Don’t Drop the Ball

Financial and legal advisors representing professional athletes (pro-athletes) confront the following unique challenges in protecting and building their clients’ wealth:

• Relatively short earnings horizon—The average career spans from 3.5 to 5.6 years, and the prime earnings period from athletics is limited. Additionally, certain pro-athletes may suffer career-ending injuries early in their professional experience.  

• Unrestrained spending habits—Generally, pro-athletes’ spending on luxury goods, such as vehicles and residences, especially in the initial period of their careers, may outstrip their earnings.   

• Limited financial literacy—Many pro-athletes are recruited from high school or college and aren’t well-versed in investing or budgeting. 

• Incompetent advising—Pro-athletes often don’t rigorously vet their advisors and frequently place their financial planning in the hands of friends and family, who may not be the optimal advisors and generally lack the tools necessary to represent them. 

• “Sudden wealth” effect—Pro-athletes, because of their rapid ascent to wealth, may perceive that they’re protected from the vicissitudes of life and are impervious to insolvency and downturns.  

Here are some of the financial and estate-planning tools that advisors can use to protect their pro-athlete clients. 

Financial Planning

Shaquille O’Neal, one of the highest earning and best marketed pro-athletes of all time, managed to be successful both on and off the basketball court. His philosophy on financial planning, which he shares with rookies, is to set aside 75 percent of one’s annual earnings. “You want cars, you want diamond earrings, you want jewelry?” he asks. “Do whatever you want (with the other 25%).”¹ Shaq’s advice may seem simplistic to advisors, but it’s not to athletes who typically have no background in financial planning and can spend millions on frivolous items. Former professional basketball player Rod Strickland spent approximately $4 million on a lifetime supply of grape Kool-Aid.² 

In many cases, the biggest challenge practitioners face in planning for pro-athletes isn’t identifying the optimal tax planning, estate planning or investment option, but educating the client to understand the importance of planning for a short career, long retirement and, perhaps most significantly, helping the young and often financially naïve athlete resist peer group and other pressures. Here’s what advisors can do to help pro-athlete clients preserve their assets and replace income. 

Disability insurance customized for the athlete. Bo Jackson, a former three sport athlete in college, Heisman Trophy winner and all-star in both the National Football League and Major League Baseball (MLB), exemplifies that even the most talented athletes can have their careers derailed by an injury. In 1991, a hard tackle dislocated Jackson’s hip, and he never fully recovered. He was forced to end his football career after only four seasons and played just two more years in the MLB before retiring.³

Disability can be devastating for a pro-athlete, whose livelihood is based on being in top physical condition. An injury can cause a pro-athlete’s income stream to diminish or evaporate. There are various ways to protect against the loss of income at different points during the athlete’s career.

Before the client goes pro, he should consider a disability policy through the “Exceptional Student-Athlete Disability Insurance Program,” which was established by the National Collegiate Athletic Association (NCAA) in 1990. This program is geared towards student-athletes who expect to be drafted within the first three rounds of their respective sport. The insurance coverage offered varies from up to $5 million for a potential first round pick to a limit of $500,000 for a projected third round pick. This type of disability insurance protects athletes should their careers end by injury while still in college. Once a student-athlete is approved for this program, he’ll automatically be eligible for a loan to help pay for the policy.⁴

Another type of income protection is loss-of-value insurance that a college can purchase on the athlete’s behalf to entice the athlete to continue to play for the college and refrain from leaving early to enter the draft. Should the athlete experience an injury in college, this type of policy will compensate for the likely future earnings that are lost due to the injury.⁵ 

Once the athlete enters the professional level, he should consider a specialized high limit disability policy. Advisors must find specialized high limit coverage, which can protect against both career ending and temporary disabilities. It’s imperative that the athlete have an “Own-Occupation” rider on the policy. This rider protects the athlete from not being able to perform the duties of his sport. For example, the disability policy of a professional football player who can no longer play football, but can still work as a network commentator, should kick in and replace the loss of income.

Life insurance. The use of cash value life insurance (CVLI), as opposed to term insurance, can be a major benefit to pro-athletes for the death benefit and for accumulated cash value that serves as a savings vehicle within the policy. The cash value of his life insurance contract can be accessed to satisfy various financial obligations if an athlete’s investments don’t work out or he accumulates unpaid debts. Another key benefit of CVLI is that it gives the athlete a regular “bill” to pay, which can help instill the discipline to set aside money and not spend it all.

The life insurance policy should be inexpensive, relative to getting it later in life, if it’s purchased when the athlete first embarks on his career, because of the pro-athlete’s young age and superior health. Given the multiple benefits of CVLI, this should be one of the first financial products that all athletes consider.

Retirement planning. The average career for a pro-athlete ranges from 3.5 years for football players to 5.6 years for baseball players.⁶ Advisors have the task of making these few years of earnings last through what will inevitably be a very long retirement. The fact that many pro-athletes are accustomed to living extravagant lifestyles makes this even more challenging. An often-quoted statistic is that 60 percent of all National Basketball Association (NBA) players are bankrupt within five years of retirement. This result is despite an average salary of $4.7 million a year, which is among the highest of any sport globally.⁷ The challenges of planning for a short initial earnings period followed by a long life are significant. A major unknown in this planning process is whether the pro-athlete, after his initial career, will be able to successfully launch a post-retirement career. 

League pension plans. Many professional sports leagues offer pensions to their players with extremely short vesting periods. The quality and generosity of a league’s retirement plan vary by sport. In the NBA, for example, 1 percent of players’ basketball-related income is invested into an annuity, 5 percent to 10 percent of their salaries are automatically deferred into a retirement savings plan (unless they opt out) and, if a player plays for 11 years and retires at age 65, he’s guaranteed $195,000 a year in retirement.⁸ The Professional Golfers’ Association, on the other hand, doesn’t guarantee retirement benefits; they’re tied to a player’s performance during the season. If a player performs poorly or doesn’t make the cut to play in many tournaments, he may have limited retirement benefits.⁹ 

Regardless of the sport and the level of generosity, most league pension plans won’t offer enough savings to last an athlete through retirement. Furthermore, most athletes will need access to the money well before the typical retirement age. The advisor must recommend other strategies that will supplement the athlete’s league-administered retirement plan.

Annuities. One way to supplement an athlete’s savings and income during retirement is through the use of annuities. While many advisors look askance at annuities because of the loads, there are products available with lower loads. The analysis for pro-athletes is different, as they may appreciate the forced savings aspect of annuities, as well as their tax-deferred growth and ability to offset risk to an insurance company. Another benefit that pertains particularly to athletes is the lack of liquidity associated with an annuity. Many athletes feel pressure to keep up financially with more established teammates and to help out friends and family. An annuity provides a safeguard to overspending because it ties up the owner’s money for a number of years and is much less accessible than going to an ATM.

Annuities come in many varieties, but the two basic types are:

Deferred. A deferred annuity is one that allows the owner to save money that’s tax deferred. This can be a great way to supplement an athlete’s league pension. There are no income limitations or maximum contribution allowances. Furthermore, the owner of an annuity can offset the market risk with a fixed rate of return instead of being subject to market fluctuation. Alternatively, there are various types of variable annuities, which give the owner the ability to participate in market appreciation with downside protection. 

Immediate. An immediate annuity is a way for an athlete to guarantee an income stream for the rest of his life. These types of annuities have many options, including the ability to defer payments for a period of time, extend payouts for the life of both the owner and his spouse and have beneficiaries receive payments. There’s also a type of immediate annuity that allows for market participation, but still guarantees income for the rest of the owner’s life regardless of how the market performs.

One complication of annuities as it relates to athletes is the penalty imposed for taking money out before the owner turns 59½. Because pro-athletes stop competing at the highest level by their mid-30s, there’s a significant gap between an athlete’s retirement age and when he can technically start receiving income payments without paying a penalty. Fortunately, Internal Revenue Code Sections 72(q) and (t) have exceptions that allow early withdrawals from annuities and other types of retirement accounts. One such exception is to receive income as a series of “substantially equal periodic payments.” To qualify, the owner must receive a series of income payments that are calculated based on his life expectancy using the life expectancy method, amortization method or annuitization method. These payments must continue annually for five years or until the age of 59½, whichever is longer. Payments may be stopped after this time if desired.¹⁰

Shaq, a model of a financially successful athlete, took advantage of annuities to secure his financial future. His financial advisor recommended he contribute $1 million a year into annuities. Shaq stated that this strategy has provided him with all the income he needs to live on in retirement, allowing his endorsement income to be kept mostly for his kids.¹¹ 

Investments. While league pension plans and annuities are great ways to prepare an athlete for retirement, it’s also important for the advisor to recommend additional ways of constructively managing his client’s capital. The important parameters that an advisor needs to consider include tax efficiency, lack of liquidity and securing additional streams of income. 

Taxes. Athletes are already in a very high tax bracket, given their annual income. Their constant traveling for games causes them to be hit with the “jock tax,” which further increases their tax liability. An advisor should consider any investments that can provide some relief in this area.

Lack of liquidity. This is an issue that’s particularly important to athletes who have a tendency to spend well beyond their means. If an athlete’s investments are illiquid, the advisor minimizes the chance of the athlete depleting these assets very quickly or using them for poor investments.

Additional streams of income. While some athletes’ careers have flourished after retirement from pro sports, many others struggle to find ways to make money. If the advisor can recommend investments that will not only appreciate in value, but also provide a source of income, this will help the athlete maintain the lifestyle to which he’s grown accustomed.

Two investments that fall within these guidelines are real estate and private equity (PE). While both areas require hiring an experienced manager, they can benefit the athlete for longer time horizons.  

Real estate. Real estate has long been an attractive asset class for investors. Owning real estate as a hard asset, as opposed to publicly traded real estate investment trusts, provides the most benefit for an athlete. 

From a tax perspective, the owner of real estate has a myriad of tax deductions from which to benefit, including expenses such as mortgage interest, property tax, operating expenses, depreciation and repairs for the rental of a dwelling unit. One can also deduct costs associated with maintaining the property, including advertising, maintenance, utilities and insurance.¹²

Another benefit is the lack of liquidity. In most areas of the country, real estate isn’t nearly as liquid as investing in the stock market, in which an investor can raise cash almost instantly. Generally, selling real estate can take time, effort and money. This process gives the athlete more time to reconsider a bad financial decision and will hopefully give the advisor enough time to encourage his client to stick with the current investment strategy.

Additionally, owning a rental property will provide the athlete with a supplemental income stream. Hiring a competent real estate advisor and management company is imperative. It ensures that all decisions are left to seasoned professionals who can maximize the value of the property over the years.

Hall of Fame basketball player Hakeem Olajuwon made a fortune in his career and even more money in the Houston real estate market. He purchased and flipped several properties, but also invested in several cash flowing buildings. Olajuwon only conducts deals with the cash he has on hand using no outside financing. Being a devout Muslim has limited him to using only cash for his deals because Muslim law forbids him from charging or paying interest. This has also proved to be a smart financial decision because it’s allowed Olajuwon to move quicker than other buyers, and he doesn’t have a bank loan hanging over his head pressuring him to make decisions.¹³ 

PE. PE is a type of investment that’s made in a company that isn’t publicly traded. PE professionals will take several years to restructure a particular company and then eventually sell it or take it public to make a profit for their investors. Initially, there’s a lockup period when the money isn’t accessible to the client. During this time, investors experience what’s known as a “J-curve,” when their money goes down in value as the PE firm makes investments and expenditures to turn around the company. Ultimately, if all goes according to plan, investors will experience significant returns on their investment. Typically, the longer the lockup period, the better the potential return on one’s investment.¹⁴

If the PE firm holds the companies for a number of years, these restructured companies can provide healthy cash flows to the investors. These cash flows can be favorably taxed if the athlete is a partner in the deal because of the carried interest tax benefit. Carried interest is profit made by the partnership, which is taxed at approximately 20 percent as opposed to up to 39.6 percent for income and wages.

Athletes are no strangers to PE, with a whole host of players who invest in this area of the market. Former San Francisco 49er’s Hall of Fame quarterback Steve Young joined a PE firm once he retired from professional football and partnered with a former Bain Capital executive to start their own firm.¹⁵ Similarly, All-Star NBA Center David Robinson founded the PE firm Admiral Capital, which he runs with a former Goldman Sachs executive.¹⁶ 

While PE can be an extremely complicated area, partnering with the right experts can give the athlete another asset to fall back on.

Estate Planning 

While pro-athletes share the same estate-planning needs as non-athletes (for example, the need for documents such as wills, powers of attorney and health care proxies), there are three areas within the estate-planning context that are highly relevant for the pro-athlete.¹⁷

Right of publicity. Advisors for a successful pro-athlete have to address their client’s right of publicity. Generally, this is the right of an individual to control how his identity is used for commercial purposes. While there’s no federal protection for the right of publicity, at least 31 jurisdictions currently recognize this right either by statute or by common law. Additionally, there’s a difference among the states as to whether a right of publicity is descendible (can be bequeathed) or if it instead extinguishes on the individual’s death.  

Advisors should consult the laws of the athlete’s state of domicile to determine the appropriate planning for their client. For example, if the right of publicity is descendible, then the right is likely to be includible in the athlete’s gross estate for federal and state estate tax purposes. The planning documents should address how the right of publicity should be bequeathed, and

appropriate planning, such as increased life insurance death benefits, should be applied to deal with this potentially very valuable and illiquid asset. 

To illustrate the value of a right of publicity, consider that professional basketball star Chris Bosh of the Miami Heat filed a lawsuit against the mother of his child and a TV producer for infringing on his publicity rights on the VH1 reality show, “Basketball Wives.” Bosh claimed that they exploited his name and likeness for commercial gain without his consent and requested an injunction preventing the use of his name or image, disgorgement of profits and further damages.¹⁸

College athletes face contractual challenges with respect to the right of publicity, because NCAA regulations prevent current NCAA athletes from receiving consideration for the commercial use of their likeness. The contractual challenge arises because the NCAA constitution and bylaws create an agreement between the NCAA and its member institutions, and the student-athletes are considered third-party beneficiaries. The NCAA’s bylaws restrict the commercial use of athletes’ names or likenesses by third parties, and this restricts college athletes from monetizing their rights of publicity. When students agree to play for their schools, they consent to the NCAA’s exploitation of their rights of publicity.

Ed O’Bannon, a New Jersey Nets player, was a starter on UCLA’s 1995 National Championship team and was the NCAA’s Most Outstanding Player that year. O’Bannon, along with several athletes, filed a class action lawsuit against the NCAA and The Collegiate Licensing Company for actions that deprived them of their rights of publicity. O’Bannon asserted that his right of publicity was violated because his likeness was used in an Electronic Arts (EA) video game without his permission. Although the game didn’t use his name, it featured a UCLA athlete who played O’Bannon’s power forward position, while also matching his physical characteristics, such as height, weight, bald head, skin tone and left-handed shot. EA and The Collegiate Licensing Company, both original co-defendants with the NCAA, finalized a $40 million settlement that could net as much as $4,000 to as many as 100,000 current and former athletes who’d appeared in EA basketball and football video games since 2003. 

Asset protection. Pro-athletes generally have highly visible public profiles, and their contracts and salaries are often public information. This makes pro-athletes attractive targets for lawsuits, especially in well-publicized circumstances involving physical altercations, paternity lawsuits and good old fashioned frivolous claims. Accordingly, pro-athletes should, as much as practicable, structure their assets so that they don’t hold direct title. Basic asset protection planning includes holding assets through limited liability entities, such as limited liability companies, limited liability partnerships and limited liability limited partnerships.  

For the pro-athlete who seeks heightened protection but doesn’t wish to relinquish the right to beneficial enjoyment from his hard-earned assets, an advisor may recommend a domestic asset protection trust (DAPT) in jurisdictions that have enacted self-settled statutes (for example, Alaska, Delaware, Nevada and South Dakota). The pro-athlete can transfer his assets to the DAPT and remain a discretionary beneficiary of the DAPT. In the event a non-exception creditor sues the athlete, these assets should be protected. Certain types of assets are more suited for a DAPT than others—including cash, securities accounts and operating businesses (assuming non-real property). Additionally, if the DAPT is structured properly, its assets won’t be includible in the pro-athlete’s estate.  

It should be noted that a pro-athlete can also use a DAPT as an alternative to a prenuptial agreement.   

Domicile. A pro-athlete’s domicile plays an important part in his planning. A pro-athlete can be born in one state, play professional sports in another state, reside in the off-season in yet another state and finally spend his retirement in a completely different location. Each of these jurisdictions may compete for the athlete’s income and estate tax dollars. For example, for income tax purposes, many states impose taxes on athletes for the “duty days” they compete in those particular states, even if the athlete isn’t domiciled there. Given a sufficient nexus, a state may claim that the pro-athlete was the domiciliary of such state. Accordingly, a pro-athlete’s advisor must substantiate the domicile of choice. The pro-athlete must satisfy the different domicile factors specific to that state, such as having a primary residence there, filing an affidavit of domicile with the appropriate county clerk, maintaining voter registration and holding assets.   

Team Player

The key to advising pro-athletes is the collaboration of all advisors. An athlete’s agent, as well as the athlete’s tax, legal, insurance and investment advisors should all work in tandem to ensure that the proper planning is put into place. In doing so, the athlete can avoid the many pitfalls that have caused so many in professional sports to go bankrupt and be well positioned for a secure financial future.    

—Oppenheimer & Co. Inc. does not provide legal or tax advice. Contact your legal or tax advisor for specific advice regarding your circumstances.

Opinions expressed are not intended to be a forecast of future events, a guarantee of future results, and not investment advice. The material prepared by K. Eli Akhavan, Esq. does not necessarily reflect the opinions or recommendations of Oppenheimer & Co. Inc.

Endnotes

1. Motez Bishara and Don Riddell, “Shaquille O’Neal: ‘I spent $1M in about 45 minutes ... but it was well worth it,’” CNN, Cable News Network (Dec. 4, 2015), http://edition.cnn.com/2015/12/04/sport/shaquille-oneal-and-charles-barkley-of-the-nba-impart-financial-advise/.

2. Pablo S. Torre, “How (and Why) Athletes Go Broke,” Sports Illustrated (March 23, 2009), www.si.com/vault/2009/03/23/105789480/how-and-why-athletes-go-broke#. 

3. Jack Andrade, “11 Athletes Whose Promising Careers Were Derailed by Injuries,” Boston.com (March 6, 2015), www.boston.com/sports/2015/03/06/athletes-whose-promising-careers-were-derailed-injuries/aedfCzaMyhj4P1uICv3SfP/story.html. 

4. “Student-Athlete Insurance Programs,” NCAA.org, www.ncaa.org/about/resources/insurance/student-athlete-insurance-programs. 

5. Marc Tracy, “Insurance Doesn’t Eliminate Risk for Top College Athletes Who Forgo Draft,” The New York Times (May 8, 2015), www.nytimes.com/2015/05/09/sports/ncaafootball/insurance-doesnt-eliminate-risk-for-top-college-athletes-who-forgo-draft.html. 

6. “Athlete Services,” Ramfg.com, RAM Financial Group, www.ramfg.com/RAM-Financial-Group-Solutions-Professional-Athletes-Athletes-Services. 

7. See supra note 2. 

8. “NBA Benefits Plan Typical ... For Millionaire Ballplayers,” The CFO Report, The Wall Street Journal (Oct. 11, 2011), http://blogs.wsj.com/cfo/2011/10/11/nba-benefits-plan-typical…for-millionaire-ballplayers/.

9. Mark Riddix, “Top Pro Athlete Pension Plans,” Investopedia (July 14, 2010), www.investopedia.com/financial-edge/0710/top-pro-athlete-pension-plans.aspx.

10. “72(q) & 72(t) Distributions,” Annuityadvisors.com, Annuity Financial & Insurance Services, Inc. (Sept. 23, 2012), www.annuityadvisors.com/reference/detail/72q--72t-distributions?refid=67.

11. Ira Boudway, “Shaq’s Still Scoring in Retirement,” Bloomberg.com (April 24, 2014), www.bloomberg.com/bw/articles/2014-04-24/retired-shaquille-oneal-cultivates-fame-and-fortune#p3.

12. “Tips on Rental Real Estate Income, Deductions and Recordkeeping,” Small Business and Self-Employed Website, Internal Revenue Service

(Feb. 9, 2016), www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tips-on-Rental-Real-Estate-Income-Deductions-and-Recordkeeping.

13. Kate Murphy, “A Slam-Dunk in Houston Real Estate,” The New York Times (Dec. 6, 2006), www.nytimes.com/2006/12/06/realestate/commercial/ 06houston.html. 

14. “Patient Capital, Private Opportunity,” The Upside of Illiquidity—White Paper, Blackstone, http://blackstone.com/docs/pdfs/the-upside-of-illiquidity.pdf.

15. Ron Lieber, “Financial Lessons From Sports Stars’ Mistakes,” The New York Times (Sept. 9, 2011), www.nytimes.com/2011/09/10/your-money/financial-lessons-from-sports-stars-mistakes-your-money.html.

16. “Team,” Admiralcapitalgroup.com (2010), http://admiralcapitalgroup.com/founders.php.

17. See also K. Eli Akhavan, “Legal Gaga,” Trusts & Estates (February 2012), at p. 22.

18. Eriq Gardner, “Miami Heat Forward Chris Bosh Slams VH1’s ‘Basketball Wives’ In Lawsuit (Exclusive),” The Hollywood Reporter (May 3, 2011), www.

hollywoodreporter.com/thr-esq/miami-heat-forward-chris-bosh-184481.