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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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More on Divorce Finances
Divorce: 15 Costly Mistakes
http://articles.moneycentral.msn.com/CollegeAndFamily/SuddenlySingle/Divorcing15CostlyMistakes.aspx
[Staff Reporters]
Medical Executive-Post
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John,
Good post.
When a physician or other couple thinks of divorcing, their first thoughts often are about the unfortunate end to a once-happy relationship and the arduous road ahead of starting a new life.
Sadly, the process of divorce, especially for doctors, is much more complicated than many of us realize. Divorcing doctor-couples often must consider child custody, relocation, starting over and dividing belongings. But one of the most daunting tasks can be setting financials straight.
Read more about the costs of divorce, in general, from this link:
http://www.fa-mag.com/online-extras/4247-cashing-out-of-a-marriage.html
Karen
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On Advisor Choice
The choice of an advisor for a physician couple going through a divorce is very important. Finding a Certified Divorce Financial Analyst experienced in the medical field or alternatively a Certified Medical Planner with divorce experience can be a challenge.
It might even be more important for the non-physician spouse to find a professional with expertise in this area, as this spouse will be particularly dependent upon a proper business valuation and accurate analysis of professional income. A divorcing physician does not necessarily need to give up on all of his or her financial goals and dreams. A comfortable lifestyle, good schools for the children, and a reasonable retirement can all still be attainable.
However, recalibration of spending, savings, and investing will be necessary in order to meet these goals. Hiring a fee-only fiduciary advisor should be the first step in making a plan and finding a path to financial success.
Brian J. Knabe MD CFP® CMP™
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Divorce Insurance?
There’s a reason Joan Rivers has joked that “The second wife gets the biggest diamond.” Financial headaches often come with a divorce and/or a second marriage; for doctors and others.
The second wife, for example, may need to deal with the hubby sending money to his first wife and kids. There may be a court order for a divorcing spouse to buy life insurance to protect an “ex” and kids in the event of the death of the alimony provider.
Plus, estate plans can be messy with second marriages. Litigation over marriage break-ups often lasts for years.
http://registeredrep.com/newsletters/insuranceletter/insuring_clients_in_divorce_and_second_marriage_0817/
Chad
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Uncoupling
Increasingly, women are the ones paying alimony after couples call it quits.
http://www.fa-mag.com/component/content/article/8311.html?issue=175&magazineID=1&Itemid=73
Gladys
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More on Divorce Planning
Few occasions in life are more joyous than a wedding. It’s typically filled with celebration, romance, and the promise of spending a lifetime together.
Conversely, there are few things as painful as the ending of a marriage that began with such promise. The unfortunate reality is there’s a 50-50 chance that what started out in wedded bliss will end bitterly in a court of law. If you are a doctor heading into a divorce, here are a few tips that may make the transition a little easier financially.
While I’ve seen many divorces start out “amicably,” I’ve seen very few end this way. While your divorce may be the exception, I would suggest you plan for things to get contentious.
A divorce is more than the termination of a marriage. It’s also a major financial event that can have repercussions for many, many years to come. Think of it as the dissolution of a business. This is not something you want to go about casually or do on a handshake. You need to get competent advice—sooner rather than later.
The type of advisors you will need depends greatly on your situation. The more assets you have and the longer you’ve been married, the more advisors you may need.
A young medical professional couple married only a short time, with very few assets or liabilities and no children, may very well be able to use one attorney or a mediator to settle things quickly and fairly. But, a mature doctor and couple married 15 or 20 years, who have children and who have accumulated assets and liabilities, will certainly each need an attorney. They would also do well to each engage a therapist for them-selves and their children. They could also benefit from consulting with an accountant, financial planner, and an appraiser if they own real estate.
If you’ve been a “stay at home” spouse of a physician, and sacrificed your career to raise children, you would greatly benefit from getting some career counseling. While you may receive child support or some alimony from your former spouse, the chances are it won’t be for as much or as long as you would like. There is also the risk that your former spouse may pay erratically or not pay at all.
Unless you can live exclusively off the earnings of assets received from the divorce, you may need to become employed. For anyone who has been out of the workforce for a long time, this may mean heading back to school and obtaining several years of education. If you can’t find or afford a career counselor, a great book with a lot of helpful exercises is Career Ownership, by Janine Moon.
There is no greater threat to your net worth than a divorce. Unless you are very wealthy, it’s a financial game changer. The reality is your lifestyle will almost certainly decline. It’s critical to actively plan for that new lifestyle as part of the divorce process. Creating a spending plan is very important. Is this difficult? Yes, for doctors, and most folks, it is. And, it’s hard enough to create a spending plan in good times, much less in the chaos of your world being ripped apart. Yet this will give you vital information to help you evaluate and intelligently respond to settlement proposals.
Finally, doctors must resist taking the attitude, “I don’t care what it costs me, I just want to be done with it!” Avoiding the discomfort of negotiating and dealing with conflict may seem easier now. Yet chances are great that you’ll regret it later.
A divorce is financially and emotionally devastating enough. Don’t make it worse by allowing your own beliefs to sabotage your future … or even your medical practice.
Rick Kahler MS CFP® ChFC CCIM
http://www.KahlerFinancial.com
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Podiatrists Among the Lowest in Divorce
Looking for a happy-ever-after partner, one who is willing to put in the hard yards for the long haul? Forget searching in bars or online; you should head to your local dentist, podiatrist, or optometrist instead.
According to research that correlated occupations with divorce and separation rates published in the Journal of Police and Criminal Psychology, optometrists were found to be among the most loyal of spouses with just four percent separating or divorcing, which is only a little less than the marital breakdown rate for podiatrists (6.8 percent) and dentists (7.75 percent).
Source: Andrea Black, Stock & Land [5/30/12]
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Regulations on Marital Portability
In T.D. 9593; 77 F.R. 36150-36163 and REG 141832-11; 77 F.R. 36229-36231 (17 Jun 2012), the IRS published temporary and proposed regulations on marital portability and the deceased spouse unused exclusion (DSUE).
During 2011 and 2012, Sec. 2010 permits “marital portability” that enables a deceased spouse to pass his or her unused applicable exclusion amount to a surviving spouse. In Notice 2011-42, the IRS stated that an executor of the deceased spouse must file IRS Form 706 and elect marital portability.
In the temporary and proposed regulations, the IRS expanded on prior guidance.
Portability will require an IRS Form 706 that is timely filed and the executor must make the marital portability election. The regulations state that valuation may be estimated for marital or charitable deduction property in the deceased spouse estate. This will substantially simplify the Form 706 return for small and moderate estates.
The calculation of the DSUE under Sec. 2010(c)(4)(b) was initially stated in the statute to require use of the “basic exclusion,” but the regulations clarify that the example in the accompanying legislative materials will be followed and will use the applicable exclusion amount.
There also are provisions that exclude gifts for which gift tax was paid in computing the DSUE. If a spouse remarries and divorces, he or she will not lose the DSUE of the last deceased spouse.
Source: Children’s Home Society of Florida Foundation
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National Breakup Season
We didn’t even know this was a thing, but according to the New York Post, the period from late December to Valentine’s Day has come to be known as “National Breakup Season.” And yes, we’re in full swing.
http://living.msn.com/love-relationships/the-heart-beat-blog-post?post=c458fb2c-a562-48d8-841d-d8dd4fd9028a
Honey … do we need to talk?
Dr. David Edward Marcinko MBA
[Editor-in-Chief]
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The Case of ‘Gray Divorce’
Couples in their fifties are divorcing at twice the rate they did 20 years ago.
http://www.fa-mag.com/news/financial-advisors-can-be-critical-in–gray-divorce–cases-13396.html?section=131
Doctors and laymen facing this prospect may need advice more than ever.
Jason
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Will Divorce Wave Follow Obamacare Rollout?
If the health insurance exchanges succeed in making coverage more affordable, financial planners and advisors say they expect some clients who are separated to make their split permanent.
http://www.financial-planning.com/news/divorce-wave-to-follow-obamacare-rollout-2686778-1.html?ET=financialplanning:e15007:86235a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=fp_alert_093013
This is an interesting new perspective.
Kimberly
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Is Divorce Contagious?
A new study just found that participants were much more likely to become divorced if a friend is divorced.
http://living.msn.com/love-relationships/love-sex/is-divorce-contagious-5
Any thoughts?
Donna
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Does Divorce Trump a Beneficiary Form?
A Supreme Court ruling has highlighted the problems that may ensue when an ex-spouse remains a beneficiary for death benefits.
http://www.financial-planning.com/fp_issues/2013_11/beneficiary-form-trumps-divorce-in-high-court-ruling-2687026-1.html?ET=financialplanning:e15531:86235a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=fp_alert_110613
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Divorce Ahead?
[Helping Docs-Clients Get a Fair Deal]
Marital divorce is by definition an adversarial process, but from a financial standpoint it works out better for both parties if it’s also a cooperative one.
http://www.financial-planning.com/30-days-30-ways-2013/divorce-help-clients-get-a-fair-deal-2687366-1.html?ET=financialplanning:e15702:86235a:&st=email&gpt_units=/30Days30Ways/November
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5 ways divorce could affect your Social Security benefits
A marital split can have long-lasting ramifications when it comes to your retirement benefits.
http://money.msn.com/retirement/article.aspx?post=5e93a4b1-9e0e-4dff-a29a-9ba6f6ba7a43
Sheila
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Client Divorce – Follow the Money
In an amicable divorce, the FA’s job is simple.
http://www.financial-planning.com/news/client/practice-profile-divorce-planning-tips-from-lili-vasileff-2689339-1.html?utm_campaign=daily-jun%202%202014&utm_medium=email&utm_source=newsletter&ET=financialplanning%3Ae2705142%3A86235a%3A&st=email
But, if one spouse is trying to hide assets, the work gets much more complicated.
Brenda
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Mature and Getting Divorced?
Here’s What Financial Advisors Should Know.
http://www.financial-planning.com/30-days-30-ways/retiree-client-getting-divorced-heres-what-advisors-should-know-2690100-1.html?utm_campaign=30%20days%2030%20ways-aug%207%202014&utm_medium=email&utm_source=newsletter&ET=financialplanning%3Ae2910274%3A86235a%3A&st=email
Hunter
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Out-of-Network Medical Costs for the Children and Mediation
Without a doubt, medical insurance and medical expenses consume a significant portion of household budgets, and that number has been increasing at a greater rate than income in recent years.
http://www.divorcesource.com/ds/newjersey/out-of-network-medical-costs-for-the-children-and-mediation-3859.shtml
For many households, those expenses can easily exceed 10% of annual income, and for self-employed individuals, that number is often double. At the current time, most plans are offering decreasing flexibility regarding choice of health care providers, and assessing severe financial penalties for choosing an out-of network provider.
Anju D. Jessani MBA APM®
[Accredited Professional Mediator]
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DIVORCE WITHIN THE MEDICAL PROFESSION
A Johns Hopkins University study, by Michael J. Klag MD in 1997, found that physicians in some specialties — chiefly psychiatry and surgery — are at higher risk for divorce than their medical brethren in other fields. But, the results did not support the common view that job-related anxiety and depression are linked to marital breakup. Alerting medical students to the risks of divorce in some specialties may influence their career choices and strengthen their marriages whatever field they choose. The study, supported by the National Institutes of Health [NIH], was published in the March 13th issue of The New England Journal of Medicine. Results also strongly suggested that the high divorce risk in some specialties may result from the inherent demands of the job as well as the emotional experiences of physicians who enter those fields.
Divorce Prone Medical Specialties*
For example, the Hopkins team assessed the specialty choices, marriage histories, psychological characteristics, and other career and personal factors of 1,118 physicians who graduated from The Johns Hopkins University School of Medicine from 1948 through 1964. Over 30 years of follow-up, the divorce rate was 51 percent for psychiatrists, 33 percent for surgeons, 24 percent for internists, 22 percent for pediatricians and pathologists, and 31 percent for other specialties. The overall divorce rate was 29 percent after three decades of follow-up and 32 percent after nearly four decades of follow-up.
Physicians who married before medical school graduation had a higher divorce rate than those who waited until after graduation (33 percent versus 23 percent). The year of first marriage was linked with divorce rates: 11 percent for marriages before 1953, 17 percent for those from 1953 to 1957, 24 percent for those from 1958 to 1962 and 21 percent for those after 1962. Those who had a parent die before medical school graduation had a lower divorce rate.
Female physicians had a higher divorce rate (37 percent) than their male colleagues (28 percent). Physicians who were members of an academic honor society in medical school had a lower divorce rate, although there was no difference in divorce rates according to class rank. Religious affiliation, being an only child, having a parent who was a physician and having a divorced parent were not associated with divorce rates. Physicians who reported themselves to be less emotionally close to their parents and who expressed more anger under stress also had a significantly higher divorce rate, but anxiety and depression levels were not associated with divorce rate
*SOURCE: Co-authors of the study, which was part of the Johns Hopkins Precursors Study, an ongoing, prospective study of physicians from the Hopkins medical school graduating classes of 1948 through 1964, were lead author Bruce L. Rollman, M.D., Lucy A. Mead, Sc.M., and Nae-Yuh Wang, M.S.
Dr. David Edward Marcinko MBA
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Alimony 2018 Update
Alimony that’s required by divorce or separation decrees or agreements that are executed after December 31, 2018 is not deductible. Additionally, alimony received as a result of divorce or separation decrees or agreements executed after December 31, 2018 is not included in taxable income, either.
It is important to note that this new rule does not affect 2018 returns or anyone who is currently paying or receiving alimony. Taxpayers who are divorced before December 31, 2018 will continue to deduct or report alimony payments.
Beth
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IRA Split and Divorces
https://www.financial-planning.com/news/grey-divorce-tax-strategies-and-dividing-an-ira-after-a-split?position=editorial_1&campaignname=FP_weekly_Tax%20Tuesday-01282020&utm_source=newsletter&utm_medium=email&utm_campaign=FP_weekly_Tax+Tuesday%2B%27-%27%2B01282020&bt_ee=4N0zxXkCs6dnG5mrj9wEjP43sigkZghAaIPwCm6uIV77rC92uJchkosJFXb1V6rb&bt_ts=1580230865584
Shana
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