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When Athletes Retire, Is the Next Step Bankruptcy or Paradise?




by:
Michael A. Gillen
Duane Morris LLP - Philadelphia Office

Kenneth L. Shropshire
Duane Morris LLP - San Francisco Office

 
March 27, 2013

Previously published on March 21, 2013

The "paradise" stories for the post-playing careers of professional athletes are without a doubt under told. The success of Roger Staubach in building a real estate empire, the multiple businesses of NBA all-stars Magic Johnson and Jamal Mashburn, as well as success in politics by the likes of Steve Largent and Bill Bradley, are known to some. Also, consider the Super Bowl's most valuable player, Joe Flacco, the proud recipient of a $120.6 million contract, alongside option bonuses of $15 million and $7 million, and superstar Ray Lewis, who, in retirement, has recently joined a new team: ESPN. Let's not leave out baseball, with Alex Rodriguez in the midst of a $275 million contract running through 2017. Then what?

For all these stories of paradise, there are also parasitic tales. Unfortunately, we are more likely to hear the stories of the multi-millionaire athletes, who after extremely successful careers, fall flat on their faces-and bankrupt. The true statistics are controversial and difficult to ascertain. A set of controversial statistics holds that more than 70 percent of professional athletes leaving the NFL are bankrupt within two years of retirement. Another analysis maintains that number approaches 60 percent within five years of retirement for players leaving the NBA. Even if those numbers are halved, they are much too high.

Remember Jevon Kearse ("The Freak")? A freakishly bad thing happened to him recently. In retirement since 2009, he is now facing foreclosure on his $6 million South Florida home purchased in 2004, just as he signed a contract with the Eagles that included a $16 million signing bonus.

Allen Iverson is running out of money, despite earning more than $150 million in salary alone. Vince Young is broke less than 10 years after a $26 million guarantee, completely maxing out his available credit, even before retirement at 29 years old. Terrell Owens is headed in the same direction after making more than $80 million over a wild 15-year playing career, and the list goes on and on. All these athletes had three things in common, with two being much more meaningful than the other. First, they all played at one time for Philadelphia franchises. More significantly, however, they all mishandled money and they all either had less-than-stellar advice-givers or failed to follow their advice.

Bad investments, terrible financial decisions, expensive divorces and support liabilities, along with trusting the wrong people, often hurt athletes much more than the game itself. Young as well as seasoned athletes, well-versed in their field, but not in business or financial management, are simply vulnerable to financial mismanagement and unscrupulous advisors or self-centered advice-givers. Add to the mix ever-increasing tax burdens, due to governmental budget shortfalls and aggressive collection divisions, at all levels-federal, state and local-and the professional athlete faces a recipe for disaster. California now boasts the highest state tax rate in the country, at 13.3 percent for those with incomes in excess of $1 million. As a result, many high net worth athletes are leaving the state, and are otherwise seeking innovative solutions.

It is vital that athletes, at the outset of their careers as well as throughout their careers, surround themselves with a team of independent advisors who have not only deep experience in sports management, investments, legal issue and taxes, but who also work well together-as one cohesive team-for the benefit of their client, the young and emerging or experienced and seasoned athlete. Intellectual property, antitrust issues, litigation, tax planning and compliance activities are just a few of the issues that a unified team of advisors can assist with, and as a result: (1) protect and shield the young or experienced athlete from the dangers of bad investments, bad decisions and self-centered advice-givers; and (2) proactively plan for a successful financial life beyond the field, court or diamond.

Speaking of planning, tax planning for athletes is now a more essential function than ever before. With the recent increase in tax rates for those earning more than $450,000, the return of the Pease Amendment (which limits the amount of available itemized deductions), increases in capital gains rates and certain Obamacare tax increases, without proper planning, athlete's incomes are at bigger risk than ever. We wrote in depth about these tax changes. With the delayed hockey season, many players worked overseas, which created a host of specialized international tax issues and treaty regulations regarding tax obligations. Additionally, athletes, due to their high wealth potential and public exposure, have become targets for the taxing authorities, often without knowing it. Risk lurks for athletes and agents in the area of parallel IRS investigations, or simultaneous civil and criminal investigations.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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