In sports and in business, success often brings significant monetary compensation. While this is a dream come true for most individuals, it is important to take the right steps to safeguard this hard-earned money.
This article discusses a legal game plan to protect and safeguard yourself and your family:
Your Off-Court or Off-Field Penalty: Taxes
There are several types of taxes that may impact you and your family members:
As you make more money, it is natural to want to give gifts to or support your loved ones. But be careful, as those gifts could generate a tax in addition to income tax. According to the Internal Revenue Service (IRS), the gift tax is a tax on the transfer of property from one person to another when nothing, or less than full value, is received in return. Luckily, not all gifts are subject to the tax. Each person has an annual gift tax exclusion amount which the amount or value someone can give another person during the calendar year without the IRS assessing the gift tax. An easy way to avoid the gift tax is to make sure you are not giving a friend or loved one more than the annual exclusion amount each year. For 2021, the annual gift exclusion is $15,000. per donor, per recipient. This means that a giver can make a gift to anyone else — such as a relative, friend, or even a stranger — up to $15,000 in assets per year, free of federal taxes.
Alternatively, if you want to make a larger gift, keep in mind that every US citizen has a lifetime estate and gift tax exclusion which is currently $11.7 million. However, this is the maximum aggregate amount you can give during your lifetime; it is not per person like the annual gift tax exclusion. Be aware that this exclusion amount is set to sunset back to $5 million (adjusted for inflation) on December 31, 2025, so if you wish to make large gifts, it is better to do so now while the exemption is high.
Although estate tax is not assessed until you die, it is vital to think about it now. As previously mentioned, the lifetime estate, inheritance tax, and gift tax exclusion are currently high but will sunset. Because no one has a crystal ball to decide when you are going to die and what the estate tax exclusion amount will be at that time, we always need to be mindful, and plan now.
Benched: Managing Your Money and Property If You Cannot
While you may currently manage your money and property yourself or with a professional’s help, have you considered what would happen if you were unable to continue managing your money and property? You may be injured on the job or afflicted with a condition that makes you incapacitated (unable to communicate or make decisions for yourself), or if you work in a state or country other than where you permanently live, you may be out of town and unavailable to oversee necessary transactions. At best, you may want to consider managing your assets through a Trust, and naming successor Trustees, and at a minimum utilizing a customized Power of Attorney to grant a trusted advisor, family member, or close friend the power to manage your finances in case of emergency. We discuss these options in more detail below.
Revocable Living Trust
A revocable living trust (RLT) is a trust you create during your lifetime and can change at any time prior to your incapacity or death. This planning tool enables you to name yourself as the current trustee (the person or entity charged with managing, investing, and handing out the money and property) and to choose a co-trustee or alternate trustee if you are unable to function as the trustee. An RLT also allows you to continue enjoying the money and property during your life and while you are incapacitated, as well as decide what will happen to that money and property upon your death, protecting it for your chosen recipients.
For this strategy to work as intended, however, any accounts or property meant to be owned by the trust must be properly funded into the trust. Funding the trust involves changing the ownership of the accounts or pieces of property from yourself as an individual to yourself as the trustee of the trust. If the trust does not own a particular account or property, the trust terms will not control what happens to it.
Not only does an RLT allow for continued management of your accounts and property if you become unable to act for yourself, a properly funded RLT also allows those accounts and property to avoid the probate process. This means that legal intervention is typically not required for the transfer of your assets to your named beneficiaries. In other words, planning with a Trust can help avoid legal fees and court costs, and court-imposed delays imposed by the probate process.
Another added benefit of utilizing a Trust, is that the details of your estate will be kept out of court records and the media. This means that upon your incapacity or death, your financial matters can be managed privately by those you have chosen. However, an RLT will not protect your money and property from your creditors or judgments but there are other legal strategies to consider in conjunction with a RLT if that is a concern for you.
The bottom line is that there are a multitude of benefits to using a Trust as part of your game plan from minimizing legal fees, maintaining privacy, to managing your assets the way you desire even when you cannot do so personally.
Power of Attorney
An added tool that can help manage your money and real estate is a Power of Attorney. This document allows you to choose a trusted person (your agent or fiduciary) to oversee your financial matters on your behalf. Your agent can handle a wide variety of transactions, from signing checks to opening a bank account, depending on the authority you give that person. If you wish your agent to act only in certain instances or transactions, then a limited financial power of attorney can be drafted for those circumstances. Alternatively, if you would like to grant your agent the authority to conduct all the financial transactions that you would be able to do yourself, then we can prepare a general financial power of attorney.
Another consideration is when you want your agent to act. If you want to limit when your agent can act, a springing financial power of attorney allows your agent to step in only when a determination has been made that you are no longer able to manage your financial affairs in case of emergency. On the other hand, if you would like your agent to be able to act right away, an immediate financial power of attorney can be created. Even though your agent can act on your behalf as soon as the document is signed, it does not change your ability to continue carrying on business for yourself. Your agent is just another person who has authority to act. This can be a useful tool if you routinely travel for work. Lastly, if you want your agent to be able to act when you are no longer able to manage your affairs, it is important that the financial power of attorney be durable. This means that the document and your agent’s authority will not be affected if you are later determined to be unable to make financial decisions for yourself. When the agent can act and what the agent can do are all things that can be customized to your unique situation.
Caring for Your Physical Well-Being If You Have Been Benched
Due to the risk of injury that comes with such a physically demanding occupation, having proper healthcare documents is crucial. These include a durable health care power of attorney, living will or advance directive, and a HIPAA authorization form.
Advance Healthcare Directive
A living will or advance health care directive allows you to clearly convey your wishes about end-of-life decisions. Because these can be very sensitive topics, it is important that you carefully consider your wishes. This may take some soul-searching, but it is necessary that you know what you would like to have happen in certain situations so that your wishes can be properly documented and communicated to your chosen medical decision-maker. Absent specific instructions from you, your spouse/partner/family member is going to be left trying to figure out what you would have wanted, and at worst will be met with push back from the medical provider to implement your health case wishes. Documenting what medical treatment you want in a healthcare directive can avoid causing added grief in a difficult situation, as well as potential conflict among your loved ones regarding decisions about your medical care. We all know that communication is key to healthy relationships, and in that way, a health care directive is simply a legal tool allowing you to express clearly in no uncertain terms what medical treatment you would want (or oppose) when you cannot communicate your desires yourself.
A privacy waiver, which looks similar to a HIPAA authorization form medical providers can offer, allows you to grant certain individuals access to your medical information (e.g., to get a status update on your condition or receive your test results) without giving those individuals the authority to make any decisions on your behalf. By at least supplying the medical information to your loved ones, you can help quiet the anxieties and uncertainties that often arise during times of emergency. This can also help alleviate tensions between your medical decision-maker and the rest of your loved ones. Although only one person will be making the decisions, the rest of your loved ones will at least understand why those decisions were made. Also, a privacy waiver provides access to medical records that could be necessary to seek a second opinion to lay the groundwork to change hospitals or alter an existing medical treatment plan that does not seem to be working.
Let Us Be Your Team Off the Court or Field
Proper estate planning is a must for everyone. Not only do you have to address and manage tax, asset protection, and other financial concerns, you also need to protect yourself and your family in the event you are injured with the proper legal documents. We welcome the opportunity to work with you, and any other financial or life insurance professionals on your team, to help craft a winning game plan that will have you and your loved ones protected.
To accommodate your busy schedule, our estate planning attorney team is available for both in-person and virtual meetings. Our law firm offers evening and weekend hours by appointment to help start your planning process. Contact Ann-Marie Murzin @ (571) 396-8460; firstname.lastname@example.org.