Risk management and insurance

Key topic

It is important for the athlete to identify and manage potential risks, as well as recognize different types of fraud when they see it, so that they can take measures to hedge against them.  Female athletes can protect themselves and their personal finances in a number of ways whether that means buying different types of insurance to cover basic and sport-specific needs, protecting their wealth and their family, or limiting the disastrous financial effects of a divorce.

Learning objectives

• Athletes are facing different types of risks due to the special nature of their circumstances.
• Insurance is a form of risk management whereby you transfer that risk from you to the insurance company for a fee.
• The basic insurance needs of athletes include health, auto and home contents insurance.
• The specialized insurance needs of athletes include temporary disability, career ending, loss of value and accidental death clauses, loss of endorsement coverage, sports travel insurance and in some cases, kidnap, ransom and extortion insurance.
• An asset protection and estate plan are a necessity for professional athletes to guarantee the preservation and protection of this wealth for a longer time horizon.
• Prenuptial and cohabitation agreements have a positive effect on the financial lives of athletes, and they save them from real hardship.

Introduction

Insurance is a form of risk management. When you buy insurance, you pay a relatively small amount of money called a premium on a regular basis either monthly or annually to an insurance company. By paying the insurance premium, you protect yourself against a large, unpredictable expense called a loss or claim that you might incur if something bad like an accident, illness, or injury happens to you. Basically, insurance transfers the risk from you to the insurance company for a fee.

Essentially, insurance is an agreement that states something is protected if it is damaged, hurt, or stolen. If anything happens to the insured item that’s covered by the policy, you can receive funds from the insurance company to have the item replaced, fixed, or you may receive a cash settlement.  People purchase insurance to have protection against the “what ifs” in life.  You never know when you may get some type of illness, break your leg, or need medication. It’s important to have medical insurance to cover these costs. In the same manner, you need to insure your car to protect it against any damage that may occur during an accident.

Insurance protects your financial future by reducing your risk. If you have an accident or a major health problem and no insurance, you could be faced with a potentially large bill to pay. If you’re unable to pay that bill, your credit score will be adversely affected, you might even have to declare bankruptcy.  In addition, insurance provides extra protection against lending.  Having insurance makes it more likely that you will get a loan, and it is required most of the time when you apply for a loan. In today’s age, having insurance is vitally important, both to your personal well-being and to your finances.

The definition of risk and hedging against it

Risk is the potential of gaining or losing something of value.  It can be defined as the intentional interaction with uncertainty.  Risk is the consequence of an action taken despite uncertainty.  There are so many risks out there: the risk of getting sick, risk of injury, risk of a car accident, risk of a house fire, risk of theft, risk of losing your job, etc.

There are various ways to manage risk, which depend on an individual’s personality, circumstances, and risk tolerance. Some of the key strategies include:

Risk Avoidance – When you avoid becoming involved or withhold from a situation to avoid risk

Example: Monica is a professional basketball player who loves clubbing. Her friend Tasha invited her to go out with her to the best club in town. Monica is excited and tells Tasha she’ll join her but later she feels it is a bad idea because the team code of conduct she has signed, requires her to be home by midnight the night before a game, or else she could face a fine in addition to other forms of disciplinary measures. Although no one might see her when she is out clubbing, Monica decides not to go out with Tasha and sends her a text to let her know she’s decided not to go.

Risk Reduction – When you take measures to reduce your overall risk in each situation

Example: Jenny had an ACL injury early in her career. In order to reduce the risk of having the same injury again she has been strictly following all the advice her strengthening coaches have been giving her over the years. Now after a career of 15 years she is still ACL injury free.

Risk Sharing – When you take measures to share your risk with another, through insurance or risk transfer

Example: Megan knows that an injury can affect the level of income she will earn in the future and can shorten her career. Although she is insured by her team, she adds extra insurance because the team’s insurance only covers the term period of her present contact. The plan she chose, insures a certain amount of income, should injury shorten her expected career period.

Risk Retention – When you accept a given risk and budget to prepare for that risk

Example: George is a football agent. His client Sonia is 17 and has just signed a big contract with one of the top 5 clubs in Germany. Sonia, although talented, is also very careless in what she says to the press and through her social media posts. George feels that this might put Sonia’s endorsement deals in jeopardy so he convinces her to insure against loss of endorsements.

Action Steps – Exercise 1 (10 minutes):

Discuss the above examples with the athletes and ask them to give more examples from their lives that fall into the above categories.

Real Life Examples (5-minute discussion) You can be careful and try to avoid injuries, but you can’t be prepared for the unexpected: Kim Clijsters was one a once top-notch women’s tennis player. Clijsters injured her ankle when she stepped on someone’s foot while wearing high heels at her cousin’s wedding. The injury put her participation in the 2011 French Open in jeopardy Skier Lindsey Vonn got a bottle of champagne to celebrate her downhill victory in 2009. The bottle she picked up was broken and she sliced a tendon in her thumb. The cut kept her out of the rest of the week’s events. In recent years, mental health and digital threats have also emerged as serious risks for athletes. For example, Naomi Osaka withdrew from major tennis tournaments citing mental health struggles, while several professional athletes in 2023 reported being victims of social media account hacks that caused reputational harm and financial losses. What do you think about these three examples?

Basic insurance categories

There are several basic categories of insurance. Four of the most common forms are Health, Liability, Property, Life and Cyber insurance.

Health insurance is insurance that covers the whole or part of the risk of a person incurring medical expenses. Through health insurance you are protecting your health, your quality of life, your ability to earn a living and your family’s future.

Liability (Third Party) Insurance protects you from having to pay for damages or injuries caused to other people. For example, if you have a car accident and cause damage to the other person’s car, you may be held liable for the cost to repair the car. Or if the other person is injured in the crash, you might be held liable for their hospitalization and/or medical expenses. If someone slips and falls on an icy sidewalk that sits on property that you own, you could be held responsible for that person’s injuries. But if you have liability insurance, much of the expense for these damages is transferred to the insurance company.

Property Insurance covers loss or damage to your physical belongings.  For example, homeowners purchase property insurance to cover damages from fires, floods, or other disasters. Renters should also insure their personal belongings with home contents insurance, which covers losses due to theft, fire, or damage caused by the rental property’s condition, such as leaky pipes or structural deterioration. If belongings are damaged or stolen, the insurance company either covers repair costs or reimburses the owner for their value.

Life Insurance is an agreement between you and the insurance company where you pay a regular premium so that, if you die, the company will pay a specified sum of money to the person(s) you choose. Funeral costs are surprisingly high, and it takes some time to recover financially from the loss of a family member’s income. Life insurance may provide a lump sum payment to handle the immediate costs of burial as well as supplement the family’s income to maintain their standard of living. A person who is the breadwinner for a family usually buys life insurance to make sure her dependents are secure if something happens to the breadwinner.

Some life insurance policies allow you to borrow against the total benefit. That means life insurance can play a role in your financial planning—you could use the loan to purchase assets, for example.

Cyber insurance can help protect you from financial losses due to hacking, identity theft, ransomware attacks, or unauthorized use of your digital presence. As athletes increasingly build personal brands and manage financial activities online, securing their digital assets is becoming just as important as insuring physical property

Action Steps – Exercise 2 (5 minutes)

Jane just got a new Range Rover. She’s never been in an accident, and she is a very responsible driver. Jane doesn’t want to purchase comprehensive car insurance; she just wants to get basic third-party insurance because her risk is very low. She thinks, “Why should I pay for something I may never use?

Give Jane reasons to purchase comprehensive car insurance.

Insurance for sports professionals

Insurance programs are not geared towards the very specific conditions of the pro athlete’s life; athletes might be continuously outperforming their insurance packages as they achieve greater visibility, expand their income flows, buy additional assets, gift property to family etc. Any, and all of these factors can affect the insurance needs in many unpredictable ways, hence leaving the athlete financially vulnerable to losses after an incident, theft, lawsuit or accident. Moreover, pro athletes, like other celebrities and public figures, are more likely to be targets of crimes such as burglaries, identity theft, kidnap or extortion situations, and are more likely to travel extensively and internationally.

It is furthermore, commonplace for professional athletes to purchase cars and housing for family members or even close friends and associates. Although this is something to be commended mostly, it’s equally important to be clear about ownership structures. That is because, the more assets an athlete has under their name, the higher the risk of liability. Plus, if the athlete is legally the owner of the home, but not its primary resident, there could be insurance implications.

Not to worry though, as there are a number of tailored insurance types that are available to athletes which we will explore one by one.  These include:

1. Personal Accident Insurance

• Temporary disability injury
• Career ending injury
• Loss of value insurance
• Accidental death

2. Loss of endorsement coverage
3. Sports Travel Insurance

• Injuries out of state and abroad
• Medical coverage out of state and abroad

4. Kidnap, Ransom & Extortion Insurance

In today’s digital era, many insurance providers offer online platforms and mobile apps that allow athletes to manage their coverage, file claims, and access policy details in real-time. This eliminates the need for in-person visits and enables faster processing of claims and policy adjustments. In addition, Artificial intelligence (AI) is transforming sports insurance by enabling real-time risk assessment. Some insurance providers analyze data from wearables and training logs to predict injury risks and tailor coverage based on an athlete’s unique risk profile

Let’s go over the different types of insurance in more detail so that you can understand how they can help you hedge against certain risks which are specific to athletes like yourselves.

Personal Accident Insurance

An injury can be critical to your athletic career and it can be a financially debilitating event. Temporary Total disability insurance is designed to respond if you, as a professional athlete, are temporarily unable to work due to an accident, injury or sickness and it normally covers your sports regular income which is lost due to an injury. In the event of a career ending injury such insurance usually covers a lump sum to compensate for your career ending.

Loss-of-value insurance protects against the risk, in certain situations, of injuries preventing athletes from realizing their expected future financial gains. For instance, a college athlete protege, who is projected to be the top Draft pick for the pros but suffers an injury in the senior year pre-Draft, resulting in a much lower draft pick can insure against that contingency in economic value.  Accidental death insurance will grant a lump sum benefit to the athlete’s estate for accidental death.

Loss of Endorsement Coverage

As a professional athlete you may have endorsement deals therefore you should also consider loss of endorsement coverage. Serious injuries and illnesses can impair your ability to meet performance expectations which can reduce your exposure and post-game endorsements. Also, the trigger for coverage may be “media coverage of conduct or alleged conduct that generates adverse publicity or public contempt.” If the professional athlete’s status is affected due to an event that causes them negative publicity, the loss of an endorsement contract can have a huge impact on their income, so it is recommended that athletes prepare for that contingency with the right insurance.

Sports Travel Insurance

Athletes, particularly those that travel frequently both nationally and internationally, either because of the nature of their sport (e.g., tennis), or due to their team’s commitments (e.g., basketball players), need to be covered for a variety of scenarios including injuries taking place abroad and medical expenses incurred due to an injury abroad.

Kidnap, Extortion and Ransom Insurance

In recent decades, there has been a significant increase in terrorist incidents and transnational crimes, with public figures and high-net-worth individuals frequently targeted.  In addition to traditional physical threats, athletes must now be aware of cyber extortion risks. Criminals may hack personal accounts, steal sensitive information, or threaten to release damaging content unless a ransom is paid. Comprehensive protection plans today often include clauses covering cyber extortion, helping to manage and recover from these types of digital threats.

This new phenomenon not only broadens the base of incident probability in respect of kidnapping and extortion, but it creates unique needs for coverage that had previously been unavailable. Kidnap and extortion are not just financial crimes. The impact on the athletes and their families who are directly affected can be even more severe. The protection offered under this type of insurance covers kidnap ransom, extortion related bodily injury or death, property damage, malicious detention and hijack.

Action Steps – Exercise 3 (5 minutes):

Jane’s club is implementing a new medical plan where they share the cost with the members of the team. Jane will have a deduction from her monthly paycheck of approximately $500 per month since along with the rest of her teammates are considered high risk for injuries. Jane is very healthy and did not sustain any injuries nor has been to a doctor in two years. She thinks the health insurance is not worth purchasing. She could really use the extra cash, so she opts not to get the medical insurance.

Why it’s important to have a good medical insurance plan, even though you may be young and healthy?

Choosing the right insurance agent

Selecting the right independent insurance agent to take care of your insurance needs should not be a hasty decision.  You are looking for a long-term relationship with someone you can trust.  We set below 6 things to look for when choosing an insurance agent so that you make sure that you select the right agent.

1. Make sure that the insurance agent understands your needs, your goals and what your objectives are.
2. You want to work with an agent who can provide you with both coverage and cost options.
3. Check out whether the agent works with reputable insurance companies.
4. Look for an agent with credentials and professional designations such as Certified Insurance Counselor (CIC), Chartered Property and Casualty Underwriter (CPCU), Associate in Risk Management (ARM).  To maintain these credentials, insurance agents must take continuing education classes, which means that they are up to date on the latest trends and product offerings of the insurance industry.

5. Ask for referrals from family, friends and colleagues and you should particularly ask about the agent’s customer service and follow-through tactics.
6. In today’s digital world, athletes should consider whether an insurance agent offers online access to policy details, claims management, and instant customer support. Agents who work with insurers providing mobile apps or digital dashboards make it easier to manage coverage on the go.

Safeguarding the assets and lifestyles of athletes requires tailored recommendations, privacy and expertise that can only be achieved through an advisor whom the person trusts and has the required insurance broker qualifications.  Normally, the insurance company will not pay if the insurance policy is not correct or has issues.  Many people choose insurance based on the cheapest rates. But going for the lowest rate can cost more in the long run for those who select a substandard company that doesn’t come through when they need it. Insurers recognize the need for expanded, special coverage, and offer enhanced policies to provide the level of protection needed for the unique assets and lifestyles of athletes.

During different phases of your life, your career will develop and transition, and so will your insurance needs. The right agent will proactively manage your insurance program and adapt it to the changing realities of your life.

Reputational risk and loss of sponsorship contracts

The sports celebrity image, like all brands, is vulnerable to being dependent on such intangibles as people’s perceptions of them.  A celebrity’s good name or reputation is the regard which they enjoy with society.  The opinion of a celebrity held by society has a definite effect on her commercial value.  If society does not approve the actions of a celebrity, her reputation would be in a bad state.  If the celebrity’s image fits in well with society’s convictions, then her reputation would be positive, and this would have a direct, positive effect on her commercial value.  A number of sports professionals who enjoy world class recognition and an excellent reputation earn enormous endorsement amounts, in some cases higher than their sports contract.

The income generating capacity of the sports celebrity is highly volatile though, because it depends on the public perception of the sports star and her reputation.  The celebrity is greatly dependent on a positive reputation, and it is the celebrity who is the origin, the foundation of the reputation.  A number of athletes have been known not to live up to the public’s expectations thus tarnishing their brand, sometimes overnight, and jeopardizing their earning power.  Several athletes lost large amounts of money when they were found positive to illegal substances. Sponsors would not want to be associated with athletes who are involved in such controversial stories.

Athletes with endorsement deals have the option of insuring commercial sponsorship/endorsement contracts.  Therefore, when a sponsor decides to terminate the sponsorship agreement with the athlete for any reason, the athlete can still be insured for the amount of the signed contract. Under these types of arrangements, the insurance company will cover the athlete for the resulting financial loss due to the termination of the contract.  It is quite important for athletes to take insurance policies on their sponsorship/endorsement contracts, so that they ensure that they will receive the stipulated amounts of the sponsorship/endorsement contracts even if such contracts are unilaterally terminated by the counterparty.

Protecting your brand from unauthorized use

The Name, Image and Likeness of athletes are an asset with potentially large commercial value.  Therefore, it is paramount to protect your image from unlicensed use by others.  As the potential for sponsorships and endorsement grows, so do the opportunities for unauthorized use and profit by third parties.

The right of publicity, otherwise called personality right, refers to the individual’s right to control the use of their likeness, name and identity for commercial use.  A company or person cannot use an athlete’s name or image for monetary gains without permission or contractual agreement. Name, Image and Likeness rights are the expression of a personality in the public domain

Unauthorized use of the sports celebrity brand can be manifested in a number of ways including:

1. Trademark infringement through unauthorized use of an athlete’s registered trademarks.
2. Brand dilution by creating look-alike logos, names, or merchandise that mislead the public.
3. Unfair competition and false advertising that misrepresent an athlete’s endorsement.
4. Cybersquatting or domain name misuse, such as registering web domains incorporating an athlete’s name (e.g., Ronaldo’s CR7).

While athletes could possibly rely on unregistered rights such as claims for passing off, false advertising’ arguments or ‘dilution of their mark’ through the use of look-alikes, to prevent third parties from using their names and likeness, such claims and arguments can prove to be quite challenging and fact sensitive.

In order to protect your sports celebrity brand, it is important for you to identify your relevant trademarks. Most often, the protectable trademarks of a sports celebrity are their name as well as their likeness. Once trademark rights are established in a name or likeness, the next step is to register these trademarks. In the United States these trademarks can be registered with the USPTO, and such registration expands common law trademark rights to the entire United States. While in the United States the personality rights are to some extent recognized and protected, there are a number of countries including the UK, where there are no specific legal tools which define image rights or address the harmful effect of the unlawful use of a person’s image. In today’s digital world, an athlete’s online presence is a critical part of their brand. Cyberattacks, identity theft, deepfake videos, and unauthorized use of images or personal data can cause serious reputational and financial damage. Athletes must protect their digital footprint by using strong cybersecurity practices, regularly monitoring their social media accounts and public mentions, and considering cybersecurity insurance if their online exposure is significant. Managing your digital identity carefully is now an essential part of protecting your overall brand.

In the case of image rights of sports and other personalities, the traditional tools of copyright and trademark protection are not as clear-cut in order to offer the required protection to celebrities in relation to the unlicensed use of their image and/or likeness.  For a claim to succeed in court the celebrity must be able to demonstrate that:

• At the time of the event, they had a significant reputation and/or goodwill
• The actions of the defendant gave rise to a false message which would be understood by a not insignificant section of the general public that their goods/products/services have been endorsed, recommended and approved by the athlete celebrity.

As the value of endorsement and sponsorship revenue of sports personalities continues to grow exponentially, the need to protect this type of revenue becomes more and more   urgent

Action Steps – Exercise 4 (10 minutes)

• Ask the athletes to identify any distinct characteristics they may have which could be used commercially for profit.
• Continue the discussion with reference to registering these characteristics as trademarks to protect them from unauthorized use.

Protecting your assets and your family

Athletes usually create their wealth at a very young age and in a short period of time.  Therefore, the preservation and protection of this wealth for a longer time horizon is of utmost importance.

While wealth protection is important for everyone, professional athletes face unique asset protection and estate planning challenges that require specialized financial strategies.   In the world of professional sports, the athletes’ ability to attain celebrity status at such a young age creates a mindset focused on professional successes, often at the expense of personal protection with many athletes overlooking some simple ways to protect the assets they have accumulated so early in their lives.  Also, athletes need to actually plan for two different retirements, the first from pro-sports and the second from working altogether.

We will take a look at the risks inherent to professional athletes, and we will explore how they can protect themselves, their assets and their family from such risks.

In the physically demanding world of sports, you are prone to injuries in the field which could end up being career ending.  Therefore, you should be adequately insured to be able to overcome the sudden loss of your paycheck. You can take on additional insurance in terms of disability and your financial plan should cater for such circumstances by including a cash cushion which you can access in case you are unexpectedly left without a paycheck.  In addition, you should have both healthcare and financial powers of attorney in place, in case an injury leaves you incapacitated.

A healthcare power of attorney nominates and authorizes a particular person to make healthcare decisions on your behalf when you become incapacitated and cannot make such decisions by yourself.  The financial power of attorney authorizes a different person to make financial decisions concerning your assets if and when you become incapacitated.  Furthermore, you can opt to have a living will in place which specifies what end-of-life actions should be taken in case you are permanently brain dead or terminally ill with no hope of recovery.

In short, having such protective mechanisms in place can be advantageous for several reasons such as:

• Ensures that the person that you want to make decisions on your behalf is the person making those decisions. This enables you to pick someone whose judgement and/or mindset is similar to yours.
• You can decide in advance as to whether your attorney is to have the ability to make decisions on life-sustaining treatment
• You can provide your attorney with guidance. For example, you might want to be cremated and so you instruct the nominated person to do that.
• You can ensure that bills, medical expenses and other financial obligations continue to be met whilst the person is without capacity.

Professional athletes usually own a number of assets such as real estate, collections of valuables, etc. and since a large number of athletes have international careers, such assets can be scattered all over the world.  These assets can become a target by your creditors.  Modern estate planning must account for digital assets, including cryptocurrency and NFTs. Smart contracts and blockchain-based trusts are emerging tools that provide automated wealth transfer and asset protection. As more athletes invest in digital assets, securing these holdings with legally recognized digital wills and decentralized finance (DeFi) solutions is becoming an essential part of comprehensive wealth management.  To hedge against your assets becoming prey to creditors, you can create a trust and place your assets therein or even create separate entities which will hold such assets, offering them entity-based asset protection.  Protecting wealth within a trust structure can keep earnings safe until the time comes to pass on the estate and it also offers added privacy.  Also, to make sure that you do not leave your assets exposed and avoid legal claim against them, you need to avoid personal guarantee of debts for business or investment entities or for third parties, such as friends and family.

Naturally, professional athletes want to provide for their children both during their lifetime and after their passing.  The best way to do that is through a Last Will and Testament which outlines how an athlete’s property will be distributed upon death.  A will also identifies the person who will be making such distributions as well as who will serve as guardian to minor children.  A will is basically a letter of wishes which ensures that your desires are met in case of an untimely death.

Asset protection and estate plans are a necessity for professional athletes because there is a lot at stake.  Once these plans are in place, they must be monitored and modified over time to adjust to changes in salaries and other compensation as well as changing family circumstances.  Properly drafted asset protection and estate plans ensure that you, your family and loved ones, will be provided for during your lifetime and beyond!

Getting married: Set up your financial relationship and let your love flourish!

Marriage is considered as one of the most important events in a person’s life. Couples usually spend a lot of time planning every little detail and may even hire a wedding planner to assist them through the whole process. What many couples choose to skip before “tying the knot”, intentionally or not, is setting their common financial future on the right basis.

Prenuptial agreements are a necessary legal step, to spell out a couple’s financial relationship before marriage. A prenup establishes the property and financial rights of each spouse during the relationship, as well as, in the unfortunate event of divorce. Contrary to popular belief, prenups are not just for the rich, they are also essential for those who are about to come into a great deal of wealth, or work in a field where financial security fluctuates significantly from year to year: An athlete’s career has this exact characteristic, you can become a superstar overnight and return to being no one the very next day.

Although you have every right to be optimistic about the future of your marriage with your spouse, this shouldn’t be a factor in your decision to sign a prenuptial agreement or not. According to the U.S. Census Bureau, the divorce rate for individuals under 45 has declined in recent years. In 1990, 19 people per 1,000 currently married individuals had divorced, compared to 13 per 1,000 in 2021. However, marriages among professional athletes have historically faced higher divorce rates, often estimated between 60% and 80%. These high-profile divorces can result in substantial financial settlements, sometimes exceeding $10 million. An estranged spouse can often get half of your worth if you don’t have some sort of marital agreement in place.

Here are a few reasons why a prenup is important to athletes getting into marriage:

Designate the passing of separate property to children from previous marriages/ relationships – A marrying couple with children from previous marriages can use a prenup to clarify what will happen to their property when they die, so that they can pass on different and separate property to their children and still take care of each other, if necessary. In the absence of a prenup, the surviving spouse might be entitled to claim a great portion of the dead spouse’s property, leaving much less for the kids.

Set financial rights and responsibilities – Couples with or without children, wealthy or not, may simply want to set their financial rights and responsibilities during their married life.

Protect spouses from each other’s debts – Prenups can also be used to protect spouses from each other’s debt obligations, and they may address several other relevant matters as well.

Maintain privacy – In case a prenup is not in place, the divorce court will have to determine how a couple’s wealth will be apportioned, with the presence of the media inside the court room. As athletes are usually in the public eye, media interest will always be heightened.

Ease the divorce process– Couples may want to avoid potential disputes in the case of divorce, by defining in advance how their property will be divided, whether or not either spouse will receive alimony payment and how much, etc.

In today’s digital world, prenups should also include provisions about digital assets such as cryptocurrency, NFTs, social media earnings, and online businesses. Clarifying the ownership and distribution of digital wealth helps avoid complicated disputes in the future.

Of course, no one can guarantee that creating and signing a prenuptial agreement with your spouse is going to be an easy or a very romantic process. Discussions can bring uncomfortable differences in a couple’s expectations and values, into the surface and you will have to be ready to deal with them.  You should prefer to consult a lawyer for advice and for drawing up the prenuptial agreement, so that it has greater legal recognition. The two parties should take separate legal advice before getting into a prenup.

As difficult as it may seem, a prenup should be considered as an opportunity to build trust and provide the security and relief that allows you and your future spouse to focus on the most important aspect of your marriage, loving each other!

It’s also important to recognize that not all athletes choose to legally marry. For those living with a long-term partner, creating a cohabitation agreement can serve a similar purpose to a prenup. A cohabitation agreement defines how assets, debts, and financial responsibilities are handled in the relationship, helping protect both parties’ financial interests in case of a breakup.

Protecting your family from the inevitable:  Estate and inheritance planning

A number of people prefer not to focus on their mortality; others simply do not believe that it is a necessity. In both cases, not planning for your departure from this world can be a major mistake.  You should put in place an estate plan to ensure that what you have built in your life so far will be there to provide for your loved ones, your children and perhaps later generations as well.  The absence of a will and an estate plan will give rise to legal battles between those who want to fight for what they think you may have wanted or those who feel that they are entitled to receive from you.

As a sports professional, you should start planning your estate from a young age, when you are at the peak of your performance and at the height of your earnings.  The truth is that the relative youth of athletes when at the height of their earnings, makes it necessary to utilize planning strategies that do not require irrevocable decisions, as such decisions will have a much longer time horizon for athletes than that of older people planning their estate.  In addition, while the amount of wealth you have accumulated from your professional sports career may be substantial, you may need to rely on that wealth to maintain a desirable lifestyle for a considerable amount of time, therefore your estate plan should cater for that.

An estate plan provides you with the ability to spell out your wishes and intentions, how you want those wishes carried out, and by whom you want them carried out.  In the event of your incapacity or death, a proper estate plan will:

1. Provide structure for your beneficiaries’ inheritance by maximizing the amount of money and assets that will be transferred to loved ones while minimizing the taxes your beneficiaries must pay on those assets.
2. Set forth your desires as to how your assets will be managed and distributed.
3. Avoid public disclosure of the size and distribution of your estate as well as avoid the cost and delay of a probate.
4. Utilize gifting strategies, irrevocable trusts and other planning techniques to potentially save your estate large amounts of taxes.
5. Safeguard your children as you will have a final say in who serves as their guardian should you and/or your spouse die prematurely or unexpectedly.
6. Minimize the emotional and financial burden placed upon your heirs, while minimizing arguments among heirs over your estate.

Real Life Example (5-minute discussion) Florence Griffith Joyner also known as “FloJo” was an Olympic runner who won 3 gold medals and 1 silver in the 1988 Olympics. To this day she remains the fastest woman in history. Joyner died at the age of 38, survived by her husband and daughter. Her husband couldn’t find her original will and failed to file it with the probate court within 30 days of her death, as dictated by California law. FloJo’s husband and mother took disputes, including whether Joyner promised her mother that she could live in their house the rest of her life, to court. Joyner never filed the original will, and the judge had to appoint a third party to administer the estate. What does this Real-Life Example teach us?

Below, we list what we consider as the basic components of a proper estate plan with the objective of assisting you to realize both lifetime and at death goals, from a tax and a non-tax perspective.

1. A Last Will and Testament through which you will designate how assets are distributed. Aside from directing the disposition of assets, a will enables the athlete to:
   1. Choose a guardian for children if a spouse does not survive.
   2. Choose an executor.
   3. Direct how and by whom taxes are to be paid.
   4. Provide for the management and control of assets through trusts.
   5. Give discretion over distributions of income and principal to trustees.
   6. Avoid misunderstandings and conflicts among family members over the athlete’s intentions.
   7. Provide for any special needs of dependents, especially minor children.
   8. Coordinate the distribution of various employment benefits.
   9. Provide for charities.
2. Your Will should always be up to date. Major events in your life such as marriage and divorce may render some or all of your will invalid if the will is not updated accordingly.  Also, you should be very careful about disinheriting children because a disinherited child might very well challenge the claims of others and create family chaos. Digital wills and blockchain-based smart contracts are emerging as secure, transparent ways to manage estate planning. Smart contracts can automate asset transfers according to your wishes, eliminating ambiguity, reducing administrative burden, and minimizing disputes.
3. A Trust where you will transfer assets. Property that you place in an irrevocable trust is no longer considered part of your estate, meaning that the property is not included in your estate’s value when it comes to determining the amount of death taxes you owe.  Also, a trust can offer protection against bankruptcy or divorce proceedings.  By passing your estate to your children, it will form part of their estate.  Should they face hostile creditors, bankruptcy, divorce, or require care, the estate passed to them might be diluted.  It might also be the case where your children are unable to look after money themselves.  Alternatively, you can make a will by passing everything to a trust for the benefit of your children and their descendants.  Your children can have the use of the trust property, without it forming part of their estate thereby offering protection against hostile creditors.  Finally, you can obtain a term life insurance policy and put it in a trust, to provide liquidity upon death for estate taxes.  You do not want your heirs to be forced to sell assets to pay for resulting estate taxes.
4. Powers of Attorney
   1. The healthcare power of attorney nominates and authorizes a particular person to make health care decisions on your behalf in the event you are incapacitated and cannot make such decisions yourself.
   2. The financial power of attorney authorizes a different person to make financial decisions concerning your assets, if and when you become incapacitated.
5. A Living Will which specifies your wishes about provision, withholding or withdrawal of life sustaining medical treatments, if you are in a terminal condition or permanently unconscious.

When it comes to dealing with the inevitable you should always remember that preventive planning and preventive action are critical.  Your best bet is to talk to a specialized lawyer who can help protect your assets and pass them on to your loved ones and your favorite charities with the least tax implications, while fully respecting your wishes.

The risks and legal traps of gifting property to family

Gifts between members of the same family are quite common. In its simplest form, gifting provides a transfer of wealth and assets from one individual to another. Athlete examples include Kevin Durant, Tiger Woods and Anthony Walker. It is alleged that Dwayne Wade bought his mum a church; yes, an actual church.

How is a gift different from a sale? In a sale, a person gives up their property in return for money; in other words, an exchange occurs that is accompanied by a legal document – a sale deed – that proves the exchange. A gift is defined as something voluntarily transferred by one person to another without compensation. It is common for many athletes to donate assets to their relatives (parents, siblings, cousins), either by transferring ownership or by granting them an exclusive right of use. However, this common practice often brings both athletes and their loved ones into legal trouble.

Some of the gifts that wealthy athletes usually give to their family members are luxury cars and homes. Athletes need to be aware that the maintenance costs for such gifts are often enormous, making it difficult for those who receive the gift to cope. In particular, a luxury car requires payment of road taxes and has a high overall cost of both general and mechanical maintenance. A bigger problem arises when it comes to luxury properties. The acquisition of a luxury home entails special expenses for its maintenance and the payment of various taxes related to the property. In case the ownership of the house was not transferred to the family member, if this member is unable to pay the taxes associated with the property, then the possible administrative and criminal sanctions will be borne by the athlete, as the owner of the house.

Another illustrative example is purchasing a business (e.g. restaurant, shop etc.) by the athlete for the benefit of their family members, without transferring ownership to them. This can lead to significant problems for the athlete if the business does not comply with the tax law or other legal obligations related to its operation. In addition, as an owner, the athlete will probably have the largest share of responsibility, which may even lead to criminal charges. For the above reasons, the simultaneous transfer of ownership is paramount for the athlete to avoid administrative, civil or criminal sanctions.

In addition to the above, in case an athlete makes a gift directly to a family member (e.g. child), they should be aware that third parties may use this asset against existing or future financial debts of the family member upon completion of the transfer of ownership. Moreover, depending on the applicable jurisdiction, the spouse can claim the property in case of divorce under family law. There are, however, jurisdictions in which any property a child acquires during the marriage as a gift from their parents is and remains their property even when the parents get a divorce.

Another important legal issue that athletes should consider and keep in mind before gifting property is the capital gains tax. In many countries, giving a gift to someone is accompanied by the obligation to pay capital gains tax. However, when the transfer takes place between spouses (married couples or civil partners), an exception is granted under certain conditions in many countries. In some other countries, the exception also includes members of the same family (e.g. parents, children, grandparents).

It should be noted that athletes should do their homework and seek legal advice when wishing to gift property to family members in order to avoid any unpleasant surprises in the future. They must also consider the additional costs that will arise as a result of the gift and the legal framework applicable to their jurisdiction to avoid potential legal traps. It is also strongly recommended that they actually transfer ownership when they wish to gift a property to a family member so as to stay away from any future liability in connection with the gifted property.

Action Steps – Exercise 5 (15 minutes): 

Take the Insurance Quiz to test your knowledge on risk and insurance. Insurance Knowledge quiz (by Kiplinger)

1. You lend your car to a friend. Does your auto insurance cover them?
   1. Yes
   2. No
2. During a storm, your neighbor’s tree falls on your house. Whose policy covers the damage?
   1. Yours
   2. Your neighbor’s
   3. Neither
3. Your basement floods. Good thing you bought a separate flood insurance policy ahead of time. What does it cover?
   1. Carpet
   2. Furnace
   3. Furniture
   4. All of the above
4. You rent a car. Does your existing auto insurance protect you in case of damage?
   1. Yes
   2. No
5. Your 18-year-old child goes away to college. Is she still covered under your health insurance?
   1. Yes
   2. No
6. Are your child’s belongings covered under your homeowner’s insurance while she’s living in a college dorm?
   1. Yes
   2. No
7. After a shopping spree at the mall, you put the goods in your car. Then you go back in to grab lunch. When you return, you find your purchases have been stolen. Are you covered?
   1. Yes
   2. No
8. Does your home insurance policy cover you for earthquake damage?
   1. Yes
   2. No
9. How about if there’s a nuclear accident or attack nearby?
   1. Yes
   2. No
10. What if a volcano erupts? Are you covered then?
    1. Yes
    2. No

 

Quiz Answer Sheet

1. A

Generally, your auto insurance will cover a friend driving your car, if he or she has a license and has your permission to use the vehicle.

2. A

If a tree falls on your house, you are covered by your own homeowners’ insurance policy, not your neighbor’s.

3. B

The only thing on this list that’s covered is your furnace. Flood insurance covers structural elements and essential equipment in a basement but not living improvements made down there. That means it won’t pay for furniture or carpets in a basement room, or damaged drywall that has been painted. (It will cover those things upstairs, however.) And don’t expect your homeowner’s policy to pick up the tab, either.

4. A

Typically, your auto insurance will cover a car rental. Before you take a trip, you should check to be sure, or you may need to buy insurance from the rental car company. Check with your credit-card company, too — it may also provide coverage.

5. A

Insurers must let adult children up to age 26 stay on their parents’ policies if the child isn’t covered by an insurance plan at his or her own job.

6. A

If your child is a full-time student and younger than 24, his belongings are usually covered by the parents’ policy if she lives in a dorm. If she moves off campus, she might need to get her own renters insurance policy.

7. A

Yes – theft of your personal property is covered under your homeowners or renters’ policy. But bear in mind that the insurance company will probably want proof of your loss, so if your receipts were stolen along with the merchandise, you’ll have to come up with some other way to prove what you bought. Also check with your credit-card company. Some offer extra purchase protection in case of theft.

8. B

Unless you buy separate earthquake insurance, you’re not covered.

9. B

Nope, you’re not covered.

10. A

You’re in luck! A standard homeowner’s policy will cover you against a volcanic eruption.

Lesson wrap – up

We have pointed out the particularities of the world of sports and the special circumstances, factors and contingencies that athletes face. We have then expanded on certain lines of defence that athletes can set up to protect themselves and those they love in such grim, albeit very real scenarios. But we didn’t just scratch the surface; we instead provided very detailed explanations and plans to help you make your decisions that will offer those much-needed extra layers of protection. Insurance, prenups, and estate plans are all effective ways of dealing with these “worst case” scenarios.

At this point, we will wrap-up today’s lesson.  First, we will go over the learning objectives of this lesson and we want your feedback as to whether they have been achieved, and then we will address any questions you may have.  Please feel free to ask anything you’d like in relation to today’s lecture, and we would love to hear how the concepts we discussed today relate to you and your greater life plan.