This weekend's NHL draft will determine the professional fate of 211 young men and although budding hockey stars like John Tavares and Victor Hedman will likely earn millions, there is no guarantee that their financial future is secure.
Coming into a considerable amount of wealth at a young age brings with it many challenges, including the temptation to blow it all on a fancy sports car, a huge new house or an extravagant lifestyle. But as is the case with many other professional athletes - including basketball, baseball, soccer, football - the career span of a hockey player is a short one.
Given that financial mismanagement is common among professional athletes, it is important that the young hockey players establish a solid financial plan that will help them preserve their wealth for the fifty years after they have stopped playing.
"Getting drafted and becoming a professional player is a dramatic change for an eighteen-year-old, as they suddenly deal with significantly more money but also much higher expectations for spending," says Darwin Schandor, regional vice-president of the sports professionals program at RBC Private Banking. "There is a lot of uncertainty in an athletic career, so they need to start financial planning as soon as they are drafted."
Here are ten financial tips for newly drafted and professional athletes, courtesy of the Royal Bank of Canada:
1. Don't let your signing bonus change your life. Players drafted in the first or second round to the NHL can receive a signing bonus in the range of several hundred thousand U.S. dollars, but the majority of those players will not immediately go to the NHL. Signing bonuses can be structured to pay only 15 per cent tax depending on where the athlete resides and where he plays.
2. Manage your spending - you'll only get paid for seven months of the year. With a big cheque coming in every two weeks, it is tempting for young players to buy big ticket items and live an expensive lifestyle. But NHL players only get paid from October to April (excluding playoffs, bonuses and awards). Many players draw on a line of credit to carry them through. A financial plan that includes budgeting can help keep players on track.
3. You probably have to fund 50 years of retirement. Most NHL players will play for less than 15 years and retire in their late-20s or early-30s. Those who are injured will have even shorter careers. They have to start saving early and invest carefully to make their money last throughout their lifetime.
4. Careful tax planning can make a huge difference. For most people, taxes are their single largest expense. The multiple filing requirements of a professional cross-border athlete can make tax planning very complex. An athlete's country of residence can dramatically impact the overall taxes he pays. Many Canadian resident players take advantage of significant tax savings by setting up a Retirement Compensation Arrangement (RCA). Players who are married or have families can use income splitting tax strategies such as spousal loans and family trusts to reduce tax.
5. Fluctuations in foreign exchange can have a big effect on your finances. Most athletes are paid in U.S. dollars. If they rent, buy or sell property in Canada or overseas, changes in the value of the Canadian dollar can have a big impact. A number of athletes mitigate their exposure through forward exchange contracts and other hedging strategies.
6. Before you buy your dream house, evaluate the impact of where you own property. In Canada, mortgage interest is only deductible if the property is used for investment purposes. For U.S. residents, interest on up to $1,000,000 (U.S.) of the mortgage on the main home or a second home can be tax-deductible.
7. You will be asked for money regularly - so plan your giving in advance. Newly signed players could be particularly subject to aggressive solicitations, so they should avoid significant donations until they have a plan. Some athletes set up a charitable foundation to raise funds, donate to charitable causes, and reduce income taxes.
8. Endorsement income can offer tax advantages. Canadian resident players who receive endorsement income could consider setting up a Canadian corporation to take advantage of lower corporate tax rates. They will need professional advice for this advanced strategy.
9. Protect your assets from lawsuits. High-income and high-net-worth individuals are more likely to be subject to lawsuits. Players should consider strategies to protect their wealth from creditors, such as setting up a domestic or foreign trust.
10. Protect your family's future through insurance and estate planning. Ensure there is adequate disability insurance. Also, some forms of life insurance can provide tax-free investment growth. To ensure the player's family is provided for, it is important that he make a Will and plan to minimize U.S. estate tax, which can be as high as 45 per cent, as well as probate tax. One common strategy is to set up a revocable living trust to hold U.S. real estate assets in order to avoid U.S. state probate tax.
Roma Luciw is a writer and web editor of the Globeinvestor.com personal finance site. Please send any comments and story ideas to firstname.lastname@example.org.