Planning for the Stars: Estate and Insurance Planning for Entertainers and Professional Athletes

By:
K. Eli Akhavan, Esq., and Jonathan I. Shenkman
Published Date:
Feb 1, 2017

This article is the second in a two-part series about some of the types of planning for entertainers and professional athletes. To read the first part published in the January 2017 TaxStringer, “Planning for the Stars: Financial & Investment Planning for Entertainers and Professional Athletes,” please click here.

Estate Planning

While pro-athletes and entertainers share the same estate planning needs as regular folk—for example, planning documents such as wills, powers of attorney and health care proxies—and can take advantage of the same traditional estate planning techniques—GRATs, Sale to Defective Grantor Trusts, among others—there are three concerns that are highly relevant for the celebrities. (For more, see K. Eli Akhavan’s article “Legal Gaga” in the February 2012 issue of Trusts and Estates. )

Right of Publicity

Advisers for celebrities must plan for a client’s “right of publicity.” Generally, the right of publicity is an individual’s right to control how his or her identity is used for commercial purposes. Currently, 31 states recognize this right, either by statute or common law. 

Advisers should consult the laws of the celebrity’s state of domicile to determine the appropriate planning for their client. Not all states allow for a right of publicity to be “descendible”—meaning able to be bequeathed. If a right of publicity is descendible, then the right is likely to be includible in the celebrity’s gross estate for federal and state estate tax purposes. Testamentary planning documents should address how the right of publicity is to be bequeathed, and appropriate planning—such as increased life insurance death benefits—should be applied to deal with this potentially very valuable and illiquid asset.

Asset Protection and Anonymity

Celebrities generally have highly visible public profiles, and their contracts and salaries are often public information. This makes them attractive targets for lawsuits. Accordingly, celebrities should—as much as is practicable—structure their assets so that they do not hold direct title to them. Basic asset protection planning would include holding assets through limited liability entities such as LLCs, LLPs, and LLLPs. For example, clients can own aircraft, yachts, and luxury residences through business entities to maintain their anonymity. Business entities in jurisdictions such as Nevada and Wyoming may offer heightened protection, as well as privacy.    

Irrevocable trusts are also recommended as part of a prudent estate and asset protection plan. Celebrities can make irrevocable transfers to a trust so that any appreciation in the asset is removed from their estate and protected from future potential creditors. Understandably, many celebrities do not wish to relinquish the right to beneficial enjoyment from hard-earned assets.  An advisor may recommend a domestic asset protection trust (DAPT) settled in a jurisdiction that has enacted self-settled statutes (e.g., Alaska, Delaware, Nevada, South Dakota). 

The celebrity can transfer his or her assets to the DAPT and remain a discretionary beneficiary of the DAPT—or even a potential future discretionary beneficiary via a hybrid DAPT.  Based on the enacted legislation, if the celebrity is ever sued by a non-exception creditor outside the statute of limitations period, these assets would be protected. If the trust is structured properly, the assets in the DAPT will also not be includible in the celebrity’s estate. Certain types of assets are more suited for a DAPT than others—such as cash, securities accounts, and operating businesses. Real property that is not sitused in a DAPT jurisdiction will generally not be protected by a DAPT jurisdiction’s laws, even if the title to the property is held by a DAPT.

It should be noted that a celebrity can also use a DAPT as an alternative to a prenuptial agreement. For example, prior to marriage, if a celebrity does not wish to enter into a prenuptial agreement either because of romantic reasons or because the celebrity does not wish to disclose certain assets, he or she can transfer valuable assets to a DAPT. Assuming the DAPT’s jurisdiction is not one in which a spouse is an exception creditor (e.g., Nevada), these assets should not be considered as part of the marital estate for equitable distribution purposes in the event of a divorce.    

Domicile

A celebrity’s domicile plays an important part in his planning. By way of illustration, a celebrity can be born in one state, perform or play professional sports in another state, and reside a third location. Each of these jurisdictions may compete for their fair share of the income and estate tax dollars. For income tax purposes, many states impose taxes on athletes for the “duty days” they compete in that particular state, even if the athlete is not domiciled there. Given a sufficient nexus to a state, such a state may claim that the pro-athlete was a domicile of the state.  Accordingly, a pro-athlete’s advisor must substantiate the domicile of choice. This would require that the pro-athlete satisfy the different domicile factors specific to that state—having a primary residence, for example, or filing an affidavit of domicile with the appropriate county clerk, registering to vote, or holding assets there.

International celebrities also confront significant income tax issues. For example, many celebrities earn significant income from endorsement contracts. For athletes, an endorsement contract either requires the athlete to wear the sponsor’s paraphernalia during a performance (on-court contract), or it requires the athlete to endorse a brand by allowing the sponsor to use the athlete’s name, image, fame, or likeness in its advertising (an off-court contract). 

Most on-court endorsement contracts contain both a services component and a royalty component. Per the services component, an athlete is compensated for performing service days for the sponsor (e.g., entertainment for sponsor executives). The royalty component provides for compensation for the sponsor’s right to use the athlete’s intellectual property, including his name and likeness in advertising. The U.S. federal income tax of these two components can vary depending on applicable income tax treaty benefits. 

Disability Insurance

A disability due to an injury can be devastating for a professional athlete, whose livelihood is based on being in top physical shape. An injury can cause an athlete’s income stream to diminish or evaporate. There are various ways to protect against the loss of income at different points during the athlete’s career.

Prior to an athlete entering the professional level, a disability policy should be considered through the “Exceptional Student-Athlete Disability Insurance Program.” This program was established by the NCAA in 1990 and is geared towards student athletes that expect to be drafted within the first three rounds of their respective sport. The insurance coverage offered varies from $500,000 for a projected third-round pick to $5 million for a potential first-round pick. This type of disability insurance protects athletes should their careers end due to injury while still in college. Once a student athlete is approved for this program they will automatically be eligible for a loan to help pay for the policy.

Another type of income protection is loss-of-value insurance that a college can purchase on behalf of its star athletes. This type of insurance is purchased in order to entice the athlete to continue to play for the university, rather than leave college early to enter the draft. Should the athlete experience an injury while in college, this policy will compensate for the likely future earnings that are lost due to the injury.

The difference between a traditional disability policy and a loss-of-value policy is best illustrated by the injuries that took place at the Fiesta Bowl in 2003 and 2015. In the 2003 Fiesta Bowl, Miami tailback Willis McGahee tore ligaments in his knee. He was covered by a traditional disability policy for $2.5 million that allowed him to only collect if the injury prevented him from playing professional football in the future. In 2015, Notre Dame linebacker Jaylon Smith also tore ligaments in his knee during the Fiesta Bowl, but he had a loss-of-value policy. This policy allowed him to not only collect $5 million if he could never play professional football again, but also allowed him to collect if he fell from the first round of the NFL draft.[1] Loss-of-value insurance is now a staple for any collegiate athlete expecting to be a top draft pick.

After going pro, the athlete should purchase a specialized high-limit disability policy. Advisers must find specialized high-limit coverage, which can protect against both career-ending and temporary disabilities. It is imperative that the athlete has an “Own-Occupation” rider on the policy. This rider protects the athlete from not being able to perform the duties of his sport. For example, the disability policy of a professional football player who can no longer play football—but can still work as a studio commentator—should kick in and replace the loss of income.           

Similar to athletes insuring their bodies against injury, entertainers should work with advisers to get specialized coverage to protect their particular talents. Anything that inhibits an entertainer’s ability to perform can derail his or her career and harm his or her ability to generate income.         

Singers have been known to take out specialized insurance policies for years. Early in their careers, both Rod Stewart and Bruce Springsteen got voice insurance. Stewart initially took out a $5.5 million policy, and Springsteen insured his vocals for $6.2 million. More recently, singer Adam Lambert, runner up on the eighth season of American Idol, insured his voice for the staggering sum of $48 million.

Musicians are not the only entertainers to get specialized insurance coverage. For example, supermodel Heidi Klum insured her legs for approximately $2 million. James Bond star, Daniel Craig, had his body insured for $9.5 million because he performed many of his own stunts. While some of these policies may sound quirky, they are essential—the damage to a particular body part can destroy the entertainer’s brand and ability to earn a living.

Life Insurance

The use of Cash Value Life Insurance (CVLI) can be a major benefit to athletes and entertainers because of the death benefit and the accumulated cash value that serves as a savings vehicle within the policy. The cash value of their life insurance contract can be accessed in order to satisfy various financial obligations if the client’s investments don’t work out or they accumulate unpaid debts. Another key benefit of CVLI is the fact that it gives the athlete a regular “bill” to pay, which can help instill discipline to set aside money and not spend it all. Given the multiple benefits of CVLI, this should be one of the first financial products that all athletes should consider.

Because entertainers may make a modest amount of money when they first start their careers, the cost of a CVLI may be prohibitive. Typically, however, waiting to purchase the necessary life insurance coverage until they are older and wealthier is not recommended because one’s health can deteriorate over time, causing them to be uninsurable. One solution is to purchase a term life insurance policy—when young—that has the ability to convert to a CVLI policy when the entertainer is making more money. This strategy allows the client to initially keep costs down to maximize cash flow by locking in lower premiums associated with a young entertainer’s good health, and it also gives them the ability to own a CVLI without requiring a new health assessment once they start making more money.

There’s No “I” in Team

The key to advising athletes and entertainers is the collaboration of all their advisers. A team-based approach will help the clients avoid the pitfalls that have caused so many in professional sports and Hollywood to go bankrupt, while positioning them for a successful financial future.

Disclaimer: Oppenheimer & Co. Inc. does not provide legal or tax advice. Opinions expressed are not intended to be a forecast of future events, a guarantee of future results, and not investment advice. This material prepared by K. Eli Akhavan, Esq. does not necessarily reflect the opinions or recommendations of Oppenheimer & Co. Inc. Oppenheimer & Co. Inc. and Jonathan I. Shenkman are not affiliated with K. Eli Akhavan, Esq.


Eli_akhavanEli Akhavan, Esq., is the managing partner of the Akhavan Law Group LLP, a boutique law firm specializing in the areas of domestic and international asset protection, estate, and tax planning for high net-worth individuals and their families.  Eli’s clients include entertainers, professional athletes, corporate executives, real estate professionals, owners of closely-held businesses, entrepreneurs, and hedge fund and private equity professionals.  Eli designs customized asset protection and privacy planning for his clients to mitigate their exposure to potential future creditors (e.g., family members and business associates).  In addition to his full-time law practice, Eli also serves as an adjunct faculty member at St. John’s University Law School teaching International Taxation.  He is a member of the American Bar Association’s Asset Protection Committee as well as its Estate and Gift Tax Committees. 

ShenkmanJonathan I. Shenkman is a financial advisor, OMEGA Portfolio Manager, and the founder of the Shenkman Private Client Group of Oppenheimer & Co. Inc.  Jonathan and his team work with clients to develop an overall financial plan, manage their investments, and put them on track to achieve their financial objectives. Jonathan’s focus is on working with multigenerational families, endowments, and businesses to define and translate their values into a comprehensive and customized investment strategy. In addition to advising more established clients who have already achieved a significant level of wealth, Jonathan is also passionate about working with individuals who are still building their nest egg. Jonathan has spent his entire career in the investment business. Before joining Oppenheimer & Co. Inc., Jonathan ran a boutique wealth management practice at Morgan Stanley where he managed the liquid capital for C-level executives, real estate investors, entertainment professionals, and partners at major law and accounting firms. Prior to working at Morgan Stanley, Jonathan spent time at Merrill Lynch where he was a partner in a financial planning practice that worked with professional athletes and business owners. Additionally, Jonathan has experience working in the research department of several buy-side investment firms. 

 


 

Eli_akhavanEli Akhavan, Esq., is the managing partner of the Akhavan Law Group LLP, a boutique law firm specializing in the areas of domestic and international asset protection, estate, and tax planning for high net-worth individuals and their families.  Eli’s clients include entertainers, professional athletes, corporate executives, real estate professionals, owners of closely-held businesses, entrepreneurs, and hedge fund and private equity professionals.  Eli designs customized asset protection and privacy planning for his clients to mitigate their exposure to potential future creditors (e.g., family members and business associates).  In addition to his full-time law practice, Eli also serves as an adjunct faculty member at St. John’s University Law School teaching International Taxation.  He is a member of the American Bar Association’s Asset Protection Committee as well as its Estate and Gift Tax Committees.

 

ShenkmanJonathan I. Shenkman is a financial advisor, OMEGA Portfolio Manager, and the founder of the Shenkman Private Client Group of Oppenheimer & Co. Inc.  Jonathan and his team work with clients to develop an overall financial plan, manage their investments, and put them on track to achieve their financial objectives. Jonathan’s focus is on working with multigenerational families, endowments, and businesses to define and translate their values into a comprehensive and customized investment strategy. In addition to advising more established clients who have already achieved a significant level of wealth, Jonathan is also passionate about working with individuals who are still building their nest egg. Jonathan has spent his entire career in the investment business. Before joining Oppenheimer & Co. Inc., Jonathan ran a boutique wealth management practice at Morgan Stanley where he managed the liquid capital for C-level executives, real estate investors, entertainment professionals, and partners at major law and accounting firms. Prior to working at Morgan Stanley, Jonathan spent time at Merrill Lynch where he was a partner in a financial planning practice that worked with professional athletes and business owners. Additionally, Jonathan has experience working in the research department of several buy-side investment firms.

 


 

Eli_akhavanEli Akhavan, Esq., is the managing partner of the Akhavan Law Group LLP, a boutique law firm specializing in the areas of domestic and international asset protection, estate, and tax planning for high net-worth individuals and their families.  Eli’s clients include entertainers, professional athletes, corporate executives, real estate professionals, owners of closely-held businesses, entrepreneurs, and hedge fund and private equity professionals.  Eli designs customized asset protection and privacy planning for his clients to mitigate their exposure to potential future creditors (e.g., family members and business associates).  In addition to his full-time law practice, Eli also serves as an adjunct faculty member at St. John’s University Law School teaching International Taxation.  He is a member of the American Bar Association’s Asset Protection Committee as well as its Estate and Gift Tax Committees.

 

ShenkmanJonathan I. Shenkman is a financial advisor, OMEGA Portfolio Manager, and the founder of the Shenkman Private Client Group of Oppenheimer & Co. Inc.  Jonathan and his team work with clients to develop an overall financial plan, manage their investments, and put them on track to achieve their financial objectives. Jonathan’s focus is on working with multigenerational families, endowments, and businesses to define and translate their values into a comprehensive and customized investment strategy. In addition to advising more established clients who have already achieved a significant level of wealth, Jonathan is also passionate about working with individuals who are still building their nest egg. Jonathan has spent his entire career in the investment business. Before joining Oppenheimer & Co. Inc., Jonathan ran a boutique wealth management practice at Morgan Stanley where he managed the liquid capital for C-level executives, real estate investors, entertainment professionals, and partners at major law and accounting firms. Prior to working at Morgan Stanley, Jonathan spent time at Merrill Lynch where he was a partner in a financial planning practice that worked with professional athletes and business owners. Additionally, Jonathan has experience working in the research department of several buy-side investment firms.

 
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