Risk management and insurance

Key topic

It is important for the athlete to identify and manage potential risk as well as recognize different types of fraud when they see it so that they can take measures to hedge against them.  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. This lesson outlines the elements of risk and insurance.  It also discusses the concepts associated with risk and insurance and offers advice as to how athletes can treat these elements at different points of their lives both within and outside of sport.

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 the 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 kidnap, ransom and extortion insurance.
• An asset protection and estate plan are a necessity for professional athletes to guarantee the preservation and protection of their wealth for a longer time horizon.
• Prenuptial and cohabitation agreements have a positive effect on the financial lives of athletes and they can 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 damages 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 times when you apply for a loan. In today’s world, having insurance is vitally important, both to your personal well-being and to your finances.

Real Life Examples You can be careful and try to avoid injuries but you can’t be prepared for the unexpected: Canizares was to be Spain’s number 1 at the 2002 World Cup, but an incident involving an aftershave bottle ruined the plans. Specifically, he dropped the aftershave bottle on his foot, severed the tendon in his toe and was forced to miss out Manchester United and England legend Rio Ferdinand somehow strained a tendon in his knee while playing Pro Evolution on his gaming console. Apparently, was resting his leg on the coffee table for far too long

The definition of risk and hedging against it

Risk carries 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 also so many different ways of hedging against risk and these depend on the personal preferences of each one of us.  Some of the ways we hedge against risk are the following:

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

Example: Colt is a professional skier who loves going at bars and having the occasional drink. A fellow skier—Trevor— invited him to go out with him at the resort’s bar for a few drinks the night before the first day of the sporting event where they were competing. Colt is excited and tells Trevor that he will be joining him but later feels it is a bad idea because the contract he has signed with his biggest sponsor, requires him to be home by midnight the night before a competition, or else he could face a fine or even lose his sponsor. Since the bar will be filled with people who are there for the event such as fellow athletes, broadcasters, journalists and so on, Colt decides not to go out with Trevor and sends him a text to let him know that he decided to stay in for the night.

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

Example: Jenny has 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 8 years she is still ACL injury free. The risk has not disappeared and there is no guarantee that it will remain this way, however, she has done everything in her power to reduce the risk.

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

Example: Kenneth knows that an injury can affect the level of income he will earn in the future and can also shorten his career. Although he is insured by his country’s national team, he adds extra insurance because that particular insurance policy only covers the current year and it is quite basic. The plan he chose, insures a certain amount of income, should injury shorten his expected career period. As a result, Kenneth has shared the risk with two insurance companies.

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

Example: Greg is a PR agent. His client Troy who is 20 is rapidly becoming one of the best tennis players out there. Troy although talented, is also very careless with his social media posts. Until now, people barely knew Troy but now that he’s on the up and up, his social media accounts have started gaining traction and his tweets will probably become an issue at some point in the near future. Greg feels that this might put Troy’s endorsement deals into risk so he convinces him to insure against loss of endorsements.

Action Steps – Exercise 1 (5 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. On the other hand, an injury can come where you least expect it: During a golfing event, NASCAR driver Jimmie Johnson decided to sprawl out on top of the cart, but when his driver hit a berm, that sent him flying. When Johnson landed, he broke his wrist. In the final round of the 1934 U.S. Open, Bobby Cruickshank appeared to be on his way to winning his first major on the PGA tour. He had the lead on the 11th hole when a shot miraculously bounced off a rock and onto the green. According to sources, Bobby threw his club in the air exclaiming “Thank you Lord”. The club landed on his head which required several stitches. He finished third.

Basic insurance categories

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

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, you would buy property insurance to cover your house in case it’s damaged in a fire or flood. It’s also important to insure your belongings if you rent an apartment or house. Home contents insurance protects the items and belongings in your rental property if anything happens to the property. For example, home contents insurance would protect your belongings from theft or from damage caused by deterioration of the building (like leaky pipes or roofs). If something happens to your belongings, the insurance company pays to fix them, or you are reimbursed for the purchase price.

Life Insurance is an agreement between you and the insurance company where you pay a regular premium so that, in the case of your demise, 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 their dependents are secure if something happens to the them.

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.

Action Steps – Exercise 2 (5 minutes)

Andrea just got a new Porsche. She’s never been in an accident and is a very responsible driver. She doesn’t want to purchase comprehensive car insurance because her risk is very low, so she will only buy basic, third-party insurance.  She thinks, “Why should I pay for something I may never use?

Give Andrea reasons to purchase a 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 and 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 liability risk. 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 is a number of tailored insurance types that are available to athletes which we will explore one by one.  These include:

• Personal Accident Insurance
  • Temporary disability injury
  • Career ending injury
  • Loss of value insurance
  • Accidental death
• Loss of endorsement coverage
• Sports Travel Insurance
  • Injuries out of state and abroad
  • Medical coverage out of state and abroad
• Kidnap, Ransom & Extortion Insurance

Let’s go over the above types of insurance in more detail so that you can understand how they help athletes hedge against certain athlete-specific risks.

Personal Accident Insurance

An injury can be critical to an athletic career and it can be a financially debilitating event. Temporary Total disability insurance is designed to respond if a professional athlete is temporarily unable to play due to an accident, injury or sickness and it normally covers their 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 the athlete’s future earnings.

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

Professional athletes usually have endorsement deals therefore they need to also consider loss of endorsement coverage. Serious injuries and illnesses can impair their ability to meet performance expectations which can reduce their 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 and medical expenses incurred abroad.

Kidnap, Extortion and Ransom Insurance

We have witnessed a marked rise in terrorist incidents and transnational crimes in the past couple of decades, with public figures and well-known high net worth individuals as the targets and would-be targets. A number of professional athletes have built admirable wealth (and fame) and they are thus more prone to kidnap, ransom and extortion.

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 to 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 (10 minutes):

Ask athletes to identify which of the above types of insurance they may need right now and why.  Continue with a discussion on the need for loss of endorsement insurance

Real Life Examples (5-minute discussion) Japanese competitive eater Takeru Kobayashi is not the typical professional sports star, but competitive eaters are actually considered athletes and eating competitions are often covered by sports broadcasters like ESPN. The man who holds eight Guinness World Records for the eating of hotdogs, tacos, hamburgers, ice cream and pizza is rumoured to have had his stomach insured for a few hundred thousands of dollars. Formula 1 driver Fernando Alonso took out a policy on his own, insuring his thumbs for $13.5 million which protects him in case anything happens to them. Five-time Pro Bowl player, Troy Polamalu wears his hair long as a tribute to his Samoan heritage. They have been insured for $1 million by Head and Shoulders, the shampoo brand that is endorsed by the athlete.

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 5 things to look for when choosing an insurance agent so that you make sure that you select the right one.

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 fellow athletes, and you should particularly ask about the agent’s customer service and follow-through tactics.

Safeguarding the assets and lifestyles of the wealthy and famous requires tailored recommendations, privacy and expertise that can only be achieved through an advisor whom the person trust 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

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 a society has a definite effect on their commercial value. If society does not approve the actions of a celebrity, their reputation would be in a bad state. If the celebrity’s image fits in well with society’s convictions, then, their reputation would be of good standing and this would have a direct, positive effect on their 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 their 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 substantial 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 kind of controversial stories.

Endorser or brand ambassador athletes have the option of insuring their commercial sponsorship/endorsement contracts.  Therefore, when a sponsor decides to terminate the sponsorship agreement with the athlete for any reason, the endorser 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.

Real-Life Examples (5-minute discussion) When athletes get caught cheating, it usually results to losing everything; from the right to compete in their favorite sport to most their revenue sources. As we saw in the first lecture, Marion Jones lost $1 million of endorsements. She was forced to sell her $2.5 million home in North Carolina and her mother’s house, in addition to the $80,000 per race of forgone income and the five years she spent in federal prison. Lance Armstrong was asked to pay $10 million to SCA Promotions Inc. for years of lying and deception, while all his sponsors— $75 million in total—dropped him without blinking an eye. Armstrong himself said that his doping scandal cost him a total of $100 million; it even crushed the momentum of his charity—those Livestrong bracelets that anyone born in the 90s is probably familiar with. What do you think about these two cases? Are you aware of others?

Protecting the sports celebrity brand from unauthorized use

The image rights 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. Image Rights are the expression of a personality in the public domain. The provision of image rights in law enables the definition, valuation, commercial exploitation and protection of image rights associated with a person.

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

1. Trademark infringement through direct use of the athlete’s registered trademarks
2. Dilution of the mark by using look-alikes of the athlete’s distinctive and famous marks
3. Unfair competition and false advertising
4. Use of web names or domains containing the athlete’s name or distinctive logo such as Federer’s RF logo.

While sports personalities could possibly rely on unregistered rights to prevent third parties from using their names and likeness, such claims for passing off, ‘false advertising’ arguments or ‘dilution of their mark’ through the use of look-alikes, 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 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 celebrity.

The creation of the International Image Rights Registry of Guernsey presents a solution for the international protection of sports celebrity image rights. Through this registry, it is possible to register the image rights of a sports personality as a kind of trademark and thereby gain some international legal protection for them. According to Guernsey Law, the core right is the registered personality. Registration means that a right exists and protection commences on the date the application is made. Personality refers to the personality of the following types of person or rights:

• Natural or legal persons
• A joint personality
• A group such as a sports team or pop group
• A fictional character

The main benefits and key features of registered Image Rights are:

• They provide legal certainty as to the scope of protection for the celebrity’s image by statutory clarification of the extent of the rights and the public interest exceptions to the rights
• They present an opportunity to clearly set out to the world, by way of an online publicly accessible register, the bundle of Image rights which the registrant considers as their own and which they intend to protect (to which reference can also be made in licensing/assignment contracts)
• Instead of reliance on contractually defined image rights, the Guernsey register image right will provide a proprietary right, which is capable of assignment in the same way as any other intellectual property rights

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 (5 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 fairly young age and in a short period of time.  Therefore, the preservation and protection of this wealth for a longer timeframe is of the utmost importance.

While all people need to protect their wealth and other interests, the special nature of the sports profession leads athletes to have special asset protection and estate planning considerations that are quite different from the more common issues addressed by estate planners.  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, as an athlete, you should actually plan for two different retirements, the first from pro sports and the second from working altogether.

Let’s take a look at the special circumstances that you will have to face as a professional athlete and how you can hedge against them and protect yourself, your assets and your family.

In the physically demanding world of sports, you will be 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 sorts income.  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 your sports income.  In addition, you should have both a health care and a financial power of attorney in place, in case an injury leaves you incapacitated.

A healthcare power of attorney nominates and authorizes a particular person to make health care decisions on your behalf when you become incapacitated and cannot make such decisions 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 or whose judgement you trust.
• 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. 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.  Another word of advice so that you make sure that you do not leave your assets exposed and avoid legal claim against them, is to avoid personal guarantee of debts for a business or investment entities.

Professional athletes have a high rate of divorce and although a prenuptial agreement can be a difficult subject to discuss when one is in a loving and committed relationship, it can protect against a multitude of disastrous financial outcomes. 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 income 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!

Real Life Example (5-minute discussion) Michael Schumacher had a terrible accident in 2013 while skiing with his family. He went off-course which led to an accident; he hit his head and went into a coma and the news sent shockwaves across the globe. Since he was incapacitated, his family found themselves in a position where they had to make decisions for him; that is decisions related to his medical treatment. Legal experts had observed at the time, that without a power of attorney in place the decisions that need to be taken become something of a jurisdictional nightmare. At first medical treatment is straightforward, but at some point, the family is bound to find itself in disagreement over what to do with their loved one since choices go from black and white to multidimensional and complex. This has the potential to cause a dispute between family members as to what the appropriate course of action is, at what is undoubtedly already an incredibly difficult and distressing time, where all parties want to do what they each think to be the appropriate action for him. What does Schumacher’s case teach us?

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

Even though you may be young, single, and don’t even think of marriage yet, we believe that it is important to raise your awareness to the fact that setting up a proper financial relationship with your better half will let your future marriage and relationship 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, about half of all first marriages among people under 45 end up in divorce and the truth is that many professional athletes, such as Tiger Woods and Kobe Bryant, have gone through high-profile divorces that ended in huge pay-outs. An estranged spouse can often get half of the athlete’s worth if they 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 – 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 for 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 intense.

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.

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 to 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!

Real-Life Examples (5-minute discussion) Greg Norman: The golfer’s first wife was Laura Andrassy whom she met when she was working as a flight attendant and married her in 1981. The couple had two children together. In 2006, after 25 years together, they shockingly announced their divorce. The split cost Norman substantially. Andrassy walked away with a total of $103 million of his assets. Furthermore, the divorce included an agreement regarding their kids. When Norman passes, they have a legal claim to all of his trophies, as well as $103 million in cash. Tiger Woods: One of the most high-profile divorces in sports history was definitely the one of Tiger Woods. Although, we do not know the exact details it is believed that Woods’ wife left with $100 million dollars. Despite it being a considerable amount, it might not be that bad when one accounts for the fact that Woods’ net worth was $600 million at the time. Woods had a prenup in place. What do these examples teach us?

Protecting your family from the inevitable:  Estate and inheritance planning

A number of people prefer not to discuss 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 substantial 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 your 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.

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.

Your will should always be kept 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.

2. 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.
3. Powers of Attorney
   1. A 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. A financial power of attorney authorizes a different person to make financial decisions concerning your assets, if and when you become incapacitated.
4. 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. Due to their high earnings, many athletes 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 the 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 an 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 their parents get a divorce.

Another important legal and tax issue that athletes should consider and keep in mind before gifting property is 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 couple or civil partner), 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 (10 minutes):

Have the athletes take the Insurance Quiz to test their knowledge on risk and insurance.  Follow with a discussion of their answers vis-à-vis the correct answers.

Insurance Knowledge quiz (by Kiplinger)

1. You lend your car to a friend. Does your auto insurance cover him or her?
   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. Are your child’s belongings covered under your homeowner’s insurance while they are living in a college dorm?
   1. Yes
   2. No
6. Does your home insurance policy cover you for earthquake damage?
   1. Yes
   2. No
7. How about if there’s a nuclear accident or attack nearby?
   1. Yes
   2. No
8. 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, as long as 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 home-owners 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

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

6. B

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

7. B

Nope, you’re not covered.

8. A

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

Lesson wrap-up

In today’s lesson, we have pointed out the particularities of the world of sports and the special circumstances, factors and contingencies that athletes face. We have 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 athletes make 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.