Contributed by Steve Butler.
It is a new era for college student athletes, who can now (as of July 1, 2021) profit from their name, image, and likeness (NIL).
A change to the long-standing National Collegiate Athletic Association (NCAA) policy that prohibited athletes from making money has abruptly—and dramatically—altered the landscape of NIL in collegiate athletics. The NCAA has long been criticized for generating billions in annual revenue from athletic programs while barring athletes from sharing the profits. Student athletes have not wasted time profiting under the new rules, with many already cashing in.
NIL agreements will undoubtedly benefit athletes and their families, but it also adds a fresh wrinkle to the old problem of athletes’ financial planning. Most athletic careers are short, and athletes go bankrupt at an alarming rate. In light of the updated NIL policies, estate and financial planning is more essential than ever for student athletes.
NIL Revenue in the NCAA
The NCAA’s leadership adopted an interim policy on June 30, 2021, that suspended previous NIL rules for all incoming and current student athletes in all sports. The sudden about-face, which stemmed indirectly from the Supreme Court’s ruling in Nat’l Collegiate Athletic Ass’n v. Alston,1 generated the following interim policies:
● Athletes may engage in NIL activities as long as they follow the laws of the state where the school is located.
● Students attending schools in states without an NIL law are permitted to engage in NIL activity without violating NCAA rules.
● Athletes may use a professional service provider to help them navigate NIL activities.
● Athletes must follow any NIL reporting requirements imposed by their state, school, or athletic conference.
Mark Emmert, NCAA president, said that the college sports governance body will “continue to work with Congress to develop a solution that will provide clarity on a national level.”2
Student athletes have wasted no time in taking advantage of the rule changes. According to Yahoo Finance, NCAA athletes could bring in over $1.5 billion in earnings this year.3 The deals range from local endorsements with barbecue restaurants to video ads for national brands to athletes launching their
own brands.4 Although Division I players’ earnings average less than $500, according to Yahoo, some earned more than their annual tuition in July 2021.
More Money, More Problems?
The top-earning NCAA Division I schools bring in around $8.5 billion of revenue per year, mostly from men’s football and basketball programs.5 Previously, less than 7 percent of that revenue was paid to athletes in the form of scholarships and living expenses stipends.6
While student athletes’ ability to make money from activities such as signing autographs, endorsing products, and in-person appearances corrects a historical inequality, history is not on the athletes’ side when it comes to financial planning. College athletes play for four years at most, and across the three major American sports (baseball, football, and basketball), the average professional career is less than five years.
The brevity of the average professional athlete’s career helps to explain why, despite lucrative salaries, 78 percent of National Football League players and 60 percent of National Basketball Association players face bankruptcy or serious financial distress soon after leaving the game. However, a short earnings window is not the only issue. Bad investments, poor planning, trusting the wrong people, and other issues also contribute to athletes’ financial failures. And because many athletes never play professionally, college sports may be an athlete’s only opportunity to cash in on their NIL.
Estate Planning for Student Athletes
Student athletes are still navigating the intricacies of how best to profit from their NIL. But signing a deal and collecting a check might be the easy part. Arguably, developing a plan that protects their newfound wealth for the long term is more challenging for young athletes.
The following estate planning considerations, geared toward college athletes with an expected NIL windfall, can help lay the foundation for a strong financial future.
Financial decision-making and power of attorney. Once they turn eighteen, athletes are legally adults, and their parents cannot automatically make financial decisions for them. If the athlete is older than eighteen and inks a deal with an agent, the deal is between the athlete and the agent. If the athlete buys a life insurance or disability policy, it is up to the athlete and the advisor who sells them the product to agree on terms and conditions.
Parents might have opinions about such deals and can voice them, but if the athlete wants their parents—or anyone else—to make financial decisions for them, handle transactions, or be formally involved in deal discussions, they must execute a financial power of attorney, a legal document that allows one person to act on another person’s behalf.
Gifts and tax consequences. Athletes might be tempted to share the wealth after getting paid. Giving financial rewards to family, friends, coaches, and others who encouraged and supported them has been the downfall of many athletes. On the other hand, a well-thought-out gifting strategy can be part of a comprehensive estate plan that reduces taxes.
College athletes must be mindful of how much they are gifting to others, even parents, and the possible tax consequences. In 2022, taxpayers are allowed to give a maximum gift of $16,000 per recipient to as many people as they want, without gift tax ramifications. Any gift of more than $16,000 will require the filing of a gift tax return; it also counts against the individual’s lifetime exemption amount.
Using Trusts for Asset Protection
Research supports the notion that many young adults have poor financial literacy and lack money management skills.7 These tendencies often lead to them being financially at risk later in life.
Sometimes, acting in our best interest means protecting ourselves from ourselves. Athletes who have not been wise with money up to this point are not likely to suddenly improve. Indeed, additional income could exacerbate bad money habits.
By placing assets in a trust that is managed for their benefit, athletes can receive disbursements only for necessities such as tuition, housing, and medical care, or at the trustee’s discretion, thus limiting bad spending habits. In addition, a trust can protect assets from creditors. There are many different types of trusts, including revocable trusts that can be changed during the beneficiary’s lifetime and permanent (irrevocable) trusts that can be customized to an athlete’s specific circumstances.
Planning for the future has a lot in common with sports. Coming out on top involves setting goals, teamwork, and dedication. A legal professional is a crucial member of your financial team. It is never too early to start thinking about your future. For help with estate planning for student athletes, entity formation and governance, as well as tax planning and preparation, please contact our office to schedule an appointment.