Important estate planning and other financial planning considerations for professional athletes
As professional advisors, we can often find ourselves counseling clients who are at a point in their lives and their careers where they are not focused on the importance of advanced planning for themselves and their families. For athletes in particular, the focus is understandably sharp because their careers are often so short.
This factor, combined with a feeling of invincibility that sometimes exists, may naturally cause estate planning or other wealth preservation ideas to sound like something they should be worrying about at some point later down the line.
Certain planning considerations are important for any individual, but planning for professional athletes or other highly compensated professionals and entrepreneurs, with short careers, can present some unique problems, but also unique opportunities. Quite frankly, there are a number of professions that can benefit from the types of planning we’ll discuss. This includes entertainers or any individual with significant levels of income and net worth achieved at an early age.
We all have a desire to protect our assets and our wealth, but the estates of professional athletes can present some additional problems that need attention. For example, professional athletes may be more likely to have issues that cross state and possibly international lines, which can require a different knowledge base to deal with the laws of multiple jurisdictions. Although we have one federal estate tax system, there are 50 states, some of which have estate and inheritance tax systems and some which do not.
Of the ones that do, they may all have different thresholds for what constitutes a taxable estate and may all have different tax rates. Professional athletes whose lives are subject to the possibility of frequent relocation may end up acquiring property over the course of their career in different states. Many states may have different rules regarding the ownership of such property with one’s spouse. For example, tenancy by the entirety does not exist in every state, and there are currently nine states that operate under community property laws.
While the options available to individuals for estate planning can be varied and highly creative, the starting point, especially where probate avoidance is a key consideration (which it should be), is the Revocable Trust. Utilizing a Revocable Trust as part of the estate plan will help ensure that your client avoids the problems, publicity and expense of having to open a probate estate. When you consider that owning real estate in multiple states presents the possibility of having multiple probate estates (potentially you could have one in each state where real estate is located), the use of a Revocable Trust Plan becomes a “no-brainer.” For this reason, the Revocable Trust is the cornerstone of any good estate plan and even more so where real property is held in multiple states. In addition to the avoidance of the probate process, the Revocable Trust will also provide for the orderly transfer of wealth, as well as for basic estate tax planning (credit shelter planning) and potentially more advanced estate tax planning, through the creation of generational skipping transfers after death to avoid multiple layers of estate tax at every future generation.
The estate tax system in place through the end of 2012 presents an unprecedented opportunity to remove a significant chunk of wealth from your estate. If an individual was in a financial position to make an irrevocable gift during 2012, the law through the end of 2012 permits the person to make gifts that total $5.12 million, without the imposition of gift tax. Because many experts believe Congress will not be so generous in future years, and if Congress fails to do anything (which is quite possible), the estate and gift tax exemption amounts are currently set to drop to $1 million in 2013. This is undoubtedly the best time ever to shelter assets from the estate and gift tax system.
For example, if you have a married client with wealth in excess of $10 million who is worried he may need these funds to live on during his lifetime, he and his wife could conceivably make $5.12 million in gifts to each other through the use of irrevocable trusts (taking care to avoid the reciprocal trust doctrine, of course), and they could enjoy the use of those funds for specific purposes such as health, education, maintenance and support, leaving the rest to descendants. And all $10.24 million could avoid the gift and estate tax system.
The use of such Irrevocable Trusts may also be set up to pass wealth not only to the next generation, but also to generations beyond, with those transfers to each generation potentially escaping estate tax, provided the amounts are below certain thresholds. Often referred to as Dynasty Trusts or Generation-Skipping Trusts, such planning can save millions of dollars in estate taxes, thereby increasing the gift that can now be used to support grandchildren or great grandchildren instead of allowing the government to take yet another bite out of your estate, which has presumably been accumulated after the payment of income taxes, payroll taxes and use taxes already paid to our federal and state governments.
Gifts can always be made at smaller levels and the estate and gift tax system allows for an annual gift tax exclusion in addition to your lifetime exclusion. The annual exclusion allows for gifts to be made to any individual with a value of $13,000 or less for gifts made in 2012. This amount is indexed for inflation and will be increasing to $14,000 in 2013. For married couples, gift splitting allows for gifts of up to $26,000 per year. Because this limit applies to each individual that you would be gifting and is not a limit on the donor, the total amount given in any year can be quite large. For example, if you were married, and had 3 children and 7 grandchildren, you might decide to make 10 gifts of up to $26,000, allowing for a total cumulative gift amount of $260,000 for the year. Although this example uses family members, such gifts could be made to any individual.
As with any individual, care must be given to evaluate the client’s life insurance needs to prevent a significant decline in a family’s lifestyle in the event of the untimely death of the primary wage earner. These needs may be even greater for an athlete or other high net worth client. It will be important for an insurance professional to coordinate the family’s insurance needs with their estate planning. The use of Irrevocable Life Insurance Trusts (ILITs), formed in advance of the purchase of life insurance, will help make sure that the death benefit payable to the family will avoid the estate tax system.
Insurance that is in existence and then later placed into an insurance trust would require the insured to survive for a period of three years before the death benefit can be excluded from the estate value for estate tax purposes. As a result, a minimal amount of planning in advance of purchasing life insurance could save your estate and your beneficiaries millions of dollars in estate taxes. This is assuming a multimillion dollar death benefit, which wouldn’t be unusual for clients with significant wealth. For individuals that already have life insurance in place, planning options are available that may include selling the existing policy into the ILIT to avoid the three year waiting period, but one would need to discuss such options with an estate planning attorney.
Just as important as planning for the unfortunate possibility of a premature death is the importance of planning for the possibility of living with a physical or mental disability. This particular topic has received a considerable amount of attention recently with a collection of former NFL players who are suing the NFL, claiming they are suffering from various brain disorders as a result of numerous concussions suffered over the course of their careers. The suit claims that many are suffering from dementia, cognitive disabilities and even early onset Alzheimer’s disease. While the health risks that some professional athletes may encounter are quite numerous, the planning they should have in place, in the event of such an unfortunate occurrence, is not overwhelming. The use of Revocable Trusts, Living Wills, Durable Powers of Attorney for Health Care and Property and insurance planning need to be in place to allow for an agent to then assist the disabled party by handling certain types of transactions, as well as making financial and health care decisions for the disabled party.
Asset Protection and Wealth Preservation Planning
Another unique aspect of planning for a professional athlete is that while the majority of clients spend much of their life accumulating wealth and a significantly shorter period of time enjoying and preserving that wealth, the professional athlete has this problem in reverse, if we can call it a problem. Most professional athletes would be extremely lucky to see their careers last for a period of ten years. For many professional sports, the average career span is as little as three to four years for professional football players, and slightly longer in baseball, basketball and hockey. They also have the ability to earn considerable wealth at a very young age. As a result, this type of client has a far greater need for asset protection planning and wealth preservation planning.
Stories of professional athletes who have lost significant wealth as a result of mismanagement, theft or simply careless and squandering lifestyles are too numerous to count. One of the most recent examples is Vince Young, the one-time Heisman Trophy candidate who led the University of Texas to an NCAA National Championship and made an estimated $45 million dollars over the course of his NFL career. He is now allegedly broke. In this example, news stories have asserted that Vince Young is suing several individuals, including a family member and an agent, who were entrusted to care for his finances. Such stories highlight the importance of selecting the proper professionals to assist with wealth preservation and money management, while the fees for a corporate or other professional trustee can be somewhat expensive, they may prove to be worth their weight in gold.
One asset protection recommendation for wealthy clients is to use trusts that allow them to have access to funds for certain necessary expenses. At the same time, this provides those assets with creditor protection. Some states allow for the creation of what’s referred to as a Self-Settled Trust, in which an individual can create a trust that he or she is also a beneficiary of and still protect those assets from the reach of creditors. At present, there are only a handful of states that will permit self-settled trusts to receive this type of protection, but with proper planning, an individual can seek out these states and set up a trust with the property and a trustee located in that jurisdiction to receive those protections.
Health Care Planning
Durable Powers of Attorney, health care directives, and HIPAA releases are all considered part of the core documents that make up a good estate plan. The Health Care Power of Attorney designates an agent to act on your behalf in the event you are unable to do so. This type of agent could then make choices regarding the approval of medical procedures or the administration of medication. A Medical Directive (also referred to as a Living Will) is a document that is similar to the Health Care Power of Attorney, except this document is a specific directive with respect to your wishes concerning life sustaining treatment as opposed to the appointment of someone to make decisions for you. In other words, you are telling the physician by way of a written statement that you do or do not wish to be kept on life support (or other life sustaining treatments) in the event you are ever in a permanent or irreversible condition. A HIPAA release is a document that simply allows a health care provider (hospital, physician, nurse, etc.) to release otherwise privileged, medical information to your designated agent so that person has the information needed to make an informed decision regarding your care.
While these documents are of significant importance, it is equally important to counsel clients on making good choices for their agents. Make sure they have discussed their desires with their agent. It is a good idea to choose agents that are close by and would be easily reached in the event of emergency. Clients should also consider naming several alternate agents to ensure the availability of an agent, if needed. Once executed, copies of all health care documents should be provided to each successor agent named in the documents, along with a copy to your client’s physician to ensure the physician can present the Power of Attorney if called upon to act in that capacity.
Other Special Considerations
For wealthy clients that are not married but are headed toward marriage, prenuptial agreements are a necessary consideration. Given the wealth and lifestyle that can come with success at a very early age, professional athletes can often be targets for people that do not have their best interests at heart, or more plainly put, are more interested in marrying the money than the individual. While this can be a difficult topic for some people, it is a necessary consideration that should be discussed as far in advance of a marriage date as possible.
When deciding where to live, one may very well consider state level tax issues (both income and estate tax) associated with living in a particular jurisdiction. While this may not be an overriding factor in making a decision of residency, it is certainly something that a wealthy client needs to be aware of. Retiring in a state that has low or no income tax, or no estate tax, could have considerable, long-term benefits that could help stretch a client’s wealth a little further. This can help avoid or delay the need for significant lifestyle adjustments later down the line when income opportunities have decreased and preservation of existing wealth becomes more important.
In extreme cases, professional athletes may have trade or brand names that require yet another type of adviser with expertise in the area of intellectual property. Very wealthy clients may also have needs in the areas of charitable planning and private foundations .
Professional athletes can encounter a host of issues that can be somewhat uncommon for your typical planner or, at the very least, are a little different than planners may encounter with their everyday clientele. As with financial, long-term wealth management, insurance or estate and income tax planning, the most important thing people can do is surround themselves with competent professionals who posses the broad range of knowledge necessary to tackle the needs of this type of client. Better yet, it’s advisable to work with a reputable firm that has a “family office” that possesses the appropriate practice areas so that multiple professionals with legal, insurance and wealth management backgrounds are looking out for the unique interests at play. It is never too early to begin thinking about your long-term needs and if not dealt with in advance, certain planning opportunities can be more difficult to tend to later.