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Mookie Betts and Fernando Tatis Jr. Ronald Martinez/Getty Images Sport/Getty Images
Mookie Betts (left) and Fernando Tatís Jr.

Estate Planning Lessons From Mookie Betts and Fernando Tatis Jr.

The giant contracts recently signed by these two young MLB stars can act as a teaching moment for "normal" clients.

Almost a year after Mookie Betts agreed to a 12-year, $365 million contract with the Los Angeles Dodgers, on Feb. 17, 2021, Fernando Tatís Jr. agreed to a 14-year, $340 million contract with the San Diego Padres. In his new contract, baseball sources indicated that Tatís’ deal included a signing bonus over $10 million and no deferred money. Accordingly, Tatís could receive up to $34 million in the next calendar year. Tatís is unmarried with no children. Assumedly, he’s a California resident.

While most clients aren’t Major League Baseball players, it may be surprising to find instances in which a client may experience issues similar to those Tatís is beginning to encounter:

  • Maximizing estate, gift and generation-skipping transfer (GST) tax exemption before the current law sunsets or is proactively changed;
  • A major liquidity event in one year (examples: sale of a business, winning the lottery, personal injury lawsuit payment);
  • State income taxation implications on earnings based on state of residence; and
  • An estate plan with no beneficiaries or heirs.

Here are some common solutions to planning encounters with estate, gift and GST tax, major liquidity events, state income taxation and estate planning for single individuals.

Using Exemptions Before Laws Change

In 2021, the estate and gift tax exemptions are $11.7 million per person. GST tax exemption is $11.7 million. On Jan. 1, 2026, these exemptions are scheduled to sunset and revert back to $5 million, although that amount will be indexed for inflation. Additionally, many estate planners “in the know” are suggesting the possibility that the exemption amount will change well before 2026. Congress and President Joe Biden will have to deal with the economic consequences of the pandemic and may not wait for current law to sunset. Instead, they may proactively work to lower the exemptions sooner and may move the exemption below $5 million.

Like Tatís, clients concerned about future estate tax liability should consider using a completed gift of their full exemption amounts, $11.7 million, as soon as possible. One strategy is to use a gifting vehicle, such as a dynasty trust. Tatís could name “future descendants” as the ultimate beneficiaries of the trust and name charities, siblings or parents as contingent beneficiaries should he have no children. For married clients, consider estate planning techniques such as spousal lifetime access trusts (SLATs) and inter vivos qualified terminable interest property (QTIP) trusts. By using SLATs and inter vivos QTIP trusts, married clients can retain some access to gifted assets (albeit limited or indirect) while using their exemptions.

In the case of someone like Tatís, $11.7 million is only a small fraction of his net worth. What options should be considered for the balance? For an athlete or a high profile client who’s the target of frequent litigation, consider using an “incomplete gift plan" in the form of a self-settled domestic asset protection trust (DAPT) for assets above $11.7 million. In the near term, that type of trust can help preserve wealth. Should the estate and gift tax exemptions increase in the future, Tatís can make use of those increases through additional completed gifts by moving assets from his self-settled trust to the dynasty-like trust described above. If the exemption is reduced, the “incomplete gift” self-settled trust (and any previously completed gifts) remains intact.

Your client might also consider the use of irrevocable life insurance trusts (ILITs) to create liquidity with life insurance that can be used to pay for the estate tax liability. This can be particularly helpful when an estate contains a significant amount of illiquid assets, such as real estate or closely held businesses.

Planning for a Major Liquidity Event

Using the estate and gift tax exemptions isn’t enough when an individual is subject to a large liquidity event in one or more years. In the case of Tatís in 2021 post contract, using his $11.7 million exemption leaves him with yet additional money to shield from taxes. When asset protection isn’t the only concern, other planning ideas can be used.

One idea is creating a charitable lead annuity trust (CLAT). A CLAT is funded with a large one-time transfer in which lead payments are made to a qualifying charity with the remainder being paid to named individuals. Because Tatís presently has no heirs, this type of planning may require further brainstorming or flexibility. Tatís might consider instead creating a private foundation (PF). Tatís could seed the PF with a large gift in Year 1 to shield some of his initial salary from taxation.

Another possibility is to establish a flip charitable remainder trust (Flip-CRUT). An inverse of the CLAT, a Flip-CRUT can be funded with a large one-time transfer but rather than making present distributions to a qualified charity, the donor is the present beneficiary. Because a donor with significant present earnings won’t need distributions now, the “flip” feature allows the donor to delay distributions for a period of years or until a triggering event, such as retirement. Until the trust flips, the assets can remain invested. Once flipped, distributions will continue for the donor’s lifetime. At the donor’s death, the remainder is distributed to the qualified charity. Although present distributions start and may continue well into the future, the donor receives a charitable deduction in the year the Flip-CRUT is funded.

Someone like Tatís is receiving his liquidity from salary. For others, the major liquidity event might come in the form of a sale of a business or other long-term holding. For older clients, it may be advisable to hold any assets with low basis until death, allowing heirs to receive a stepped-up basis. Assets with the potential for future growth may be gifted to grantor retained annuity trusts (GRATs) using  shorter or longer terms with the hope that if the asset appreciates in the future, the GRAT will shift the value to beneficiaries via trusts. In the case of Tatís, he could create a dynasty type trust as the vehicle to receive the excess of the GRAT, funding the GRAT with a portfolio of stocks and bonds that his financial advisor hopes will appreciate in the future.

Domicile and State Income Tax Planning

While an athlete like Tatís performs the majority of his games and practices in a high income tax state like California, it doesn’t necessarily mean that he’s domiciled there for state income tax purposes. Many athletes call Florida home because it has no state income tax. Although a thorough analysis of Tatís’ California income tax computation is outside the scope of this article, his circumstances as a professional athlete aren’t unique. Think of the highly compensated executive that during the pandemic worked from their Florida home or traveled back and forth between New York and Miami three working days a week during normal conditions.

Of the $34 million, a state like California could tax up to $4.2 million of Tatís’ immediate earnings. Some cities have a city tax. For professional athletes, the threat of nonresident sports facility usage fees in certain cities also takes a cut of any earnings.

Further, some states offer greater asset protection than others. For example, individuals domiciling in Florida can receive creditor protection for retirement plans, annuities, cash value of life insurance and an unlimited homestead exemption. In contrast, other states don’t have these exemptions. Yet many states without generous creditor exemptions historically have higher income taxes, higher property taxes and a greater cost of living. This is problematic as individuals in low exemption-high income tax states may need to consider other asset protection vehicles. In addition to the self-settled DAPT previously discussed, your client could also consider umbrella insurance policies for added creditor protection. However, umbrella insurance policies can be costly for high earners, and like any insurance product, there’s a reluctance on the part of the insurance company to pay out during a major loss. So caution is warranted in relying exclusively on an umbrella insurance policy for creditor protection.

Domicile can also have a significant impact on your client’s marital rights. Whether a client is domiciled in a community property or non-community property state will determine how assets are treated during their lifetime and how they’re divided in the event of a divorce. High earning clients should always consider establishing a prenuptial agreement to clearly define the expectations of both parties and to protect the assets acquired prior to marriage in the event matrimony ends in acrimony.

If a client works and resides in different states, particular care should be exercised to ensure the intended state is recognized as the client’s domicile. There’s no single rule that establishes domicile but rather a collection of facts and circumstances. Some factors that can be considered include the issuing state for the client’s driver’s license, vehicle registration, voter registration, mailing address, property ownership or lease, place of worship, location of bank accounts and the number of days physically present in one state.

Single Clients and Clients With No Beneficiaries

Single clients with no children or grandchildren, like Tatís, aren’t readily able to spend down their estates by using annual exclusion gifting or paying directly for education or medical expenses. When a client has no ascertainable beneficiaries, they should consider charities, friends and other non-immediate family members as potential beneficiaries. For example, Tatís has a younger brother for whom he could pay education expenses directly (tuition) to spend down his assets (albeit his brother, Elijah Tatís, is in the Chicago White Sox farm system and might not need the education at this time). For other high earners looking to spend down their assets, paying tuition or medical expenses directly for nieces, nephews and other close relatives, or establishing a foundation or donating to other charitable organizations, offers an altruistic benefit where the choice is between taxes and helping others.

More worrisome though is deciding who the client should appoint as their health care decision maker and financial power of attorney. This can often be a difficult decision for anyone. For athletes, the calculus is even more important when there are potential bad actors in such individual’s life. In the case of Tatís, his father was a major league baseball player so he would be privy to a different perspective. Other athletes may not be so fortunate.

Many athletes are sold term life insurance policies with high face values. Other athletes are sold large disability policies. For the single client, the purchase of insurance should be scrutinized by credentialed professionals. Although younger single clients, such as Tatís, may never be easier to insure and the insurance may never be cheaper, there could be better investment opportunities than traditional insurance policies to “insure” a player’s career. The same decision making can be applied to other high earners who are single with no children.

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