By Tom Taulli

Besides being an elite Major League Baseball player, the 26-year-old Juan Soto has demonstrated that he's a skilled negotiator. He was able to snag a record-setting $765 million, 15-year contract with the New York Mets. If he elects to the opt-out clause after the 2029 season, the value of the compensation package could rise to $805 million.

He'll need to have a team of tax professionals to help mitigate the tax bite. According to Robert Raiola, who is the director of the Sports & Entertainment Group at PKF O'Connor Davies, he may have to pay up to $322 million in federal income taxes, $36 million in state income taxes to New York and $25.6 million in "jock taxes." These are taxes for visiting players in various cities and states.

"When an athlete signs a megadeal like Soto's, you can be sure that it is the product of intense negotiations and bargaining," said Larry Mandelker, a private wealth planning and tax partner at Venable LLP. "What is not as apparent is the significant tax planning and structuring that forms the foundation of the deal. These tax preparation steps are an absolute necessity for anyone engaging in a significant transaction."

For financial advisors, a client like Soto may be rare, but large multiyear contracts are more common than you might think -- especially when clients sell a business.

So, how can you help clients navigate the tax challenges that come with these contracts? Here are three key strategies:

Tax plan around paydays. The first step is to figure out when and in what form each payment will be made. This can sometimes be hard to do. As in the case with Soto, payments can be based on contractual decisions. Or, say with the sale of a business, they could be according to the amount of profits generated. In some cases, the payments may be noncash, such as with stock. As much as possible, make a realistic estimate of the payment schedule.

Next, you can minimize the taxes by bunching deductions. "If the largest payment is in year five and you will move into a higher bracket, that is the year to consider maximizing charitable contributions, tax-loss harvesting and incurring deductible business expenses," says Jane Ditelberg, who is a director of tax planning at Northern Trust. "In the year with the lowest bracket, you can take discretionary actions that generate more income, including Roth IRA conversions or sales of appreciated assets."

State taxes matter. With high income-tax rates in some states -- such as California, which has a top rate of 12.3% -- it may make sense for clients with large contracts to consider moving during that peak-earnings period.

"We see this frequently in the sports world," said Mandelker. "An example is if the person rushes to sign a deal before year end so that he can report that income as a Texas resident, rather than a NY resident."

It's common for states to challenge residency. "You should have a detailed record of where you live and earn your income," says Spencer Carroll, a CPA and account director at Gelt. "This includes keeping logs of physical presence, such as the days spent in each state, updating legal documents like driver's licenses and voter registrations, and ensuring income sources are correctly allocated to low-tax jurisdictions."

Start estate planning early. For very wealthy clients, age should be no obstacle to starting estate planning. For example, if a client is selling property, it's a good idea to transfer it to a trust. This will mean that the proceeds of the sale are not subject to the claims of future creditors. The trust may also benefit from favorable state income tax laws.

Another way to start early is to encourage clients to donate to charities. A charitable remainder trust $(CRT)$ may make sense. "CRTs enable you to donate assets while receiving income during your lifetime and leaving the remainder to a designated charity," says Carroll.

"When you transfer assets to a CRT, you receive an immediate charitable deduction based on the present value of the remainder interest going to the charity," he says. "The CRT can then sell appreciated assets without triggering immediate capital-gains taxes. Income from the trust is distributed over time, deferring taxes and potentially lowering your overall tax rate."

Tom Taulli ( @ttaulli ) is a freelance writer, author, and former broker. He is also the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction .

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

December 24, 2024 07:45 ET (12:45 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.