As of July 1, 2021, college athletes can profit from their name, image, and likeness (NIL). The National Collegiate Athletic Association (NCAA) policy allows college athletes and recruits to make money from endorsements, autograph signing, and personal appearances as long as they follow applicable state laws. The NCAA has long been criticized for its ability to generate billions in annual revenue from athletic programs while prohibiting athletes from doing the same. As a result, student-athletes have jumped at the chance to be reimbursed for the value of their NIL.
Most athletic careers are relatively short. The high earning potential athletes enjoy typically has an abrupt start and end, which causes many athletes to go bankrupt at a much higher rate than those with a more steady income stream. For this reason, and due to the recent NCAA policy change, it is more important than ever for student-athletes to begin estate planning.
The NCAA’s New Policy on NIL
Nat’l Collegiate Athletic Assn. v. Alston was likely an impetus for the sudden change in the NCAA rules on allowing student-athletes to benefit from NIL. The NCAA leadership adopted an interim policy on June 30, 2021, which includes the following:
- Athletes can engage in NIL activities as long as they are consistent with the states’ laws. Colleges and universities can serve as resources for athletes to help them understand these state laws.
- Athletes can use a professional services provider for NIL activities.
- Athletes who attend school in a state which does not have a NIL law can still engage in NIL activity without violating NCAA rules.
- State law and schools may require athletes to report their NIL activities.
According to NCAA President Mark Emmert, “This is an important day for college athletes since they all are now able to take advantage of name, image, and likeness opportunities. With the variety of state laws adopted across the country, we will continue to work with Congress to develop a solution that will provide clarity on a national level. The current environment — both legal and legislative — prevents us from providing a more permanent solution and the level of detail student-athletes deserve.”
As expected, student-athletes have wasted no time taking advantage of the rule change. According to a recent article in Yahoo News, nearly 90% of all NIL deals center around social media promotion. Athletes have a potential earning of more than $1.5 billion. Up until the rule change, division 1 players have been earning $471 on average. Now some earned more than the cost of their tuition in just July 2021.
Will More Money Lead to More Problems?
In 2006, NCAA Division 1 schools earned $4.4 billion in revenue. Over the next decade, their revenue doubled to $8.5 billion, according to Garthwaite et al. The authors estimate that of these earnings, only 7% of football and basketball earnings are paid to athletes either in the form of academic scholarships or a modest stipend for living expenses.
The change in NCAA policy will help correct this financial inequity. However, other problems may develop. College athletes typically play their sports for four years, and the average professional career in baseball, football, and basketball is around five years.
Sports Illustrated estimates that 78% of NFL players face financial difficulties within two years of retiring from the sport. The same can be said for 60% of NBA players within five years of retirement. A short earning period, bad investments, poor planning, trusting the wrong people, and other social and psychological factors all contribute to this population’s high prevalence of financial problems.
Estate Planning for Student-Athletes
Learning how best to profit from NIL while a student-athlete is important, but so is learning how to maximize and protect their earnings. The following estate planning tools and considerations can help student-athletes lay the foundation for a strong financial future.
Financial Power of Attorney
Parents, arguably the biggest advocates for each student-athlete, can help them make financial decisions up until they are eighteen years of age. After that, they are legally adults, and parents cannot automatically make decisions for them.
Parents must stand by while their child makes financial decisions that will significantly impact their future. If they sign a deal with an agent, they are locked into that deal. The terms are between the athletes and the agent. If they purchase a life insurance or disability policy, the terms and conditions are determined by the agent and the young athlete.
Parents (or anyone else) can voice their opinions, but they have no legal authority unless the athlete wants to give them that power through a financial power of attorney. A financial power of attorney allows athletes to choose someone to make financial decisions for them, handle transactions, or be formally involved in a deal discussion. A financial power of attorney is a legal document that allows one person to act on behalf of another.
Gift and Tax Consequences
Being a sudden high-wage earner leads many college athletes to gift others who have helped in their success, such as family, friends, coaches, and others who have supported them. Generous gifts can lead to an athlete’s financial downfall or be part of a comprehensive estate plan that reduces taxes. There are tax consequences to gifting. In 2021, taxpayers can give a maximum gift of $15,000 per recipient to as many recipients as they want without gift tax ramifications. These amounts count against the individual’s lifetime exemption amount. If a gift is more than $15,000, it will require the athlete to file a gift tax return.
Protecting Assets Using Trusts
Many people reflecting on their lives will acknowledge that they had poor financial literacy and lacked money management skills when they were college age. Unfortunately, choices as a young adult can have ramifications later in life.
Placing assets in a trust that is managed for the athlete’s benefit is one way to protect their money for their future. Using a trust, athletes can receive disbursements for necessities such as tuition, housing, and medical care. The trustee can manage the trust money, limiting its waste and protecting it from creditors.
There are several types of trusts, including revocable trusts, which can be changed during the beneficiary’s lifetime, and permanent (irrevocable) trusts, which can be tailored to an athlete’s specific circumstances.
Planning for your financial future, like sports, involves setting goals, teamwork, and dedication. An estate planning attorney can be a crucial member of your financial team. It is never too early to begin planning for your financial future.
You can schedule a call with us or reach us directly at 855.631.3457 to learn more about how best to plan today to protect those most important to you.