Yash Chavda, Articling Student, Gowling WLG (Canada) LLP

A career in professional sports can be incredibly lucrative, but those earnings are typically concentrated into a short window, with most athletes reaching their peak earning years in their twenties and early thirties. During this period, athletes may sign major contracts, secure sponsorships, and build large personal brands. At the same time, they must navigate uncertainty, frequent relocation, and shifting financial circumstances. This combination creates unique estate planning needs, requiring careful attention to traditional planning tools, domestic and cross-border tax considerations, and treatment of branding and intellectual property assets.

Core Estate Planning Documents

A will remains a cornerstone for any estate plan. It outlines how a person’s assets will be distributed upon death and allows them to appoint an executor and guardians for minor children. For professional athletes, a will helps ensure that complex assets such as investments, real estate, business interests, and intellectual property tied to their personal brand are distributed per their wishes.

Athletes may also consider establishing trusts as part of their estate plan. Trusts can allow for tailored distribution of assets to their beneficiaries over time and offer tax planning advantages, depending on the jurisdiction and structure used. These benefits are especially important for athletes with young children or heirs who may need financial guidance.

Given the inherent physical risks of professional sports, powers of attorney are equally important. If the athlete becomes incapacitated, a power of attorney for personal care authorizes a designated individual to make healthcare decisions on behalf of the athlete. Similarly, a power of attorney for property allows such individual to step in and manage the athlete’s financial affairs. Both documents are important for professional athletes considering their specialized healthcare needs and complex financial situations, which demand a more tailored approach to estate planning.

It is equally important to appoint trustworthy and capable individuals to manage these decisions. For example, former NHL player Jack Johnson appointed his parents to manage his finances very early in his career. Unfortunately, they mismanaged Jack’s fortune and accumulated substantial debts under his name. Jack ultimately filed for bankruptcy in 2014. This emphasizes the need for careful selection and ongoing oversight of designated individuals. Athletes should be proactive in replacing or adjusting powers of attorney if they are being mismanaged.

Domestic and Cross-Border Tax Considerations

Professional athletes often earn income in multiple jurisdictions. Teams may be located in different countries, and athletes are frequently traded or sign contracts across borders during their careers. These movements can create tax residency issues that affect both lifetime taxation and estate planning.

For athletes moving between Canada and the United States, the rules in the Canada-US Tax Treaty are particularly relevant.[1] For example, a Canadian athlete signing with an American professional team may cause them to cease Canadian residency and trigger a deemed disposition of their property.  Where an athlete is determined to be a resident of both countries, the tiebreaker test would apply considering their home, centre of vital interests, habitual abode, and citizenship.[2]

The Canada-US Tax Treaty also contains specific rules governing the taxation of athletes. In particular, Article XVI(1) allows the country where the activity occurs to tax income earned from those services, even if the athlete is not resident there, unless annual gross earnings in that country are $15,000 USD or less.[3] Another important consideration is the taxation of signing bonuses. Under Article XVI(4) of the Canada-US Tax Treaty, signing bonuses are generally taxed at only 15% in the country that pays them.[4] However, the payment must true inducement to sign the contract. If the bonus is effectively compensation for services or performance obligations, the 15% rule would not apply.

Overall, the high earnings associated with professional sports frequently attract high tax exposure. With tax rates varying across jurisdictions, integrating these strategies into the estate plan is essential to managing tax exposure and protecting assets for future generations.

Sponsorships, Branding, and Intellectual Property

An athlete’s earning potential does not necessarily end when their playing career does. Sponsorship deals, personal brands, and related intellectual property can continue generating significant income long after retirement or death, making these assets an important component of any estate plan. A notable example is Kobe Bryant, whose family has continued to manage and benefit from licensing, merchandise, and brand-related opportunities following his passing in January 2020.

Moreover, these intangible assets can be difficult to value, however, proper valuation is essential for calculating gift and estate tax and ensuring fair distribution among beneficiaries. They can also be difficult to manage, as they often involve ongoing licensing and commercial agreements. Further, upon incapacity or death, the athlete’s estate may be required to make key business decisions. For example, when should the estate terminate a sponsorship or licensing agreement? When should a personal brand be wound down? Who has the knowledge and authority to enter into new commercial opportunities on behalf of the athlete? These are all important questions that should be addressed as part of the athlete’s estate plan.

Athletes should consider appointing individuals who understand the nature and value of these assets and have the expertise to oversee their management and commercial use. One approach is to establish corporate entities to hold and manage the intellectual property, licensing and sponsorship deals. These corporate entities should have clear governance and succession structures to ensure proper management if the athlete becomes incapacitated or passes away.

Finally, the value of these assets can also fluctuate significantly over time, as they are closely tied to an athlete’s public image, or even the team or location that they play in. For this reason, estate plans should be reviewed and updated regularly to reflect important changes in the athlete’s life. Athletes should also ensure that the individuals responsible for managing these assets are informed and prepared so they can properly manage these assets when the time comes.

Conclusion

Overall, estate planning for professional athletes requires a proactive and tailored approach. Athletes who put the right documents in place, plan around domestic and cross-border tax considerations, and proactively plan for the management of their brands and intellectual property will be well positioned to protect their wealth and provide for their families.

[1] Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, 26 September 1980 [Canada–US Tax Treaty].

[2] Canada-US Tax Treaty, Article IV.

[3] Canada-US Tax Treaty, Article XVI(1).

[4] Canada-US Tax Treaty, Article XVI(4).