Michael Phelps, who became the first person to win eight gold medals at a single Olympics earlier this week, also became a richer man: He automatically earned $1 million for his accomplishments through his contract with Speedo, and his agent told the Wall Street Journal that he expects Phelps's performance in Beijing to earn him $100 million over the rest of his life. (Phelps already pulled in $3 million to $5 million a year through endorsements.)
But a life of luxury isn't a foregone conclusion. Plenty of celebrities, including MC Hammer and Kim Basinger, have raked in millions only to run into financial trouble later. I spoke with Alby Salaman, chair of Holland & Knight's private wealth services group for the mid-Atlantic region and lawyer to several NBA and NFL players, about what Phelps should do to protect his windfall. Excerpts:
What does Phelps need to do to manage his money smartly?
The first step is to hire the right people, including financial advisers, lawyers, accountants, and possibly an insurance agent—what if he loses an arm or becomes disabled, God forbid? One thing you want to do here is preserve this sum so that when the career is over, he has enough money to live on for the rest of his life. The financial advisers will help him invest the money in tax-exempt bonds and stocks to do that. He could become a spokesman for McDonald's or Nike, and he needs lawyers to help him negotiate the contracts and determine which are good deals. You also need an estate-planning lawyer. On top of that, he needs a pension lawyer to determine how he defers income and puts it into a retirement account.
He also will need a prenuptial agreement at some point. [Phelps has been linked to fellow Olympic swimmer Amanda Beard as well as British model Lily Donaldson, although the Baltimore Sun reports he has a nonfamous girlfriend.]
That sounds really unromantic.
Yes, but in this situation that he's in, you wouldn't want him being dragged through divorce courts. Divorce law is murky. In all the states I know about, if you get divorced, then the property you bring into marriage is still your own separate property, but marital property, which is the earnings after the date of the marriage, can be split up to fifty-fifty. He has to be protected—clearly, he should have a prenup.
What else does he need to watch out for?
I've been involved with athletes that have friends and hangers-on who say: "Can you lend me $50,000 for a restaurant, it's going to be terrific, we'll make so much money, and remember in ninth grade, when the teacher asked where you were, I lied for you." They call in their chips. There are all sorts of distant relatives who have really sad luck stories. [Phelps] has to be careful about protecting himself, not just from a failed marriage but also from family and friends. That's where a financial adviser can help out. He can say, "I'd like to give you the money," or "I'd like to get married without a prenup, but I've been with this adviser for a really long time and he'd kill me if I did that." What are other common mistakes athletes make with their money?
Not having proper estate planning. When Len Bias [the University of Maryland basketball star who was drafted by the Boston Celtics in 1986 and died two days later after overdosing on cocaine] died, he didn't have any insurance. His contract was voided, and then his parents didn't get any money. So, after all these years of watching basketball games and sacrificing, they got nothing. Should Phelps also think about what types of philanthropy he wants to get involved with?
A lot of athletes are charitably minded. Look at Dikembe Mutombo, the basketball player who set up a hospital in the Congo. So, that's a question, too, but the first thing is really their own security for the rest of their life, and then for a parent who sacrificed every day. [Phelps has worked with the Make-A-Wish Foundation in the past.] What about protecting his reputation? He was already charged with driving under the influence once. It seems like that kind of thing could really hurt his earning power.
Yes. You need a public relations person. Also, Phelps is getting all sorts of endorsement offers, and you don't want to endorse a product that adversely affects another. That's where public relations people come in.