For decades, college athletes have benefited from scholarship-funded education and stipends but were otherwise unable to share in the billions of annual revenue generated from athletic programs by the NCAA. The 2021 landmark Supreme Court ruling in NCAA v. Alston changed that by holding that the NCAA could not restrict education-related benefits for athletes, effectively legalizing their ability to earn compensation from their name, image and likeness (NIL).
This ruling opened the door for student-athletes to earn a potentially significant amount of money during their college careers from marketing, appearances and licensing deals – making personal estate and financial planning considerations even more important for student-athletes who are moving quickly to benefit from the NCAA’s change in policy. From basic but crucial estate planning documents that every athlete should have to more sophisticated tax and financial planning tailored to those benefiting from NIL, the following are important considerations to address the unique needs and career trajectories of athletes to protect them and their earnings.
Patient Advocate Designation and Living Will
While every young adult should have a Patient Advocate Designation and Living Will, athletes are at increased risk of serious injury. A Patient Advocate Designation allows the athlete to name an individual to act on their behalf with respect to medical decisions, and a Living Will details what type of care they would like to receive under certain circumstances, including end of life wishes surrounding whether and when to implement or withdraw life support. Without this document, a guardian would need to be formally appointed by the probate court to make these decisions, adding stress on top of an already incredibly stressful situation and costing time when time is of the essence. This is the bare minimum that every athlete should have as a legal adult.
Durable Power of Attorney
The Durable Power of Attorney is a document that allows someone else (the “agent”) to make legal and financial decisions on the athlete’s behalf. These documents can be structured so they are effective immediately upon signing or only upon incapacity. As most student-athletes will be over age 18, they are legally adults and must transact on their own (e.g. signing insurance documents, endorsement deals, etc.). Great care must be given to selecting an agent, particularly if the athlete has significant assets or fame, as the agent will have the same authority and power over the athlete’s assets that the athlete would.
Similar to the Patient Advocate Designation, in the event of incapacity a conservator would need to be appointed by the probate court to make these decisions for the athlete if a Durable Power of Attorney is not in place. Also note that the athlete’s agent under Durable Power of Attorney is distinguishable from the athlete’s “Agent” who represents the athlete in contract negotiations for their employment and other endorsement or sponsorship opportunities. However, the athlete could choose the same person to fulfill both roles, if appropriate under the circumstances.
Athletes compete all over the country and, in some cases, the world. From an income tax perspective, athletes need to be aware of earning income in multiple states (or countries) and carefully track this as additional tax filings may be required (and additional taxes may be owed).
Athletes Benefitting from NIL
Comparatively few student-athletes will make it to the professional ranks, and NIL earnings may be the financial pinnacle of their athletic careers. For those who do end up playing at the professional level, the odds are stacked against long-term financial success: most professional careers end in under five years, and a majority of these athletes who are in the NFL or NBA face serious financial issues or bankruptcy shortly after they stop playing.
Developing a strategy with a team of trusted advisors (attorney, accountant, agent, financial advisor) is the key to success for athletes who have limited time to spare outside of training and unique needs including (but not limited to) substantial risk of a career-ending injury, a few peak years for earning that must then last for decades and increased risk of being targeted by those who would take advantage of their wealth. This strategy should include additional estate planning documents, financial and tax planning advice and a discussion of asset protection and privacy concerns.
The use of revocable trust planning is a great place to start for younger athletes, especially those who are in the wealth accumulation phase of their life. Trusts can provide an additional layer of security against any third parties who may try to take advantage of the athlete, especially when using a professional or other trusted individual as trustee. Trusts can also provide terms that would allow the athlete to grow with their wealth and learn to manage it in a responsible way by limiting distributions to those things that are necessary, like medical or health expenses and housing. Another advantage is privacy, as a Trust does not have to carry the name of the person who created it. Thus, a trust can house assets without easily being tied back to any particular individual. In the event of the athlete’s death, the assets would pass outside of probate court, further preserving privacy, to whomever the athlete has named as beneficiary.
Estate and Gift Tax Planning
When coming into wealth, it is tempting to gift money or items (e.g. homes, cars, watches, etc.) to those people who supported the athlete while they were up-and-coming. However, athletes should be mindful of not only the constraint on their assets but also the tax impact of making these gifts, especially larger ones.
For 2022, any person can gift up to $16,000 to any other individual without needing to file a gift tax return. Anything with a value above that amount will require filing a gift tax return, though tax may not be due. Further, anything reported on the gift tax return reduces an individual’s lifetime exemption ($12,060,000 in 2022) for estate tax purposes. It is important to note that, absent Congressional action, the estate tax exemption is scheduled to revert to its previous limit at the end of 2025, which will be half of the current exemption, adjusted for inflation. In that event, if the athlete previously made substantial gifts, it is possible their entire lifetime exemption could be used. This also means there could potentially be estate tax due at their passing.
If the athlete has a level of wealth that would support large gifting, utilizing irrevocable trusts to receive those assets could be a good planning option. While there is generally still a filing requirement for gift tax purposes (and exemption used), once the assets are in the trust, they are inherently more protected and could be structured to last for several generations. Assets could also be invested to provide additional growth for beneficiaries, and future appreciation on the assets of the irrevocable trust would occur outside of the athlete’s gross estate for estate tax purposes, representing additional estate tax savings.
In several states including Michigan, there are Domestic Asset Protection Trusts (DAPTs) which can be set up for maximum creditor protection. These types of trusts have clear advantages in that the person setting up the trust is still able to receive distributions from it at the trustee’s discretion, in addition to directing investments and setting the terms for ultimate disposition. There are also downsides to DAPTs, mostly that the assets are not easily accessible, the grantor is giving up control over those assets to a trustee and the trust is irrevocable and not readily changeable. DAPTs are most often utilized by people with substantially risky careers who are exposed to liability.
As NIL is a brand-new concept for both athletes and institutions, it remains to be seen how it will practically play out. What is certain is that athletes now have the ability to earn at a high level during their college years, which is a benefit that has never before been available to them. These income streams could last well past college and even leave a lasting legacy for generations to come. Athletes need a trusted team of advisors to help ensure they are doing the most they can to continue to earn, protect, grow and be tax-efficient with their assets. Having that structure in place will help the wealth last through the athlete’s life and protect it for future generations.