Financial tips for NHL’s new drafts

By Kanupriya Vashisht | June 25, 2009 | Last updated on June 25, 2009
4 min read

More than 200 young hockey players will be drafted at the 2009 NHL Entry Draft in Montreal on Friday. And the grinders, defencemen and smooth skaters who make it to the big league, will find themselves swept into a ritzy world of ice, admirers and mega bucks.

While the fame might stick, the money often goes as easily as it comes. Within two years of retirement, 78% of former NFL players have gone bankrupt or are under financial stress, while an estimated 60% of former NBA players are broke within five years of retirement, according to Sports Illustrated magazine reports.

So, to keep them from treading on thin ice, and make sure their early athletic success translates into long-term financial success, RBC’s Sports Professional Program has put together 10 tips for these fledgling sports stars.

According to Prashant Patel, vice-president of high-net-worth planning services at RBC Wealth Management, financial planning is not what most players will think about on draft day, but they should be thinking about it soon after, given their short careers. “They need advice to help them minimize tax, preserve capital and ensure their money lasts for 40 to 60 years after their professional career ends.”

Darwin Schandor, regional vice-president of RBC’s Sports Professionals Program, notes that getting drafted and becoming a professional player is a dramatic change for most 18-year-olds, who suddenly deal not only with significantly more money but also much higher expectations for spending. “There’s a lot of uncertainty in an athletic career… but professional athletes who develop a personalized financial plan can be very good at sticking to it, because they are focused, determined people.”

Ten investment tips that will keep players between the hash marks

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 limit taxation to just 15%, depending on where the athlete resides and where he plays.

Manage your spending – you’ll only get paid for seven months of the year. With a big cheque coming in every two weeks, it’s 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.

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.

Careful tax planning can make a huge difference. For most people, taxes are their single largest expense. This is especially true for athletes at the top of their game. 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.

Fluctuations in foreign exchange can have a big impact 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. Many athletes mitigate their exposure through forward exchange contracts and other hedging strategies.

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 of the mortgage on the main home or a second home can be tax-deductible.

You will be asked for money regularly, so plan your giving in advance. Newly signed players could be subject to particularly 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.

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.

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.

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.

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Kanupriya Vashisht