Wealth Planning in a League of Its Own: Guidance for Professional Athletes

2. Understanding and Reducing Taxation

For many athletes, income tax bills can be a shock to the system. With federal rates of 37% at the top income bracket and some state rates in excess of 10%, athletes may end up paying nearly half of what they make to various tax authorities. But there are decisions an athlete can make, with the support of an advisory team and tax professionals, which may help reduce these tax obligations.

Before the Tax Cuts and Jobs Act passed in 2017, many athletes reduced their tax payments using deductions related to their career, but after the passage of this Act, many deductions an athlete can use are limited or no longer valid. While some athletes and their tax advisors have implemented strategies that may allow for some of these deductions through the use of legal entities like S-Corporations, the benefits of these strategies should be weighed in light of the potential for increased IRS scrutiny.

With income tax rates ranging from 0% in states like Florida and Texas to 14.4% in California, where an athlete chooses to live can be a million-dollar decision. While the money professional athletes earn day-to-day playing for a team is likely to be taxed as income in the state in which they play, other payments may not. For example, signing bonuses for athletes are generally taxed by the state of the athlete’s residence. The language of each contract and the specific state in which an athlete plays weigh heavily on this analysis and should be overseen by a tax professional.

The “Jock Tax” was created after Illinois discovered that California had taxed the income of the Chicago Bulls during their defeat of the Los Angeles Lakers in the 1991 NBA Finals. Illinois passed a law to treat visiting athletes similarly (affectionately dubbed “Jordan’s Revenge”). From there, similar “Jock Tax” laws spread across states imposing income taxes. 2021 reporting found that each NFL player is responsible for 8–12 tax returns each season, 16–20 for an NBA player, and a whopping 20–25 for an MLB player.

3. The Full Income Picture

For some athletes, their salaries and bonuses are only one part of a larger picture. Understanding the amount and duration of various income sources plays a significant role in shaping a successful plan. For example, an athlete’s total annual compensation will include their salary, but may also include: (1) post-season winnings and performance bonuses, (2) endorsements and sponsorships, (3) licensing and royalties, and (4) investments and passive income. Athletes may find themselves receiving dozens of 1099s, W-2s, and K-1s each year because of their “non-athletic” activities and investments. Each income stream may be treated differently for federal and state income tax purposes, and each may have different rules governing your activities or actions.

4. Preserving Hard-Earned Assets

Property and casualty insurance are an integral part of protecting against possible liability claims if unforeseen circumstances occur. Protecting assets from the risks of nature and society alike with property insurance can reduce the costs associated with recovery and rebuilding if the worst should occur.

While an athlete’s abilities are their greatest asset for financial success, they are also their largest risk. The shortening of their career by even one season due to injury can alter their financial horizon significantly. Tailored use of insurance policies can help mitigate risks during their career. For example, an athlete may choose to purchase a personal injury insurance policy that guarantees a set income level for several years in the event they suffer a career-ending injury.

Some athletes insure their performance and success-based bonuses against an unforeseen poor team performance through contractual bonus insurance. And with the potential increased need for medical care throughout their athletic career, they may choose to purchase medical and catastrophic care insurance beyond what the team or league provides.

Many athletes will find themselves as either the sole provider or the highest income earner in their families and may be concerned about the continuing well-being of their families in the event they should pass prematurely. Whether it is providing for a surviving spouse, children, or even extended family members, life insurance can provide peace of mind.

The divorce rate for professional athletes is estimated to be between 60% and 80%, a rate far more than the general population, so planning for a possible end to a marriage is important. Athletes who are considering marriage should consult with a family law attorney to ensure they understand the ramifications of a potential divorce or separation on their current and future assets. While the concept of a pre-marital agreement can be jarring for some, it can be crucial to preserving wealth.

Athletes often become public figures and this increased exposure can bring greater risks. What they do, say, and endorse all comes with heightened scrutiny. Some athletes who have concerns about risks to their assets may consider the use of specialized asset protection strategies and structures to protect themselves from future liability. From Domestic Asset Protection Trusts to the creation of limited liability companies, there are myriad ways in which athletes can protect themselves and their business enterprises from risk and creditors.

5. Leaving a Legacy

Even if it is early in an athlete’s career or the growth of their family, they may be considering how they will be remembered. Helping to plan an athlete’s legacy can range from estate planning to business succession and charitable goals.

An athlete — like all clients — should have their testamentary affairs in order with a will and/or revocable living trust dictating how their assets should be distributed. They should also have supporting documents that direct how financial and medical decisions will be made if they are incapacitated, and who they would like to act as the guardian of their children. Additionally, an athlete’s NIL rights may continue to have value beyond their passing and could even earn their families millions of dollars, so special care should be given to the preservation and distribution of those rights.

And lastly, if the athlete’s planning has been successful, they may have significant assets that may be subject to estate tax at their passing. By using irrevocable trusts, wealth transfer planning, and/or charitable giving, they can reduce the tax burden facing their families.

Frederick Blue is the Head of New Business Development at Wells Fargo Wealth and Investment Management.

Wells Fargo Bank, N.A. (“the Bank”) offers various banking, advisory, fiduciary and custody products and services, including discretionary portfolio management. Wells Fargo affiliates, including Financial Advisors of Wells Fargo Advisors, may be paid an ongoing or one-time referral fee in relation to clients referred to the Bank. In these instances, the Bank is responsible for the day-to-day management of any referred accounts.

Wells Fargo & Company and its Affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.

Insurance products are offered through nonbank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies.

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Investment products and services are offered through Wells Fargo Advisors, a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker-dealer and non-bank affiliate of Wells Fargo & Company.

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