Divorce involves the division of a couple’s marital assets which frequently includes homes, vehicles, investments, securities, and other highly valued holdings. A professional practice is also an important asset that must be valued and divided in a New York divorce. Medical, dental, accounting, and legal practices are considered identifiable assets that must be considered and distributed in a divorce.
Establishment of the Practice
The date the practice was begun is significant in the valuation process. If the practice was begun during the marriage, the entire value of the practice is a marital asset and will be distributed in the divorce. If it was formed before marriage, then the increase in value since the marriage is the only portion that the court distributes.
Valuation Method
Before the court can decide how much each spouse is entitled to, the practice itself must be valued. There are several valuation methods that the court can use:
- Original cost: The court may refer to the purchase price (if a practice was purchased) or the initial start-up costs.
- Book value: This straightforward method totals the practice’s assets and subtracts its liabilities to determine its worth.
- Fair market value: This method entails determining what the practice could be sold for in an arm’s length transaction on the market
- Liquidation value: This valuation is determined by looking at how much the practice could be sold if a sale were required. This is less than a fair market value because such a sale is done with expediency as a primary concern.
Valuation takes into consideration:
- Debts owed by the practice
- Equipment owned by the practice
- Goodwill the practice has created
- Income from the practice now and in the future
- Intellectual property of the practice
- Key employees
- Location of the practice
- Property owned by the practice
To obtain a valuation, appraisal experts will evaluate the business, consider all of the relevant financial records, and provide a valuation estimate.
Professional License Valuation
In order to establish a professional practice in New York state, the professional must obtain a license from the state in their field, such as medicine, dentistry, law, or accountancy. That license itself is also considered to be a specific marital asset and must be valued as part of the divorce. New York is the only state that separately values such a license.
Factors Influencing Division
New York distributes marital property, including professional practices, in a way that is fair and equitable yet is not necessarily a 50/50 split. When considering how to distribute a professional practice, the court may consider:
- Whether the non-professional spouse financially supported the professional spouse as they earned their degree or license or as they began to build the practice.
- If the non-professional spouse worked for the practice (such as an office manager) or provided services or support (such as handling the interior design of the office).
- Child care the non-professional spouse provided while the professional spouse worked, which the couple would otherwise have had to pay for.
How a Practice is Divided
Although divorce law talks in terms of dividing or distributing a professional practice, in actuality, the practice itself is not actually divided between the spouses. The court cannot, for example, give each spouse a 50 percent ownership interest in the practice because, by their very nature, professional practices can only be owned by people with the necessary degrees or licenses that are required in that type of practice.
Instead, the court finds the total value of the practice and determines what percentage of value each spouse is entitled to in the divorce judgment. The non-professional spouse would then receive that amount by an award of other marital assets. For example, suppose a highly respected plastic surgeon has a practice valued at $20 million, and the court determines her spouse is entitled to 50 percent of the value. In that case, the court will first preliminarily divide all of the other marital property. The spouse will then receive $10 million of the assets that have been initially distributed to the surgeon as compensation for the spouse’s share of the practice.
Additionally, it should be noted that the court would never order the professional spouse to sell the business in order to provide funds to distribute to the other spouse.
Professional Practices and Double-Dipping
Double-dipping in a divorce occurs when a spouse is paid twice from the same asset. Double-dipping on a professional practice occurs when the future income of a professional practice is valued and included in the practice’s value, and that total value is then equitably distributed among the couple. Then that same income is also used as a basis for maintenance (also called spousal support or alimony) and child support. In essence, the professional spouse must provide a distributive award based on future income AND pay spousal and child support out of that income.
In contrast, a person who is paid a salary is not required to have their future salary valued and distributed to their spouse. They only pay spousal and child support based on that income and nothing else.
New York laws about double-dipping are complex, but in general, if the professional practice is considered a tangible asset, then double-dipping is allowed. If the professional practice is classified as an intangible asset, double-dipping is prohibited. The distinction is one ripe for argument in a professional practice divorce case.
Why an Attorney Experienced in Professional Practices Is Necessary
If you or your spouse own a professional practice, it is essential that you work with an attorney with a depth of experience in this area. This is a highly specialized area of law, and the financial outcome is dependent on:
- An accurate valuation being reached by the court using the chosen method
- Clear and accurate portrayal of the non-professional spouse’s role in the practice or support of the practice
- Full and complete discovery that provides accurate documentation of the practice’s financial situation
- Selection of an expert with specific experience in this type of professional practice
- Whether double-dipping will be allowed
- Which valuation method the court chooses to use
A professional practice is one of the most complex assets to be considered in a divorce. To obtain the best possible outcome, it is essential that you work with an attorney skilled and experienced in this area.