A Game Plan for Success: Basic Estate Planning for Student-Athletes

A new era for student-athletes continues to take shape. Historically, student-athletes have generally been unable to monetize their athletic careers until post-college due to NCAA amateurism rules, but with state laws limiting the NCAA's prior restrictions on student-athletes' ability to derive revenue on their publicity rights from third parties going live in July 2021 and the NCAA's subsequent changes to its own enforcement policies in light of the pending settlement of the House v. NCAA litigation, these athletes can now generate potentially significant earnings prior to and during their college careers from name, image and likeness (NIL) deals associated with marketing, appearance and licensing fees. Much like preparing for an upcoming game and the unknowns associated with a new opponent, this fast-changing NIL landscape requires young athletes and their families to develop a game plan to address crucial estate and tax planning issues associated with NIL and future professional earnings.

The Starting Lineup: Powers of Attorney for Financial and Healthcare Matters

Once a student-athlete attains age 18, they are legally adults, meaning a student-athlete's parents or guardians are no longer the authority to make legal, financial or healthcare decisions on the athlete's behalf. This can be a source of risk as young adults already lack experience, and adding the new and complex environment of NIL without adequate counsel may leave them particularly vulnerable to the influence of bad actors for both financial and legal decisions. Moreover, irrespective of an athlete's NIL earnings potential, every athlete should plan for the changes associated with reaching adulthood by implementing valid powers of attorney to authorize a parent, guardian or other trusted person(s) to make financial and healthcare decisions for the student-athlete who might be attending college in a distant city/state.

Without exception, every adult should have a Healthcare Power of Attorney granting someone authority to make healthcare decisions in the event they cannot make their own decisions; however, student-athletes are at increased risk of serious injury and hospitalization, making this document even more important. A Healthcare Power of Attorney enables the student-athlete to name an individual to act on their behalf with respect to medical decisions and can also express the student-athlete's wishes under certain circumstances where the designated agent is unavailable to make decisions (e.g., end-of-life wishes, decisions relative to artificial nutrition and hydration, and organ donation matters). Without this document, a guardianship proceeding in the local probate court would be required, adding unnecessary expense and stress to an already undesirable situation.

A Durable Power of Attorney is one of the most powerful estate planning documents because it authorizes the designated "agent" to make legal and financial decisions on the student-athlete's behalf. In this new NIL era, student-athletes, as adults, will generally be able to negotiate and execute important legal and financial documents, including insurance contracts, NIL deals and other financial contracts. However, a Durable Power of Attorney can enable an athlete's parents to assist in protecting the young athlete's interests by authorizing a parent to transact on the student-athlete's behalf, as agent, to help the student-athlete make smart "in-game" decisions on NIL deals and other transactions. Although the parent may serve as the student-athlete's "agent" under the Durable Power of Attorney, this role should not be seen as the equivalent to an outside professional sports agent that may be engaged, which is generally a different role than that of "agent" under a Durable Power of Attorney. Without a valid Durable Power of Attorney, a conservatorship proceeding in the local probate court would be required to authorize a parent to make these important legal and financial decisions on behalf of his or her child.

The Setup Man: Core Estate Planning

Though the statistics make clear that most college athletes will not have the opportunity to pursue a career in professional sports, there is now an opportunity to capitalize on an athlete's abilities through significant NIL earnings. Even those student-athletes who end up in the professional ranks will have long odds for long-term financial success in light of the general lack of career longevity in professional sports. To better the odds of success, an athlete's game plan should include a foundation of core estate planning documents that consider both privacy and asset protection matters.

A Revocable Trust, not a last will and testament, should form the foundation of a young athlete's core estate plan during the athlete's wealth accumulation years. Revocable Trusts offer many significant advantages over wills, namely:

• Efficient Asset Management. Revocable Trusts allow a young athlete to name a trusted individual as co-trustee to help manage his or her assets and guide the young athlete on responsibly managing and growing the assets (and potentially limiting the athlete's ability to make distributions for frivolous or unnecessary expenses).
• Privacy. Titling assets in the name of an anonymously named Revocable Trust can add a layer of privacy protection for a young athlete with newfound fame and notoriety. For example, an athlete's residence can be held in a Revocable Trust that will not be tied back to the athlete, protecting the athlete from overzealous "fans" invading his/her privacy.
• Avoiding Probate. The most basic benefit of a Revocable Trust is that it allows the athlete's assets to avoid a time-consuming and public probate proceeding to transfer the athlete's assets to his or her intended beneficiaries at death.

The Closer: Estate and Gift Tax Planning

For those athletes who do achieve professional success or notoriety, they will likely acquire significant wealth in a short period of time (e.g., upon receipt of an initial signing bonus). It may be tempting to share this newly acquired wealth with family members, and developing a deliberate gifting plan is imperative to avoid unexpected gift tax results and maximize the benefits available under the current transfer tax system.

In 2024, any person can gift up to $18,000 per year to any other individual without any adverse gift tax consequences or the need to prepare and file a federal gift tax return. Gifts in excess of that amount to any particular individual will require a federal gift tax return to be filed; however, no tax may be owed as a result of the lifetime exemption that can be used to shelter gifts from tax.

Currently, the lifetime exemption from gift and estate taxes is at an all-time high of $13.61 million per person, meaning an individual can give up to that amount of assets away during their lifetime (or at death) without paying any gift (or estate) tax. Gifts in excess of the annual exclusion will reduce the amount of exemption available to shelter future gifts and reduce the amount that may be passed tax-free at death. Importantly, the lifetime exemption is subject to significant change depending on 1) the outcome of the upcoming 2024 elections and 2) absent legislative action, the "sunset" of the 2017 Tax Cuts and Jobs Act, which will see the lifetime exemption revert to $5 million (adjusted for inflation) on Jan. 1, 2026.

When an athlete has generated sizeable wealth that would support significant lifetime gifts, an important tax planning opportunity exists for the athlete to make those gifts to an irrevocable trust for the benefit of the intended recipient. The gift will still use the athlete's lifetime exemption from gift and estate tax; however, when the assets are gifted to a properly structured irrevocable trust, the assets can be effectively removed from the transfer tax system, meaning the assets (and the future growth, income and appreciation thereon) should not be subject to future gift, estate or generation-skipping transfer taxes.

Creating a deliberate and thoughtful game plan to address the financial, legal and practical considerations of a young athlete's new earning potential in this NIL era will help protect, grow and manage these earnings in a tax-efficient manner to jumpstart the wealth creation and preservation process.

For more information or questions, please contact the authors, who are experienced estate and tax planning practitioners in Holland & Knight's Private Wealth Services Group, where they partner with the firm's Sports Industry Team to counsel athletes and their families on legal matters related to NIL transactions and compliance, tax and estate planning.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.