You’ve dreamt of this moment your entire life—the big contract. Years of two-a-days, time away from home, and a laser focus on your goal have just paid off. Now that your dreams are coming true, how can you create a legacy while supporting your family and community? Here’s a roadmap.
A Roadmap to Creating a Legacy
Your journey to success required sacrifice—both from you and those around you. But while you maintain your game, start thinking about your legacy and giving back to those who championed you along the way. Giving to family, friends, or charity is inherently personal. No one can decide that for you. But surrounding yourself with a team who has your best interest at heart is a crucial first step. Trusted advisors can help you scope out your spending needs, assess your capacity to give, and help you find the best gifting structure (Display).
Understand Your Wealth: What is your contract really worth? Typically, it’s not what’s reported by ESPN! In other words, a $10 million contract doesn’t represent $10 million in the bank today. It’s often spread out over the term of the agreement and impacted by guarantees or deferrals (not to mention taxes, agent commissions, etc.). It may also be predicated on hitting certain milestones—touchdowns, home runs, goals scored.
Determine Your Lifetime Spending Needs: Just as you set training and performance goals over the years, defining your wealth goals helps ensure financial success. Start by understanding the amount you need to save during your playing career to secure your spending needs after the final whistle blows. We call this amount your core capital. Depending on your contract terms, these funds may be guaranteed the moment you sign, or you may need to hit specific milestones before the cash is in hand. Let’s walk through an example:
Devin just signed a non-guaranteed contract that will last to age 30. Though he has every intention of playing for years to come, he wants to dimension how much wealth he’ll need to accumulate by the end of this contract to secure his lifetime spending. The analysis will consider when and how much Devin can give away, or if he can invest in a friend’s business venture.
Devin and his business manager project that by the time he’s 30, his portfolio would need to support an annual withdrawal of $250,000. This amount contemplates a modest future income from a second, post-playing career or ongoing endorsements. After inputting these estimates into our proprietary Wealth Forecasting System, we calculated that Devin will need $11.7 million* to support this annual, inflation-adjusted amount. What if Devin’s portfolio reaches that value before age 30? In that case, he has extra, or “surplus capital” to comfortably make gifts or investments.
Your Desire to Gift: Beyond the numbers, you need to decide whether to gift to family, friends, or charity. It’s often not as simple as putting cash in an envelope—especially for a young athlete caught between competing family pulls. For instance, how do you reconcile the needs of an older generation (such as parents or siblings) and a new spouse and baby? Think about your current relationships and how you’d like them to look in the future. Do you want to be the “breadwinner” for your parents or siblings? Will gifts to your children inhibit their personal growth and ambition?
Sometimes gifting is not in the best interest of the recipient or your relationship. Or, it might be prudent to respond in a way that differs from what’s sought. Other times, gifting today isn’t feasible at all. But after securing a second contract, a step-change in your wealth may be more conducive to making a big donation, underwriting your friend’s new venture, or funding your nephew’s education.
Have a Conversation: “Loved ones you feel obligated to or people looking to capitalize on your success are asking for [an] investment—in their ideas, to help out with a tough situation, or flat-out asking for money,” says Winston Justice, 9-year NFL veteran, and Bernstein advisor. “But realizing how to say no to certain people and situations or filtering the requests and making disciplined long-term financial decisions beyond immediate feelings, which is hard, actually contributes to the success of the athlete—during and after his playing days.”
Clear communication with your family and friends will keep your relationships grounded and intact. Enlisting the help of a trusted advisor who acts as an intermediary can put parameters around giving without hurting your core capital. This partner can also set expectations—especially early in your wealth cycle—around whether and how to give while facilitating family discussions, vetting deals, and filtering out the noise. To avoid hurt feelings, all parties (whether parent/child, brother/sister, or lifelong friend) must respect the relationship and the athlete’s vision of success.
Gift X’s and O’s
If you proceed, be sure to consider IRS rules and the gift’s purpose, time frame, and optimal structure.
Rules: The IRS regulates the size of gifts, their use, and frequency. For instance, each year, an individual can gift up to $15,000 each to an undefined number of people free of gift tax. Individuals can also make a tax-free gift above that amount using their lifetime applicable exclusion.**
Purpose and Time Frame: What gift feels right for a given situation? You may prefer making smaller, annual gifts that are flexible and can be stopped or restarted. Or, you might parse gifts over time to keep family members on a budget. On the other hand, in some cases a larger gift may help recognize a milestone (significant birthday or wedding) or fund a specific purpose (buying a house, paying for university). A significant, one-time gift offers several benefits—it can immediately and dramatically alter the recipient’s circumstances while remaining finite, which forestalls expectations of future gifts.
Speak with your advisor before bestowing a gift, so you can understand how it may impact your ability to give to charity or others. And think about how you’ll frame the gift—what expectations do you want to set for the future? Clear communication can go a long way!
Structure: Lastly, consider the gift’s design. One made directly gives recipients free rein. Will they act responsibly with the funds? If you are concerned about reliability, consider setting up a trust to protect the gift, whether from the recipient or others. Trusts help ensure the appropriate use of funds by balancing monetary support with controls.
Family and Legacy
It’s hard to say no to loved ones, especially those who fought for you along the way. But sometimes, “not yet” is a better response. Those that supported you likely want you to make your mark. Honest conversations, especially early on in your wealth journey, will go a long way toward preserving relationships and keeping everyone on the same page. The key is to surround yourself with advisors who can nurture these life-long bonds. These trusted advisors can also become partners, helping you transition from playing the game to your next life stage. Being an athlete opens many doors and provides a launching pad to new opportunities. Your advisors can serve as sounding boards during your playing days and beyond.
*Devin’s portfolio withdrawals are expected to be supplemented by additional income from a new contract or endorsements, and he will earn the league pension in his later years.
**Remaining unused applicable exclusion at death can be used against estate tax. As of the date of publishing, the annual exclusion amount is $15,000 per person, per gift recipient, and the lifetime applicable exclusion is $11.58 million per person ($22.8 million for a married couple). The lifetime applicable exclusion will be $11.7 million per person in 2021. Refer to Estate & Gift Taxes for more information.
Bernstein’s Family Engagement services works with individuals and their families—to facilitate discussions on wealth, educate about investments and wealth strategies, and strengthen links between members and among generations.
The views expressed herein do not constitute and should not be considered to be legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.