Information by family lawyers for doctors and dentists who own their practices and what happens to their medical or dental practices in Maryland divorce cases.
Did you know that the medical or dental office that you own is most likely considered marital property and your spouse could claim a financial interest in it if you are going through a divorce? Whether and to what extent your practice or ownership interest in a practice (if you are a part owner in a practice) is considered marital or non-marital property depends on when you acquired your practice relative to the date of your marriage and/or whether any marital funds were used to pay for any loans, improvements, or for other purposes even if you owned your practice prior to your marriage, inherited it, or if it was gifted to you.
A “non-owner spouse” can almost never become a shareholder, member, or a partner in “owner spouse’s” medical or dental practice after a divorce for a couple of reasons. First, if they are not a doctor or a dentist, they do not have the required license to become a part owner under Maryland law. Second, usually shareholders’ agreements, bylaws, operating agreements, or partnership agreements include provisions that restrict the transfer of ownership interest even if the non-owner spouse has the required medical or dental license. If you don’t yet have those provisions in your corporate documents, then you should contact our experienced family lawyers for doctors and dentists to include these provisions in your documents.
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The “non-owner spouse’s” recourse is usually to try to appraise the “owner spouse’s” practice or interest in a practice and then try to obtain a monetary award based on the equitable division of the marital portion of “owner spouse’s” interest in the practice. Keep in mind that the “non-owner spouse’s” monetary award will not be the entire value of the “owner spouse’s” interest in the practice because the value of “owner spouse’s” interest in the practice should be equitably divided between the spouses, which could be ½ of the value, less than ½, or more than ½ of the value depending on many factors listed in Maryland Code, Family Law § 8-205(b).
Therefore, the valuation of “owner spouse’s” practice becomes crucial and can make a material difference in the outcome of “owner spouse’s” case. But the valuation of “owner spouse’s” practice for divorce purposes is usually significantly lower than the valuation of the practice for the purpose of selling it. One of the major defenses that our experienced family law attorney for doctors and dentists invoke is the deduction of personal goodwill from the valuation of the dental or medical practice. In Maryland, the personal goodwill that you have accumulated and established (even during your marriage) is considered non-marital property, which could provide the practice owner with a great windfall.
In Maryland, doctors, dentists, and other medical professionals are among those who could claim one of the highest levels of personal goodwill and therefore significantly reducing the value of their practices for divorce purposes, which will result in great reduction in the non-owner spouse’s monetary interest in the marital portion of the “owner spouse’s” medical or dental office. In Maryland, the court is also required to consider discounts for lack of marketability and lack of control if you are not the sole owner of the practice (and your ownership interest is 50% or less), which can further reduce the value of “owner spouse’s” practice for divorce purposes. It is quite possible to substantially reduce the value of a practice for divorce purposes by claiming the “owner spouse’s” personal goodwill and applying discounts for marketability and lack of control if the “owner spouse” owns 50% or less interest in a practice. Considering that the value of practices are hundreds of thousands of dollars or even millions of dollars, an experienced family lawyer can save you a substantial sum with the assistance of an expert valuation experts.
Finally, other than your practice you almost inevitably have other marital property, whether real or personal property, which could be used to off-set the value of your practice. For example, if you own a house that has equity or if your spouse has an interest in a property that is more valuable than yours, then the value of the “non-owner spouse’s” interest in those properties can be used to off-set the value of your practice. If you are trying to settle your case and reach an agreement with your spouse, then there can certainly be some “horse-trading” to help you reach a settlement.
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In Strauss v. Strauss,101 Md. App. 490, 647 A.2d 818 (1994) Maryland Court of Special Appeals provided an in-depth analysis of valuation of dental and medical practices in divorce cases. The Court reiterated Maryland law that personal goodwill is not considered marital property and therefore should not be considered as part of the valuation of a practice in divorce cases. That means the personal goodwill portion of the valuation for dental and medical practices are non-marital property of the dentists or doctors who own their practices and not subject to equitable division of marital assets. The following is an excerpt of the Court’s Ruling:
“As background, we note that it is well established in Maryland law that goodwill, although an intangible asset, is nonetheless a legally protected property right. Archer, 303 Md. at 356, 493 A.2d 1074; Schill v. Remington Putnam Co., 179 Md. 83, 88-89, 17 A.2d 175 (1941); Green v. Green, 64 Md. App. 122, 134, 494 A.2d 721 (1985). Based on this status, the goodwill of a spouse’s business is to be valued and equitably divided pursuant to the three step marital property analysis. Nevertheless, when the business in question is a sole professional practice, owners have claimed that any goodwill inuring to the entity is not marital property, but, rather, a direct reflection of the owner’s reputation and skill and therefore “uniquely personal” to the holder. This rationale was first acknowledged in Maryland in Brown v. Benzinger, 118 Md. 29, 36, 84 A. 79 (1912), in which the Court distinguished between the sale of the good will of a trade or business of a commercial character where the location is an important feature of the business, and the sale of an established practice and goodwill of a person engaged in a profession or calling where the income therefrom is the immediate or direct result of his labor and skill and where integrity, skill, ability and other desirable personal qualities follow the person and not the place.”
You can find the Court’s decision in its entirety at Strauss v. Strauss :: 1994 :: Maryland Court of Special Appeals Decisions :: Maryland Case Law :: Maryland Law :: US Law :: Just
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