Shohei Ohtani’s giant new contract with the Los Angeles Dodgers carries interesting financial planning and tax questions alongside its unprecedented impact on Major League Baseball.
The 29-year-old superstar designated hitter and pitcher smashed the previous record deal among professional baseball players by hundreds of millions of dollars when he
Ohtani drew further attention by helping his new franchise
“I was looking into it and doing some calculations, and I figured if I can defer as much money as I can if that’s going to help the [luxury tax] and that’s going to help the Dodgers be able to sign better players and make a better team,” Ohtani said through an interpreter at
The structure prompted more jealousy among fans of other teams and
“The current tax system allows for unlimited deferrals for those fortunate enough to be in the highest tax brackets, creating a significant imbalance in the tax structure,” Cohen said. “The absence of reasonable caps on deferral for the wealthiest individuals exacerbates income inequality and hinders the fair distribution of taxes. I would urge Congress to take immediate and decisive action to rectify this imbalance. Introducing limits on deductions and exemptions for high-income earners promotes social responsibility and contributes to a tax system that is just and beneficial for all. This action would not only create a more equitable tax system, but also generate additional revenue that can be directed towards addressing pressing, important social issues and fostering economic stability.”
Cohen’s cold-take on the deal may be ignoring the fact that Ohtani could also net
“There’s a risk there, because you don’t know what taxes are going to be in the future,” Rawiszer said in an interview. “His heirs would inherit the future value of those dollars. There is a risk there that he could be in a higher tax bracket in the future. … Who knows what taxes will be, and who knows where he will be living at that point? There are so many different factors that go into it.”
Ohtani’s contract is “remarkable and, as a result, the planning considerations are abundant,” Matthew Bacchiochi, the president of Toronto-based
“I think you have to plan that the income will be taxed federally and in the state of California regardless of where he resides when he receives the deferred income,” he said. “This is prudent as it adds a considerable margin of safety to forecasting and modeling, recognizing that the ultimate determination of the tax liability will be fact-specific. Nonetheless, California is known to be aggressive with regard to collecting tax on income believed to be sourced to the state.”
The deal reminded Rawiszer, a fan of the New York Mets, of that franchise’s annual payment of $1,193,248.20 to retired star Bobby Bonilla
Rawiszer knows Bonilla’s former agent, financial advisor
“We don’t currently have any athletes that have done that, but I’m sure this is going to start a trend,” he said. “Ohtani’s contract is off the charts. There’s never been anything like it paid to any professional athlete in any sport.”
Deferring the vast majority of the money to the future raises important needs around cash-flow budgeting and estate planning, according to Rawiszer and Bacchiochi. Other potential tools to protect Ohtani’s long-term wealth may include life insurance “depending on his objectives for philanthropy, family and gift-giving,” as well as some means of safeguarding “against a career-ending injury (on or off the field),” Bacchiochi said.
While “it is largely inconceivable that they default on their commitment,” the Dodgers did file
“Interestingly, Mario Lemieux ended up using the leverage of his $29 million of deferred salary to rescue the Pittsburgh Penguins from bankruptcy when he converted the debt to equity in 1998,” Bacchiochi said. “We have seen in the NHL that the introduction of escrow to manage revenue sharing between owners and players has caused retired players to lose up to 20% of their deferred contracts. Hedging currency may also need to be a factor, assuming Shohei returns to Japan after his playing career, to protect against a strengthening Yen. Overall, the wealth will provide numerous opportunities, but, in our view, it is essential to segregate or ring-fence the assets from harmful events, as well as creditors and predators seeking to misappropriate his resources.”
‘Who in their right mind’?
Despite the intriguing issues raised by advisors about the terms of his deal, Ohtani remains focused on baseball results rather than the financial implications,
“Nobody should be surprised,” Balelo told SI. “Everything he does is unique and impeccably well thought out. Who in their right mind gets to this level and decides he wants to help the team and the city compete above all else and basically says, ‘I don’t need it.’ Nobody does that. But there is nobody like him. This is the epitome of thinking about others, of pure intentions.”
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