Going through a divorce can be a difficult time for anyone involved. It’s an emotional situation with financial implications for both spouses; however, the process is even more complicated when one of the spouses owns a medical practice.
In a divorce, most assets are added to the “marital pot” and split amongst the spouses. Assets, like cash and publicly traded stocks, are easy to value because they have a readily accessible market value. On the other hand, a medical practice is not a liquid asset, which makes it more difficult to value.
Valuing a medical practice is similar to valuing a privately held business in many ways, with the exception that special attention needs to be applied when valuing goodwill. The valuation of goodwill is important because not all goodwill goes into the marital pot. Valuing the goodwill of a medical practice can be complex, so it’s recommended that a valuation expert is retained by the practicing spouse.
A medical practice generally has different classes of goodwill. Goodwill that is attributable to the practice, like a patient list, is usually added to the marital pot. Conversely, Goodwill attributable to the individual doctor, like his or her professional reputation, is usually not added to the marital pot. Thus, when valuing a medical practice, it is crucial to distinguish between the different classes of Goodwill.
When a doctor divorces, the medical practice is often the largest asset in the marital pot. To ensure that the practicing spouse is providing the correct amount of spousal support, it’s critical that they hire a valuation expert who has extensive knowledge with medical practices. By not hiring a valuation expert, the practicing spouse could potentially pay out to the non-practicing spouse a buyout payment of the medical practice and monthly spousal support payments that are based on the same stream of income. The non-practicing spouse would essentially be double dipping in the same income stream. A valuation expert will help to protect this from happening.
In addition to making sure the goodwill of your medical practice is valued correctly, new rules have recently been enacted under the Tax Cuts and Jobs Act (TCJA) that impact the tax treatment of alimony payments. For couples entering into a divorce pursuant to a signed divorce agreement after December 31, 2018, alimony payments are no longer deductible for tax purposes by the payer spouse. Consideration due to the loss of this tax benefit should be made when determining the amount of alimony payments. A CPA can help with this calculation.
When doctors are pondering divorce, consulting experts like a CPA and an attorney for valuation and legal advice is the most important step. Reaching out to the experts, sooner rather than later, will help make the situation much more manageable and should result in a fair outcome for both sides.
For more information or questions on divorce, please contact Steven Sanquist, Gregory Rascher, or one of our tax advisors at 301.231.6200.