Outstanding financial planning?

Investment Analysis Clubs Macro Economic Trends and Risks
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{{ Shohei Ohtani’s record-setting 10-year, $700 million deal includes a series of unprecedented deferrals, a person briefed on the terms told The Athletic on Monday.

In an effort to enable the Dodgers to continue spending around stars Ohtani, Mookie Betts and Freddie Freeman, Ohtani agreed to defer all but $2 million of his annual salary — $68 million of his $70 million per year — until after the completion of the contract. The deferred money is to be paid out without interest from 2034 to 2043. }}

If he’s earning that money after he has retired to a low tax rate jurisdiction, it could be a good idea. Ohtani currently earns about $50 MM/yr in off diamond endorements.

Most large, multi-generational fortunes are the result of the lack of taxation, rather than whatever productive activity the first generation workers and innovators were up to. That’s why it’s important to keep the voters ignorant and innumerate enough to let this kind of tax policy continue.

intercst

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Not good financial planning. No interest and total exposure to inflation so he will be getting less buying power by the time the checks roll in. I would still like to have that problem.

The big picture, he is leaving the organization room to surround him with other good/great players so he can hopefully win championships which at the professional level is how your legacy is made. Maybe he took a page from Tom Brady who was always underpaid relative to results but he has 7 rings to make up for it.

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It would be a fair assumption that all parties were aware of the potential impact of inflation and interest and took that into account when making the deal. In other words, the nominal amount is very likely higher because of the delay in much the same way the lottery amount is higher when one takes it in payments vs a lump sum.

When parties are dealing with nine figures of income, you can rest assured that they did not ignore something so blatantly obvious.

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I don’t think inflation was taken into consideration, at least not to any significant effect. His contract almost doubles the next highest paid player. So unless they think inflation is about to significantly increase again…

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Over 10 years at even 3% inflation on $700 million is a big pile of money. Something like $140 million if I’m doing the sums correctly. I’m with @Hawkwin, I don’t see how numbers this large would have been overlooked.

This is somewhat reminiscent of Bobby Bonilla’s contract with the Mets. He took a $1.19 million per year deal for 25 years, which was deferred for 11 years. But he got an 8% interest rate, which is a pretty great deal for him.

For their part, the Mets thought they could make more than 8% over that time period, thanks to their wizard investment manager, Bernie Madoff.

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You are over thinking this. Perhaps his upfront offer would have been exactly the NPV of 700,000,000 discounted for inflation.

How much more it is than another player is entirely irrelevant.

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Today’s much larger first-generation fortunes came up in high tax conditions. Foundations avoid taxes.

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If he collected that $700 million while being subjected to Federal and California ordinary income taxes, he’d lose almost half of it. Once he retires, he qualifies for the much lower leisure class tax regime that favors inherited wealth and those living off investment income. Or, who knows, he might decide to live in Monaco tax-free for a while. I suspect he sees little utility in becoming a US citizen.

intercst

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That’s only good for investment income. Deferred pay such as this is taxed as wages, just like it would be if paid out without the deferral.

–Peter

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That’s actually evidence that interest on the deferred pay was taken into account. If I’ve used Excel correctly, the present value of that series of payments ($2 mil for 10 years followed by $68 mil for another 10 years) is around $310 mil at a 6% interest rate. That puts his contract in the same ballpark as that next highest paid player.

Discounting at 5% makes the present value a little over $350 million - roughly half of the headline figure.

–Peter

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Would that still be true if Ohtani left the country after the 10-year playing contract ends, and he collects the deferred income while a residient of Japan (or Monaco). Don’t forget, he’s not a US citizen.

intercst

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Income from US sources is still taxed as income. Leaving the country or not being a citizen doesn’t change that. If he failed to pay taxes, the income would eventually be garnished.

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The question perhaps is -

If paid now in CA, full federal tax at max rate, full CA tax at max rate, maybe 48-52% in total.

If paid in 2033+ in WA, full federal tax at max rate, no state tax, maybe 39-42% in total

If paid in 2033+ in Japan, what is max tax rate for foreign sourced income? I think maybe 20-21%?

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I’m not that well informed on international taxation. It’s outside of my area of practice. With that disclaimer, I am reasonably certain that if it is taxed, it would be taxed as wages. I suspect it would be taxed in the US, as it was earned there and is it being paid by a US business (the Dodgers).

—Peter

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In the suggested scenario, Ohtani would be a non-resident alien and subject to a pretty hefty withholding to make sure that taxes are paid.

—Peter

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From the US perspective, it is US sourced income paid to a foreigner. There might be a tax treaty that comes into play as well. I’m pretty sure this would be income effectively connected to a US business and therefore subject to the same tax rates as a US citizen.

—Peter

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Yep. I don’t think it was done mostly for tax purposes. It was done so they have room to build a super team for as much as a decade.

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Like the Dodgers haven’t been a super team for the last decade. :grinning:

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Heh heh. I think they want to be like the Yankees of the 1950s. Played in 8 of the 10 World Series, won 6 of them.

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As a Red Sox fan would be okay with me since it would not be the Yankees doing it.

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