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NJ Family Legal Blog Pertinent Information As It Relates To New Jersey Family Laws

WHAT DOES EQUITABLE DISTRIBUTION MEAN FOR A MEDICAL PRACTICE?

Posted in Alimony, Equitable Distribution

You work hard in high school, graduate top of your class in college, go on to graduate medical school, spend the longs hours and dedication needed to finish your residency, and finally after thousands of hours of studying, hundreds of tests and years of hard work – you are a doctor.  You start your own practice. You made it professionally. Personally, things are a bit different. You are facing a divorce. What does that mean for the medical practice you’ve worked so hard to establish?

Doctors may face unique issues during a divorce. Long term marriages may have seen years of what is considered relatively ‘average’ income (medical school and residency), followed by a dramatic or steady increase in salary (or a combination of both). It is no secret that self-employed doctors are usually not a typical W-2 employee. So what does this mean in the context of a divorce? What happens to the medical practice when the couple divorces?

Equitable distribution in New Jersey does not automatically mean half or 50% of a marital asset. Equitable distribution is not a simple mechanical division of assets accumulated and/or created during a marriage. The word ‘equitable’ itself implies the weighing of many considerations and circumstances that are presented in and unique to each case.  A judge would not be fulfilling his/her judicial obligation if he/she routinely or mechanically divided assets from a marriage equally.

In a long term marriage, personal assets are usually divided equally.  Businesses, including medical practices are a different story. Why? One argument may be that the spouse working in the business created the value of the business through his/her talent and hard work. Because of this unequal division of labor, perhaps there should be an unequal division of value. Other considerations may need to be made regarding the tax consequences of dividing the value of a business. Often times accounting experts are helpful in not only determining the value of a business (based upon different forensic valuation methods) but also cash flow and the consideration of perks that are paid by the business.   Every circumstance must be considered independently and in light of all the factors involved.

The matter of Steneken v. Steneken, 367 N.J. Super. 427 (App. Div. 2004), the Appellate Court addressed a situation of “double-dipping” regarding the husband’s support obligation and the equitable distribution of a closely held business. The Court in that matter considered whether it was impermissible “double counting” to use the actual income of a closely held corporation for alimony purposes, but a lower, “normalized” income amount when valuing the corporation for equitable distribution purposes. It held that in determining the income for a closely held corporation for purposes of awarding alimony, there is no requirement that a court use the same method of calculating income that is used to determine the value of the corporation for equitable distribution purposes. The interplay between an alimony award and equitable distribution is subject to an overarching concept of fairness.

Take for example the business of a single medical practitioner. If a court were to award the doctor’s spouse half the value of the medical practice plus an award of alimony based upon the same value used for the business – that could be considered double dipping. The court would have to take into account many considerations, including but not limited to the length of marriage, income from the business, income of the parties, age of the parties, ability of each party to work and contribute to their own support, contributions from each spouse to the business, and a multitude of others.  Each case must be assessed on its merits and the specific facts it presents.  

Dividing a closely held business or a medical practice can present its challenges. It is important to get the right professionals involved early on so that an appropriate legal strategy can be developed and implemented.