletes create their wealth in an extremely short period of time—they're lucky if their careers stretch to 10 years. And they accomplish this feat while very young. This means an extreme emphasis must be placed on preserving and protecting wealth that athletes accumulate while in their 20s and 30s—and on making their money last for a very long time. Strategies that require irrevocable decisions, such as those using irrevocable trusts, must allow for a much longer time horizon and for the risk that the athletes might consume wealth at a faster rate than anticipated and need access to additional funds.
Some professional athletic organizations, like the National Football League, have programs that try to help players quickly get up to speed on their new financial situations and connect them with financial and estate-planning advisors. But most don't.
So, how can you best assist pro athletes to realize both their lifetime and “at death” goals? The elements of any estate plan can be as varied as the assets it covers, but the will and revocable trust form the cornerstone. For athletes in particular, a comprehensive plan pays close attention to the selection of domicile, use of marital agreements, benefits of planning with life insurance held through irrevocable life insurance trusts, disability planning, lifetime gifting and leverage transfer strategies, and asset protection.
So, how do we get started? Get the big picture: Become familiar with the relevant sport's collective bargaining agreement, which can impose salary caps and “luxury taxes” on teams. These provisions can significantly reduce the athlete's earning potential after his current contract expires. You also should consider special issues relating to the taxation of deferred compensation, and the use of entities to hold the athlete's licensing rights for the marketing of his right of publicity, including through commercial endorsement deals. Endorsement revenues can potentially be more lucrative than players' salaries.
More and more athletes are coming to understand the importance of a second career after their time in pro sports ends. Some players' associations do a good job providing guidance to help facilitate athletes' transitions to second careers, be it as broadcasters or as real estate brokers. If the athlete starts a closely held company, that creates opportunities for estate planning, including through leveraged transfers of entity interests to family trusts, so asset growth can occur outside of the athlete's taxable estate without triggering any gain on such a transfer.
The simplest of questions, “Where do you live?” has great implications for professional athletes. Given the national (if not international) scope of professional sports, it's not uncommon to find athletes who grow up in one state, play out of one or more other states, then live off-season in yet another state. With the frequency of player movement due to trades and free agency, the web of jurisdictions can actually get much more complicated than even that. Further complicating matters: athletes often can play for several professional teams during their careers; some will even play for two or more professional teams during a single season.
Also, in those states where the athlete is not domiciled and is not otherwise considered a resident for purposes of income tax, the professional athlete generally is subject to state income tax as a non-resident on a “duty-days” basis that prorates the athlete's salary based on where he renders services.
Yet, the athlete's domicile, or legal residence, is critical for estate planning. Domicile generally determines the rules governing the disposition of tangible and intangible personal property upon one's death. In addition, domicile can determine the power of a particular state to tax worldwide income and transfers. Domicile may be defined as an actual residence within a state, combined with the intention of making that state one's permanent home. For the professional athlete to avoid being treated as having more than one domicile, it's important to be clear in establishing the athlete's domicile and relinquishing any prior domicile.
While you're talking to a young athlete about the unpleasant subject of his potentially premature demise, you should also point out that he needs to plan just in case he's physically or mentally incapacitated before he dies. You don't have to mention the high rate of early onset Alzheimer's among NFLers or other sports dangers. It's all understood. What you do have to point out is that certain documents should be in place, just in case. They include:
1. revocable living trusts;
2. living wills;
3. health care proxies; and
4. durable powers of attorney, which may confer upon the person designated authority to engage in transactions on behalf of the athlete (such as paying bills, or making gifts within the $13,000 per recipient annual exclusion amount) even after the athlete has become disabled.
Athletes unfortunately are notorious for their neglect of various forms of financial foresight, which can affect what happens to their fortunes even after they're gone. Kansas City Chiefs' Hall of Fame linebacker Derrick Thomas, who died at age 33 following a January 2000 car crash, had ignored the urging of his financial advisor to make a will. Thomas' entire estate was left for the court to divide, touching off a legal battle among the five mothers of his seven children. And there wasn't much left to fight over: Of the estimated $30 million Thomas had earned in the NFL, he had only $1.16 million in valued assets at the time of his death.
His agent Leigh Steinberg was quoted in Sports Illustrated as saying, “Derrick didn't care about meeting with his planner, and we tried to set him up to do it 10 times. The sad truth is that there was a certain group of athletes who actually believed that if they ever sat down to write their wills, they were going to die.”
Revocable trusts have many of the same advantages as wills and, because they take effect as soon as they're created, have some additional advantages that are particularly helpful for professional athletes. A trust can set up a program to handle financial matters during the athlete's lifetime, which is especially significant when pro careers are so time-limited and long-term asset management so critical. The athlete can grade his trustee's performance during life. If that performance is unacceptable, the trustee can be replaced.
Use of a professional trustee, such as a bank or trust company, can take on added importance to the athlete who travels frequently and, for entire seasons, does not have time to administer his wealth personally. Using a professional trustee also can help protect the athlete from tricksters and hangers-on who often see athletes as a source of easy money for dubious private equity investments, outright fraud, systematic overcharging and other financial abuse.
If desired, the athlete can serve as co-trustee with a professional trustee. The property in the trust also can provide support if the athlete has a serious career-ending injury. Another advantage of trusts: Athletes are in the public eye, but property held in a trust is not. The trust is a more private way of distributing his property when he dies.
All the tools in the estate planner's kit are helpful to pro athletes with substantial wealth. These include gifts (including to charity), grantor retained annuity trusts, and sales to trusts for the benefit of family members whereby appreciation in value (or appreciation in value above a benchmark IRS interest rate) can be shifted outside of one's taxable estate. Also, through grantor trusts, the income taxes attributable to the property transferred to the trust can be charged to the athlete, thereby permitting wealth to accumulate unimpeded by tax outside of his taxable estate (and without triggering any income tax on transactions with the trust). Such a transaction can be particularly beneficial in planning for interests in entities that hold licensing rights related to the athlete's endorsement contracts.
But oftentimes, planning with irrevocable trusts of which the athlete is not a beneficiary is undesirable (other than in the case of irrevocable life insurance trusts). That's because of the athlete's need to ensure he has sufficient wealth to live on for his whole life.
Instead, a better match for the athlete (at least for a “nest-egg” amount of wealth) sometimes is to use an irrevocable trust of which he is one of the beneficiaries (a self-settled trust). Because under the laws of most states, a self-settled trust subjects the assets held by the trustee to the claims of the athlete's creditors, it's generally desirable to use a trust that is held under the laws of a jurisdiction that has enacted asset protection trust legislation. Thus the athlete receives enhanced creditor protection, provided that the basis for a claim against him didn't exist at the time that he transferred assets to the trust.
Mum's The Word
It's true for every client but more so for athletes: Once the estate plan is in place, it must be monitored frequently — as a rule of thumb, generally every three to five years. Indeed, athletes often have very substantial changes in salaries, bonuses and other compensation (as well as changes in family circumstances), which can create an immediate need for change to their estate plans.
But even while we stay constantly in touch with these famous clients, we have to keep quiet about it. This means no war stories to fellow practitioners about famous clients. Indeed, no name-dropping whatsoever.