Stepping out onto the financial stage

As seen with the recent SAG and WGA strikes (and the earlier pandemic), cash reserves matter. You can be worth millions on paper, but if all your wealth is tied up in real estate and business interests, it will be hard to quickly unwind those assets to meet immediate cash needs without incurring losses.

• Don’t underestimate your liquidity needs: Given the uncertainty of income flows in your profession, try to save at least a year or two of living expenses just in case you face an unexpected interruption in your career.
• Set up a separate account for quarterly estimated tax payments: Avoid unpleasant surprises by setting aside more money for potential taxes than you think you'll need. Keep in mind that almost all states will require you to file a state income tax return and pay a portion of any earnings made performing/working in their state — even if you don’t reside there. Also, make sure to keep any money that is set aside to cover tax payments liquid and secure.
• Save first, spend second: Commit to setting clearly defined annual savings goals and achieving them each year (or ideally front-loading a couple of years) before making any major luxury purchases.
• Explore your tax-deferred retirement investment options: Working in the entertainment industry, you may have different sources of income. It’s important to talk to your accountant about how to maximize the tax-deductible retirement savings options you have available.
• Establish a separate corporate entity for name, image and likeness (NIL) income: Talk to your attorney and accountant about the potential tax benefits of establishing an LLC, C-Corp or S-Corp if you have a significant amount of endorsement, personal appearance or social media marketing income.

Debt isn’t a black-and-white issue. While you want to keep longer-term debt to a minimum (except, perhaps, a mortgage), there are times when custom lending solutions (such as contract-based lending, mortgages, secured loans and unsecured lines of credit) can be invaluable resources to help smooth out cash flow fluctuations.

• Consider a secured line of credit: A secured line of credit like a Bank of America Loan Management Account® can be invaluable for those times when you have immediate major expense needs but a substantial lag before back-end revenues are received. To accommodate any inconsistent cash flows, you may also want to investigate custom lending solutions to fund any major purchases.
• Don’t automatically assume that paying cash is better: When it comes to making major purchases such as a home or car, sometimes leveraging credit and lending solutions can be more tax-efficient while at the same time helping to preserve your liquidity.
• Carefully consider interest rates and tax-deductible interest: Some types of interest paid, such as mortgage interest paid on debt balances of up to $750,000 and interest paid that is allocatable to a trade or business, can be used to offset your income and reduce your overall income tax liability. When determining which debts to pay off first, it’s important to look at the debts on which you are paying the highest interest rate, such as credit card debt. Consider whether the interest is tax deductible or not. If the interest rates are similar, it’s better to pay off non-deductible debt before debt that offers an income tax deduction.

As a recognizable personality, protecting your assets and income is especially critical to ensuring your future. There are a host of financial risks that intensify with wealth and fame, including lawsuits, hackers and other financial fraud, as well as injuries that could jeopardize your career.

• Don’t cut corners on liability insurance: As a public figure, you’re more likely than most people to face litigation, so make sure you have a robust umbrella policy in place for protection (it’s better to be over-insured than under-insured).
• Use a real estate trust for privacy: When you establish a blind real estate trust to purchase a property, you can avoid having any public record of your ownership.
• Structure your charitable giving: If supporting specific causes and charities is important to you but you would like to preserve your anonymity, a donor-advised fund like the Bank of America Charitable Gift Fund (CGF) can allow you to give more tax-efficiently while protecting your privacy.¹
• Avoid excessive investment risk (such as crypto or the latest hot stock): The more money you can set aside and save early, the less risk you’ll need to take on in order to reach your financial goals. In addition, there’s a lot to be said for maintaining appropriate risk with your financial decisions so you can “sleep at night.”

Although it may be the last thing on your mind early in your career, it will take thoughtful planning to sustain the type of lifestyle you’ve grown accustomed to once your career winds down. The earlier you start working on retirement and estate planning, the easier it will be to reach your goals.

• Front-load your retirement savings: Suppose you’re in your early 30s and have a $2 million payday from a film/television role or a successful music tour. While it’s great to splurge a little and enjoy the here and now, don’t forget about the future. Putting aside $1 million in an after-tax account for retirement can pay both literal and figurative dividends when allowed to grow over a 30-year or longer period.
• Review your pension statements each year: Your pension can be a significant future income stream, so it’s important to make sure you receive the proper credits each year for work performed.
• Don’t forget to account for any residuals/royalties: You will need to stay on top of managing and ensuring the accuracy of these ‘mailbox money’ income payments and building them into your financial plan.
• Fund future long-term care needs: Long-term care can be one of the biggest expenses you face later in life. Whether you opt to self-fund or purchase long-term care insurance, it’s a good idea to fund those healthcare needs now — while you’re making significant money.
• Use life insurance to protect your loved ones and transfer wealth: A life insurance policy (especially when held in certain types of irrevocable trusts) can be used to provide financial security to your loved ones in the event of your untimely passing. It is also a highly tax-efficient way to transfer wealth to the next generation — allowing for assets to pass outside of your estate — and avoiding both probate delays and estate taxes.
• Make sure your beneficiary designations are up to date: Be aware that certain assets, such as your retirement plan accounts, pensions, annuities and life insurance policies, will be distributed to the named beneficiary, even if your will says otherwise.