Why celebrities need help with finances

Celebrity finances are frequently in the news, for reasons from bankruptcy to tax trouble to messy divorces to squabbles over estates.

Lawyer, businessman and author Martin Litwak, founding partner of Virgin Islands law firm Untitled, has dealt with plenty of them throughout his career, and he’s developed his theories about what financial services practitioners who want to pursue celebrity clients should know.

In his most recent book, Planificación Patrimonial Para Celebrities — which translates to Estate Planning for Celebrities — he theorised that most of the troubles come down to a lack of planning.

“Fifty percent or more of successful athletes go bankrupt within five years of their retirement,” he told an audience of financial services practitioners last Thursday at the BVI Finance office. “And this is all across the world; this is all across sports. The studies for the NBA, NFL and Premier League are exactly the same. Which is the other group of people that have the same stats? Winners of the lottery.”

Sports stars may come from lower-income backgrounds and often aren’t prepared to plan ahead when their pockets are suddenly full of cash, Mr. Litwak said.

They can also fall victim to unscrupulous or inexperienced lawyers, accountants and financial advisers.

Successful athletes, for example, may not have any professionals they can trust, so they hire friends and family who may have little to no experience in those fields, and who may set them on the wrong path, he said.

“You can have your friend supervising you or have your friends playing a role for you,’” he said. “But you can’t have your friends making the calls: not your father, not your wife.”

Diversifying

Another mistake celebrities make is failing to diversify their income, not only after retirement, but in the prime of their careers, according to the lawyer. Truly successful celebrities make “different types of investments,” he said, adding, “Soccer players have chains of hotels; they have whiskey factories; they have restaurants.”

Retirement may seem like a long way off for stars at the top of their game, but it may come sooner than they think, he said.

Ultimately, for athletes and other celebrities who achieve success when young, retirement is “psychologically speaking, really, really tough,” he added. “And of course it is good to have a plan when you are in the middle of your career, not waiting for retirement.”

Career stages

Anyone who achieves success in any field can easily divide the career into three parts, Mr. Litwak said: beginnings, success and retirement.

“Each of the phases of your career allows you to do certain things, and certain things just cannot be done,” he said.

But the planning, he added, should start right away.

“What happens initially is that you have to look at all the contingencies you have,” he said. “There are probably more chances for you not to make it than to make it, but you’re still going to spend a lot of money and time trying to make it.”

Insurance, he said, can cover injuries and the losses in income that can come with career setbacks.

Branding

Also important, he said, is establishing a tax residency early in one’s career, and managing one’s brand.

“Restructure and manage your brand professionally,” Mr. Litwak advised. “If you do it late, then you have a problem.”

For example, Argentinian football star Lionel Messi transferred his brand to a company in Uruguay, managed by him and his father.

“After having played in a World Cup, having won two European Cups and however many titles with FC Barce-lona, he decided that his brand was worth $50,000,” Mr. Litwak said.

“The tax authorities in Spain were not very happy about that.”

He ended up being fined about $2.3 million by a Spanish court, Mr. Litwak said, citing news reports.

The key to avoiding such issues is to “establish your investment vehicles,” he added. “I mean, create companies to invest your money and reinvest your money and provide for succession planning.”

Experienced, knowledgeable practitioners can win celebrity business by helping guide them along the right path, he added.

“A lot of the structures that will be valid and have good effects in the future will require moving from one country to the other,” Mr. Litwak said. “And that’s something that celebrities can do and that’s why I think that ultra-high-net-worth [individuals] and celebrities are probably the two main markets for any offshore practitioner these days.”

International rules

Mr. Litwak noted that ever-evolving requirements from the Organisation for Economic Cooperation and Development, the Financial Action Task Force, and other bodies are driving up the cost of complying with regulations, which in return require practitioners to charge more for record-keeping, appointing directors and other related expenses.

Such complicated international regulations call for experienced financial professionals to help set up structures designed to avoid future issues, he said.

Moderator Simon Gray, head of business development and marketing for BVI Finance, said Mr. Litwak’s scenarios illustrate that “so often, so many lose so much by not planning well enough. Good examples include sports professionals and pop stars as well as lottery winners — skillful on the pitch or stage, but less so in the world of financial planning and the navigation of tax laws.”