Estate planning fundamentals are the same for every client. Regardless of wealth or age, every client needs the basic suite of documents - a power of attorney, a living will, a health care proxy, a will, a revocable trust and, for many, an irrevocable life insurance trust.
Similarly, a budget, and then a financial plan, is at the center of every well-crafted estate plan. They help determine future estate-tax exposure, appropriateness of a gift program, insurance planning strategies and more.
But when your clients are celebrities or athletes, estate planning takes on new dimensions. While every client is unique, star power brings with it several unique issues that change the entire planning process, creating new risks as well as new opportunities.
Identifying these factors and their impact on planning is essential if you intend to serve these clients properly. Even if your client roster doesn't include the likes of Derek Jeter, Will Smith or Lady Gaga, you can adapt these planning techniques to meet the needs of less well-known clients.
Good planning always begins by identifying a client's objectives. "The athlete and celebrity face unique circumstances that typically bring with them additional objectives for planners to address," says Eido Walny, an estate planning lawyer in Fox Point, Wis.
For many, especially athletes, future earnings are typically projected at a very high level over a short duration. The concept of the traditional income stream - from entering the workforce to retirement - that is at the base of client planning assumptions is often useless as a guide for these individuals.
Once their prime earning career ends, future income will often be modest, perhaps even nonexistent. This requires a different perspective on savings, retirement planning and other planning topics.
Athletes are also more likely to suffer a disabling injury that could cut their careers short. While this risk varies depending on the sport, it is far greater than the risk faced by most clients, and the consequences are far worse.
Insurance is only a partial answer to hedging this risk. In addition, while it might be logical to increase the client's current savings, that strategy may conflict with the need to accumulate retirement savings during a potentially short period of high earnings.
The nature of the assets that most athletes and celebrities own is often unique. Their biggest asset tends to be their earning power and, for some, endorsements and other intangible rights. They tend not to have built the asset values in business endeavors that other clients have, unless their investment ventures have already taken them down that path.
Celebrities and athletes often are undermined financially by trying to leverage their names and images in business ventures. They should evaluate whether to contribute their efforts and star power to a venture, but limit their financial exposure. Too many celebrities and athletes have signed guarantees that have proven ruinous decades later.
A major factor for many of these clients is lifestyle risk. They often face tremendous pressure to keep up with their peers.
Many stars and athletes have entourages that include manipulators and predators seeking to take advantage of their wealth. A high rate of divorce and the probability that family members or friends will seek their financial assistance, leaning on them emotionally to lend or provide money, all add to the pressure cooker.
All told, celebrities and athletes run a dramatic risk of financial ruin from the costs of an extravagant lifestyle, needs or demands of family and friends, legal entanglements, bad investments and a lack of financial planning. And it is your job to minimize these risks.
While most financial planners presume doctors are most concerned about malpractice protection, creditor protection is even more important for anyone with celebrity status. "Failing to have adequate creditor protection could prove to be the undoing of the athlete or celebrity client's wealth planning, considering the sycophants, pseudo-investors and others opportunists they face," Walny says.
Celebrities and athletes often ask their peers to recommend professional advisors, even though those friends may not have made the best decisions themselves. To protect these clients and ensure their financial success, you must proactively ensure that they have the proper advisory team in place, quarterbacking the process. In addition, special trusts designed to minimize estate taxes and protect assets can hold endorsement contracts, equity in startup business ventures and even a limited liability company formed to insulate accumulated savings.
While many stars use entities such as LLCs to hold various real estate or business ventures, this planning strategy often falls short. If the LLCs are structured as single-member entities, they can protect personal assets from a claim against the property or business conducted by that LLC. However, that approach does little to protect the various business entities from other attacks, such as a large guarantee gone bad, an ex-spouse or someone who has sued the client personally.
Instead, if the LLCs were formed in states with favorable creditor protection laws, had multiple members so that charging order protection was available and were in part owned by irrevocable trusts, the level of asset protection could be enhanced substantially. Charging order protection means that personal creditors cannot seize the partner's LLC interests but can only obtain a charging order and receive the percentage of the profits allocated to them - profits that the partner controls.
Multiple member LLCs are generally taxed as partnerships for income tax purposes. While there is some cost associated with filing another return, for the client concerned with privacy, this provides a significant advantage.
If there is a suit against the entity, only the entity income tax return, Form 1065, should be discoverable, not a personal income tax return. If a single member LLC is used instead, there is no entity return and the results of the entity's activities are reported directly on the client's Form 1040.
For the famous client, having a parent or other relative establish a trust may be the most powerful planning tool. In particular, a vehicle known as a beneficiary defective irrevocable trust may be ideal.
Because the parent is the settlor establishing the trust, it may provide a greater measure of asset and estate-tax protection than a trust established by the client. Because a parent only needs to gift $5,000 to the trust, this modest amount may be feasible even if a client's family is not particularly wealthy. This trust grants the client the right to withdraw the gift using an annual demand power, also known as a Crummey power, meaning the client is treated as the grantor for income tax purposes.
This tax classification permits the client to sell assets to the trust without triggering capital gains. Intangible rights that might be subject in the future to valuable endorsement contracts, business ventures the client has invested in and even non-controlling interests in a family investment LLC are all assets that might be beneficial for the client to sell to the trust.
In this manner, substantial assets can be frozen inside the trust so that future growth is outside of the client's estate and relatively secure from the reach of claimants. Because the client will continue to pay income tax on the assets growing inside the trust, this technique will enhance the savings and security component of the plan.
"The athlete or celebrity might pair a permanent life insurance policy with the BDIT technique," suggests Richard Oshins, an estate-planning lawyer in Las Vegas. The life insurance can create the desired wealth if tragedy cuts the client's life short, protecting his or her family and loved ones.
The conservative growth inside the insurance policy also may be a reasonable ballast to offset some of the riskier ventures a client might pursue. The income earned on the other assets sold might suffice to cover the insurance premiums, so future gifts can be used for other purposes. Also, inserting an institutional trustee into the distribution decision-making process may relieve a celebrity or athlete from having to say no to a family member or friend's request for a gift.
Estate planning for clients with star power relies on many of the same building blocks as estate planning for other clients. But the unique challenges faced by celebrities or athletes can be better met by tailoring these techniques to address the unique risks and opportunities they face head on.
Martin M. Shenkman, CPA, PFS, J.D., is an estate planner in Paramus, N.J. He runs laweasy.com, a free legal website.