One More Risk for Doctors

“I'm an excellent housekeeper. Every time I get a divorce, I keep the house.”—Zsa Zsa Gabor After toiling for years to build a successful practice, some physicians stand to lose a substantial amount of its value. This time the threat comes not from competing medical practices or from whopping malpractice judgments.

Instead, the financial threat lies at home. Should nuptial bliss devolve into rancor, equity in the practice—like that of any privately held business—could be on the marital-property table. This is why physicians are advised to say “pre-nup” long before saying “I do.”

Count on Change

A common objection to prenuptial agreements (prenups) is that they’re not needed when the two partners trust each other completely. “That’s fine right now, but people change,” says Ira Garr, a prominent Manhattan attorney who’s handled numerous divorces for physicians and represented Ivana Trump in her split from The Donald. “What people will be like in 10 years, you just don’t know.”

Although hauling out a prenup may not make for a romantic evening, attorneys advise physicians it as an essential business item to get out of the way long before hiring a caterer for the wedding reception.

Actually, those making wedding plans should consider prenups well before starting their practices—indeed, before starting medical school. Courts view an MD degree as an asset in and of itself because of the earnings that it’s likely to bring. If a physician receives support from his/her spouse to get through medical training, this can give the spouse a valid claim against future earnings from the degree.

And just because one young physician marries another, one of them may need a prenup even if they both continue to work after having children. This is because earning potentials that seem equal today may not be equal tomorrow. Gayle Rosenwald Smith, a Philadelphia divorce lawyer, recalls the case of two physicians who married early in their careers. The woman went into a lucrative medical practice and the man, into research that paid far less. The woman’s income enabled the couple to enjoy a high standard of living during the marriage—a standard that had a direct bearing on the property settlement. “He got a sizeable piece of her assets, plus alimony,” says Smith.

Round II

Perhaps the most compelling reason for physicians to seek a prenup, of course, is that they’re planning a second marriage after getting divorced from the first without this protection.

Typically, physicians engaged for the second time have established practices and, of course, have acquired considerable wealth drawn from these practices.

In advising these second-timers on prenups, Marvin L. Solomiany, an Atlanta lawyer who routinely represents physicians, strongly recommends keeping the practice off the table of divisible assets whenever possible and focusing instead on wealth derived from the practice.

How is this possible when spouses’ lawyers are gunning for equity in and income from the practice? Says Solomiany: “We do this by ‘creating’ marital property that the spouse can receive instead.”

For example, let’s say an engaged physician has acquired substantial equity in his/her home or even owns it outright. This equity isn’t marital property in most states because the physician acquired it before the marriage to the second spouse. So this value wouldn’t be on the table for division in the event of a divorce without a prenup. Enter Solomiany, who seeks to negotiate a prenup that would give all or part of this home equity—or the house itself—to the physician’s spouse in the event of divorce. One thing that makes this appealing to the other side is that the house is an appreciating asset.

Another appreciating asset that can be proffered to ward off claims on the practice is physicians’ interest in the buildings in which they practice. Typically, this building is owned not by the professional association or corporation that owns the practice, but by a limited liability company created for the sole purpose of owning the building. So if the physician assigns this value to the spouse in a prenup, this in no way opens the door for the spouse’s attorneys to go after the practice itself because this asset is held by a separate company.

“Another option is to fund a retirement vehicle from money the physician receives from the practice,” says Solomiany. “This provides value to the spouse while protecting the producing asset—the practice itself.”

Prenup BasicsRegardless of whether a prenup is for the first marriage or a subsequent one, there are some basics to keep in mind:

• Don’t wait for wedding bells to chime before popping the prenup. All too often, proponents put it off until weeks or even days before the wedding. In a divorce proceeding, this could be viewed as coercive, as the caterer may already have already bought the Dom Perignon. “One of my clients’ engagement fell apart when he brought up the prenup,” recalls Solomiany. “Her parents had put down a lot of money for the wedding and they brought a lawsuit to recover it.” In cases where the betrothed signs the prenup, the spouse who proposed it can look bad in eventual divorce litigation for having brought it up too soon before the wedding.

• Let the lawyers earn their money.

That is, the idea is to let the lawyers earn their fees and refrain from getting into any detail with one’s spouse. Above all, experts advise, ensure that your spouse retains counsel. Many prenups have been set aside because one party didn’t have representation at all, or not soon enough in the process.

• Don’t be too greedy.

Courts have rejected contracts that they deemed “unconscionable”—that is, so unfair that no one in their right mind would have signed them. Adds Garr: “There’s less chance that a prenup will be successfully challenged if it’s fair.”

For those who are married without a prenup and wish they had one, there’s something called a postnuptial agreement. Legally, a postnup is the same thing as a prenup. “They’re both essentially divorce agreements in advance,” says Garr. But “Postnups usually come up if there’s a rift in the marriage,” says Garr. “Sometimes one person agrees to take the other back if they sign a postnup.”

Even when such emotional leverage exists, however, it’s understandably difficult to get spouses to sign them, as the suspected motivation behind these documents engenders more ill will and distrust. The better course of action is to be equipped with a prenup in the first place.

Richard Bierck is a veteran financial writer who has written for Bloomberg, the Harvard Business School and US News & World Report.