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Effects on a Physician’s Financial Plan
[By John R. Connell, MBA, JD, CPA / PFS]
Just because a physician or other couple is getting divorced, does not mean that all previous financial planning has become untenable. The parties’ goals and objectives may remain the same. However, even though assets are divided equally, income and expenses rarely follow the same pattern.
Therefore, savings rates may decrease from previously projected levels. Consequently, the main planning activity for divorcing doctors and spouses may be segregating goals and objectives and fine-tuning the previous financial plan. This is where a healthcare focused financial advisor may be very helpful.
The Advisor
It is likely that a physician focused financial planner will be called upon to provide specific advice related to the actual divorce settlement. Such advice generally includes strategies for disposition of assets, determining reasonable levels of maintenance, and tax and other considerations.
The Process
It is important for the financial advisor providing advice to a first-time divorcing couple to help explain the divorce process to them [doctor client and/or spouse]:
- Generally, the first step in a divorce is the service of summons and petitions. The petition briefly states what is being requested. The party that commences the dissolution is, in most cases, the Petitioner (unless both parties commence, in which case each would be called Co-Petitioner).
- The person answering the petition files a response and is known thereafter as the Respondent. The response indicates the requests of the Respondent. In no-fault states, no wrongdoing is necessary to obtain a divorce. In states which do not have a no-fault provision, fault is generally required to allow the parties to divorce. Also, jurisdictions may have waiting periods that must pass before the divorce can be finalized. Because many domestic court dockets are quite full, the chances are that most cases will not be heard within the 90-day waiting period.
- Discovery may begin at this time. Discovery is used to determine the assets of the parties. Once the assets are determined, each asset must be categorized as either marital or non-marital.
At this point, it may be possible to propose a settlement. In most cases, however, some time will pass before settlement discussions begin.
Temporary Orders
It may become necessary for the case to proceed to the stage of Temporary Orders. At this point many items may be considered, including use of the assets, payment of debts, payments of attorneys’ and accountants’ fees, custody of children, and temporary maintenance. Then the court will issue Permanent Orders, which permanently decide the questions of custody of children, division of assets and debts, and provisions for maintenance and child support.
Separation Agreement
When the parties are amicable, court appearances may not be necessary and the parties may be able to create a separation agreement outlining issues related to custody, maintenance, property, and debt. The financial advisor should feel free, with the client’s permission, to discuss the process with the attorney handling the matter. Because divorces are governed by jurisdictional statutes, each advisor must educate him-or-herself regarding the statutes of his or her individual jurisdiction.
Areas to Consider
A survey of the general areas of financial planning suggests that typical advisory engagements will include cash flow and budgeting, analysis of net worth, estate planning, tax planning, and risk management, including life insurance, disability insurance, property insurance, and umbrella liability insurance. In addition, a planner may be called upon to provide advice on funding for education and other goals.
Post-Marriage Changes
In almost all situations, cash flow is most significantly affected by a divorce. The net worth of the parties will generally be halved, the tax situation may be significantly different, insurance matters may change, estate matters will probably be quite different, and planning for education and other goals may be significantly affected.
As with all financial planning engagements, the planner’s first step should be to understand the assets of the parties and cash flow so he or she can assist the client in formulating realistic goals and objectives. The more focused the goals and objectives, the better the results of the process will be.
Unusual Events
In a physician divorce situation, the financial planner may be faced with certain unusual issues that must be considered. Such items will likely have a significant effect on the future lives of the parties. Major other considerations can include the disposition of the family residence, division of retirement plans (especially with use of a Qualified Domestic Relations Order [QDRO]), structuring of property settlements and maintenance, deferred income taxes and their effects on the property settlement, and analysis of partnership interest and tax shelters, etc.
Assessment
Other physician specific or medical practice management topics include practice valuations and appraisals, practice succession planning, buy-sell agreements and restrictive covenants, potential partner dissolutions and a host of other considerations depending on specific circumstances.
Conclusion
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