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Estate Planning for Athletes Part 1: Your Financial Game Needs a Winning Strategy Too

Posted October 21, 2020 at 6:21 PM

In the sports world, success often brings significant monetary compensation. While high earnings are a dream come true for many, it is important to take prudent steps to safeguard this new wealth. Most assume that the biggest challenge is to spend wisely and to live within one’s means. While limiting extravagant spending can be a problem for some athletes, proper planning should consider and address a few other important issues:

Taxes: Create a Game Plan for These If You Play in the United States

1.    Gift tax
As you increase your income, it is natural to want to give gifts or support your loved ones. However, be aware that those gifts could generate a tax. The gift tax is a tax on the transfer of property from one person to another when nothing, or less than full value, is received in return. Fortunately, not all gifts are subject to the gift tax because each person has an annual gift tax exclusion amount ($15,000 in 2020). This cap is the amount or value someone can give another person during the calendar year without the IRS (Internal Revenue Service) assessing the gift tax. This amount is per person, meaning that you can give up to $15,000 to as many people as you want in 2020. An easy way to avoid the gift tax is to make sure you are not giving a friend or loved one more than the annual exclusion each year.

Alternatively, if you want to make a larger gift, keep in mind that every US citizen has a lifetime estate and gift tax exclusion of $10 million adjusted for inflation ($11.58 million in 2020). However, this is the maximum aggregate amount you can give during your lifetime; it is not per person like the annual gift tax exclusion. Be aware that this exclusion amount is set to return to $5 million (adjusted for inflation) on January 1, 2026, so if you wish to make large gifts, it is better to do so now while the exemption is high. Although you should file paperwork with the IRS, there should be no gift tax due as long as you have your exclusion. We can discuss your gifting desires and offer ways to make gifts, save taxes, and protect the gift recipient from wasting the money.

2.    Estate Tax
The estate tax is not assessed until death, but you must think about and plan for it now. As mentioned above, the lifetime estate and gift tax exclusion is currently high, but will return to $5 million (adjusted for inflation) on January 1, 2026. Because we cannot predict the future and determine when you are going to die nor can we know what the estate tax exclusion amount will be at that time, we have to plan early and adjust your plan as your career progresses and the laws change. As an athlete, your income potential is great, and you will likely receive income in large lump sums. Invested properly, those large lump sums should grow even larger.

Insurance: Guarding Your Money and Property
Your first line of defense is having a proper insurance plan – you need the right kind of coverages at the proper amounts. This includes homeowner’s, automobile, long-term care, disability, and life insurance. If the need for cash arises to pay a claim or satisfy a judgment, these policies will be available first before looking to the rest of your money and property. You should periodically review these policies with an experienced insurance professional to ensure that you are adequately covered. As your income increases, so should the amount of your life insurance. As you acquire more money, assets, and property, you should also adjust your other policies’ value to reflect these increases.

As a further step, there are sophisticated asset protection planning tools we can use to provide you with more protection. One common strategy is an irrevocable life insurance trust (ILIT). An ILIT is an irrevocable trust created by transferring an existing life insurance policy into the trust or by the trust purchasing a new policy. Using your annual gift tax exclusion, you make cash gifts to the ILIT in order to pay the premiums on the insurance policy. Upon your death, the death benefit is paid to the ILIT, and the money is distributed according to the instructions you have left in the trust document. Not only does this strategy allow you to utilize your annual gift tax exclusion and remove the value of the life insurance policy and death benefit from your estate, but it also allows you to direct and protect the money you are leaving for your surviving loved ones. You can also use an ILIT to provide cash to your loved ones without increasing the value of your accounts and property that are subject to estate tax.

Next Player Up: Managing Your Money and Property If You Cannot
While you may currently manage your money and property yourself or with a professional’s help, have you considered what would happen if you were unable to continue managing your money and property? You may be injured or afflicted with a condition that renders you incapacitated (unable to communicate or make decisions for yourself), or if you play for a team in a state or country other than where you permanently reside, you may be unavailable to handle necessary transactions in your home state.

A revocable living trust (RLT) is a trust that you create during your lifetime and that you can revise at any time prior to your incapacity or death. This planning tool enables you to name yourself as the current trustee (the person or entity charged with managing, investing, and handing out the money and property) and to designate a co-trustee or alternate trustee if you are unable to act as the trustee. An RLT also allows you to: 1) continue enjoying the money and property during your life even if you become incapacitated; and 2) specify what you want to happen to your money and property upon your death.

For RLT to work as intended, however, your financial accounts and property must be funded into the RLT. Funding the RLT involves changing the ownership of the accounts or property from yourself as an individual to yourself as the trustee of the RLT. If the RLT does not own a particular account or property, the trust terms may not control what happens to it.

Finally, not only does an RLT allow for continued management of your accounts and property if you become unable to act for yourself, a properly funded RLT allows those accounts and property to avoid the probate process at death. This means that upon your incapacity or death, the people that you have chosen can handle your financial matters privately and keep the details out of court records and the media. One caveat, however: an RLT will not protect your money and property from your creditors or judgments.

You’ve Been Benched: Caring for Your Physical Well-Being
Since injury often comes with physically demanding occupations, having proper healthcare documents is crucial. These include an Advance Medical Directive (AMD) and a HIPAA authorization form.

An AMD allows you to name a trusted healthcare decision-maker to communicate your medical wishes in the event you are unable to do so. You should name someone who will respect your wishes and enforce them when you are unable to communicate them to the appropriate medical professional.  An AMD also allows you to express your wishes in writing regarding end-of-life decisions. Absent specific instructions from you, your medical decision-maker may not know what you would want to happen in certain circumstances. Uncertainty in this difficult situation can cause additional grief to your loved ones and potentially cause conflicts among your family members.

A HIPAA authorization form allows you to grant certain individuals access to your medical information (e.g., to get a status update on your condition or receive your test results) without giving those individuals the authority to make any decisions on your behalf. Providing your loved ones with access to your medical information can help calm the anxieties and uncertainties that often arise during times of emergency. This may also help alleviate tensions between your medical decision-maker and the rest of your family. Although only one person should be making the healthcare decisions for you, the rest of your family should be able to understand the reasoning behind those decisions.

Let MM&C Be Your Estate Planning Team
Proper estate planning is necessary for everyone. However, athletes and those in other high-risk occupations must also address and manage tax, asset protection, and other financial concerns.  You also need to protect yourself and your family in the event you are injured on the job. We welcome the opportunity to work with you and any other financial professionals on your team to help craft a winning game plan that will have you and your loved ones scoring for years to come. To accommodate your busy schedule, we are available for both in-person and virtual meetings.

The attorneys in Miller, Miller & Canby’s Estates & Trusts practice provide extensive estate and legacy planning, asset protection planning, retirement planning, and business planning services to individuals and businesses. To learn more about Miller, Miller & Canby’s Estates & Trusts practice click here.