I am a life-long Phillies fan. Imagine my pure delight when I heard that on Monday, elite pitcher Cliff Lee signed a 5-year, $120 million deal (plus a potential 6th if he reaches certain goals) with my phavorite team to help shepherd in a new era of excellence. For more information, type “Cliff Lee” into your favorite search engine, and an article or two may pop up.
Since Mr. Lee made the correct choice by going to the Phillies, I thought it might be fun to discuss some estate planning issues more common to highly-paid athletes that he and his legal and financial team will likely address in the coming months and years.
Note that the following is obviously not an exhaustive list of issues (for example, asset protection strategies are beyond the scope of this post). I also have no personal relationship or knowledge of Mr. Lee’s circumstances, besides the oft-reported fact that he spends his off-seasons in Arkansas.
Speaking of Arkansas, it is quite important to determine whether it or some other state is Mr. Lee’s domicile, as this will determine the law that will govern the direction of his estate planning. To illustrate significant differences in state laws, let’s examine the rules regarding ownership of any real estate Mr. Lee owns with his wife (see this prior post on joint ownership).
As discussed, Mr. Lee stays in Arkansas during the offseason, but he will be working for a Pennsylvania entity for over half the year. The Lees may have purchased property in Seattle or Texas when he played for each last season, or in Ohio, where he played for seven years.
Arkansas and Pennsylvania presumes that spouses purchasing property own it as “tenants by the entirety”. Ohio has no such provision. Washington State and Texas are “community property” states. Knowledge of his intended permanent home is the key starting point for constructing his estate plan.
Revocable Living Trust
As a celebrity, Mr. Lee would likely enjoy any ways to maintain privacy for him and his family. If this is true, a revocable living trust would certainly be a better choice than a will as the estate plan’s primary instrument. If the Lees own property in several states as discussed above, transferring ownership of the real estate into the trust would prevent the Lees’ estates from probate proceedings in multiple states.
Typically, high-paid athletes will establish personally-owned corporations that hire the player out to handle endorsement opportunities. A hypothetical “Cliff Lee Enterprises, Inc.” would then pay Mr. Lee a limited salary in exchange for benefits such as deducting certain travel, employing and providing retirement plan assets for his family, and having the company pay a portion of his likely significant life insurance costs (aka “split-dollar insurance”).
Estate Tax Reduction
Beyond A-B trust planning, the main way to limit Mr. Lee’s estate taxes is by reducing the amount of assets in his estate. Transferring his assets to various instruments would do so while still enabling him to benefit from them.
For example, funds or life insurance given to a dynasty trust would provide income to his relatives for generations. Assets placed in charitable trusts and family foundations can provide income, greatly benefit favored causes, as well as a large tax deduction.
Finally, here is one area in which the Lees have the same concerns as the rest of us, namely the effects of disability or the guardianship law of his state. Like all adults, the Lees would need powers of attorney, living wills or advance directives, as well as provisions for the guardianship of their children if necessary.
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- Play Ball! Estate Planning for Professional Athletes (registeredrep.com)
- Best Income, Gift, and Estate Tax Planning Ideas for Professional Athletes and Entertainers (new.abanet.org)
- Asset Protection 101 for Athletes and Managers (arfinance.blogspot.com)