In a white paper report issued by Rothstein and Kass in December of 2008, 85% of pro athletes didn’t have a plan in place to protect their assets. Perhaps the issue hasn’t received much attention, or the vehicles available to help them protect their assets have not been highlighted enough. Whatever the reason, professional athletes have very unique asset protection considerations as a result of their nomadic lifestyle and short career span, making planning crucial. Oftentimes, athletes are targeted by frivolous lawsuits due to their deep pockets, which is also a primary driver for asset protection as well as anonymity.
An LLC can protect the professional athlete’s assets from lawsuits. It is a hybrid business entity blending elements of a partnership or sole proprietorship and corporate structure. It is a type of unincorporated association with the presence of limited liability. However, owners are not always protected from personal liabilities if fraud or misrepresentation is involved. Creditors have breached this liability protection. Creating multiple entities combats this. If one entity is attacked, those assets will be gone.
However, the assets held in the other entities will remain intact. The availability of pass-through income taxation is a characteristic of an LLC. This means that owners report their share of profits or losses in the company on their individual tax returns. The IRS does not assess taxes on the company itself, which alleviates “double taxation.” Also, owners are not required to be U.S. citizens or permanent residents.
Estate planning and risk management for a professional athlete can be very complicated. Federal and state gift and estate taxes are a real problem for athletes trying to leave assets to family members. Oftentimes, the majority of their wealth is tied up in illiquid long-term contracts so the source of income needed to pay the large estate taxes due at the time of the athlete’s death could be an unknown variable.
Family limited partnerships and trusts are some of the more popular methods used today to remove assets from their estate and take advantage of income tax benefits
This is an agreement set up between family members who are actively involved in a business. The partnership divides rights to appreciation, control among the family members, and income. Once the partnership is formed, you gift the limited partnership interests to your children but maintain the general partnership. You are the “general partner” and have control over the business. Your children are the “limited partners,” which allows them to share in the ownership. This strategy enables you to:
To protect assets and keep them in the family, a lot of professional athletes utilize trusts. They protect assets in the event of a divorce, lifetime access to income and principal is afforded, and any transfers do not apply to in-laws. Trusts can also provide protection from creditors.
Revocable trusts can be advantageous for professional athletes due to their limited career span and need for their assets to be managed carefully based on this unique income structure. A trust can set up a program to handle financial matters during the athlete’s lifetime, and should the trustee not live up to the athlete’s expectations, they can be replaced.
Another advantage comes into play should the athlete sustain a career-ending injury, as property in the trust can provide added support. Last but not least, trusts support the need for anonymity and tasks such as distributing property at death are more private.
Irrevocable trusts of which the athlete is one of the beneficiaries is sometimes the right tool to use due to the enhanced creditor protection afforded when the trust is held under the laws of a jurisdiction that has enacted asset protection legislation. Irrevocable trusts also help with long-term generation-skipping planning to provide a tax-efficient source of wealth for the athlete’s family.
Irrevocable life insurance trusts are also a tool many athletes utilize. An ILIT is a type of irrevocable trust that is specifically designed to hold and own life insurance policies. Ownership of the policies are transferred to the Trustee of the ILIT (which can be spouses or children if so desired), and as a result, the proceeds of the policy are not taxed in your estate when you die.
One of the main objectives for a professional athlete will be to reduce his overall estate tax. Transferring his assets to various instruments will serve this purpose while still enabling him to benefit from them.
To illustrate this, if an athlete places money or life insurance in a dynasty trust, it will provide income to his/her relatives for generations. Assets placed in charitable trusts and family foundations can not only provide income but support the athlete’s favorite causes and yield a large tax deduction.
Every professional athlete’s financial situation and lifestyle situation is unique. So too will be the blend of vehicles used to safeguard their assets.
For more information or to speak to one of our Maryland asset protection specialists, call (410) 824-1853 or contact us online!