It is well documented and established that many professional athletes have fallen victim to economic difficulties, sometimes even having to file for bankruptcy, despite earning a great deal of money throughout their career. This revelation gets amplified when the individual becomes physically incapacitated. As a professional athlete, it is difficult to prepare for the worst and often seems ridiculous because of one’s youth, health, and physical attributes.
However, all professional athletes should take a serious look at their estates and give them the necessary time and attention that they need. Although salaries of professional athletes continually rise, the statistics surrounding athlete impropriety, litigious legal battles, and bankruptcy filings have risen as well. Lack of education or oversight is often cited as the ever-growing problem, therefore every professional athlete should have the following documents in order should an accident or unforeseen illness render the person unable to make decisions.
Durable power of attorney
This document enables an appointed person to carry out your wishes on behalf of your estate and to allocate money appropriately. However, no one should ever make a major financial decision for you without your knowledge or consent.
Health care power of attorney
This document carries out your wishes in the event you cannot make your own decisions, especially if you become ill or physically incapacitated.
In terms of planning for the future, this document allows you to decide what happens to your assets in the event that you pass away. It also gives your loved ones the comfort of to whom and where the assets will be distributed in the event something ever happens to you.
A loan out corporation
A loan out corporation can be set up as a corporation or limited liability company for the purposes of using the company’s corporate legal and tax advantages.
A prenuptial agreement can save an athlete’s fortune and avoid a litigious separation while dividing assets of the estate accordingly, prior to marriage. In addition, it stipulates as to whether one will pay alimony or spousal support. Poor planning on this part of your estate can erase over 50% of your net worth overnight.
Having a trusted team of professionals around may cost you more than you care to allocate for these services up front, but the money you will save in the long run will far outweigh the initial cost. A competent team around you can identify problems in your financial outlook, long before a crisis may arise. In many instances, friends, family or trusted professionals can play valuable roles in shaping your career and image. However, unless any of those members are educated and trained to handle the complexities of a professional athlete, the journey can often turn problematic.
Let’s examine a hypothetical NFL rookie making the league minimum under contract and implement some of the strategies here. For simplicity, I will assume that the player is engaged with no children and has a competent financial adviser or business manager overseeing his expenses. Of course, the permutations will change as the variables change over the course of his playing career and whether he receives money from outside endorsers.
Under the new collective bargaining agreement, the player could make roughly $390,000 for his first year, assuming he received no signing bonus and he is on the team for the full year. Let’s also assume the player received no endorsement money or trading card money and that roughly 40% of his salary will be allocated to taxes, an agent fee (if it is taken) and possible insurance.
As you can see, before the player steps foot on the playing field, and assuming he lasts the entire season, his salary is already reduced to $156,000 before various expenditures and deductions. However, if you implement some of the strategies mentioned earlier, you receive some much needed tax benefits and legal protection in the event of sudden death, paralysis, divorce or any type of fraudulent investment advice that was given.
If that rookie marries his fiance and they divorce shortly thereafter, the jurisdiction they live in will dictate the proportion of the estate that will be divided. New York State employs an equitable distribution model that provides for a formulaic standard whereby various factors are considered in determining the dollar amount allocated to each party whereas in a communal property law state, the percentage given is predetermined, and both parties are allocated a portion of the estate pursuant to the law.
The $156,000 can once again be cut in half if appropriate planning is not taken and a prenuptial agreement is not drafted. The severity is even worse if that hard-earned money cannot be allocated to the appropriate people or the loved ones that truly need it or may rely upon it.
In the event of death or a sudden state of incapacitation, a little preparation will make a world of a difference in terms of keeping financial matters out of court, let alone dwindling the estate away from people the money is not supposed to go to.
A durable power of attorney and a carefully drafted will can save hundreds, if not millions, of dollars ones in the event of a sudden crisis. It will enable flexibility and distribute assets to the people who are supposed to receive the benefits, even if the dollar amount is very small.
Former NFL great Derrick Thomas died suddenly in a car crash. At the time of his death, he left no will and mothers of his children filed suit with the probate court for a share of his estate. This started a lengthy court battle. Once again, if adequate preparation would have taken place beforehand, loved ones would have received their appropriate share of the estate and kept the matter out of court.
As we often see, when professional athletes lend money to a business, family member or friend, careful consideration must be addressed before potential financial misfortune strikes. Setting up a loan out corporation is of utmost importance to ensure tax flexibility and adequate legal protection is in place. Not only will the corporation provide tax advantages, but it will also protect the athlete’s personal savings against possible litigation or creditor action.
Statistics surrounding professional athletes lending money and investing money into defunct companies is readily reported. Adequate due diligence and lack of education and/or understanding runs rampant in an industry where appropriate professionals aren’t asked or don’t answer questions. Until professional athletes are educated by the right professionals and surrounded by the right team, they will continue to become statistics in terms of their financial stature.
Often times, greatness may be achieved through failure, but when it comes to money, there is no room for error or the repercussions may wipe out a fortune, and the costly mistake will claim the potential generational wealth intended for your loved ones.