What do you do when have the chance to earn life-changing amounts of money?
As an example, let’s talk about the G.O.A.T – No…not Messi, Lebron, Phelps, Woods, Brady or even MJ himself, but the baseball legend in the making -- Shohei Ohtani AKA “Showtime.”
He just signed a headline-grabbing $700-million contract to play a game for the next 10 years!
I have to imagine that Ohtani’s wealth management team - which, to be clear, we are not – took months meticulously thinking through his goals and creating the most tax-efficient yet financially lucrative way for a team to pay him his worth.
At Sozo Private Wealth, we have expertise in serving athletes who experience unique compensation models similar to Ohtani. We believe the opportunities and strategies which are useful to athletes are also applicable for the non-athlete families we serve. If you receive a meaningful cash bonus, stock option or stock grant compensation, have variable payouts, on-target earnings, or have the chance to sell all or part of your business, we may apply a framework to your situation that we also use with athletes.
For example, here are few questions we consider:
- How can taxes be deferred or reduced?
Ohtani’s contract is the largest in North American sports history, but he deferred 97% ($680 million) of the entire contract until 2034, giving it the equivalent of a present-day value of $460 million. Why did he do this? Two reasons come to mind.
First, as a resident of California the tax rates he must pay are high, but in the future he may be able to relocate and receive his income in a state with a lower tax rate.
Second, he wants to win! As you can imagine, not only do teams have a finite amount of cash they can spend each year on payroll, but there’s a threshold for how much you can spend as a team. The upcoming payroll threshold for 2024 is $237 million. Therefore, if Ohtani did not defer his salary, he would have taken up 30% of the team’s salary, limiting them on the caliber of players they can sign. Teams who exceed that figure will be penalized and must pay Competitive Balance Tax - better known as Luxury Tax.
- If I can trade money now for more money later, is it worth it and can I afford it?
If you happen to be a highly marketable baseball star, this may not be much of a concern. Let’s not forget, he did make at least $40 million last year off endorsements alone, and that is expected to grow in 2024.
However, through his new contract he will only receive the net present value of $460 million, which must be factored into the discussion as well. Is it wise to take less later instead of more sooner?
Having the right financial forecast is essential for individuals who may not have the endorsement earning power of someone like Ohtani. What do I spend now, and what do I want a liquidity event such as the sale of business, a signing bonus or stock grant vesting to afford for my family now versus later? These are questions and forecasts we routinely help clients measure and consider.
- Most importantly, how does the person define success?
At Sozo Private Wealth, we love learning how each person we serve thinks about success, and quite often, there are amazing stories that fuel that definition. Sometimes people have passion and energy around personal financial independence. It could be about making sure the people in their company are in the right place when the business sells. Other times clients may be focused on securing a confident income stream. Perhaps they are concerned about the economic and financial environment and want to know if and how they can take risk off the table. Or maybe they want to care for loved ones such as children, a spouse, parents or other family members.
If you have questions like these and would enjoy a conversation, please let me know. Our team would be thrilled to hear your story and see if we can contribute to your thinking…even if you are not signing an Ohtani-sized contract!
This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.