If Cupid has finally found his mark and you are engaged and planning a wedding, don’t forget to budget time and money for a prenuptial agreement (or “prenup”). It’s often the most important asset protection tool many physicians will ever need.
On average, individual physicians are sued for malpractice about 1.8 times during their practice life (depending on specialty). This significant risk prompts doctors to buy heavy levels of liability insurance, apply risk management plans, and implement asset protection planning to avoid a significant loss.
But marriage also carries a significant amount of risk.
- About half of all first marriages end up in a divorce
- About 60 percent of all second marriages end in divorce
- About 70 percent of all third marriages end in divorce
I routinely talk to doctors who have had years of high income, amassed significant wealth, and then lost half or more of their hard-earned net worth to a divorce. When I ask if they had a prenup, the response is predictably the same: “We didn’t have anything to protect when we got married. We were not long out of school. We ended up successful and never thought a divorce would happen to us…”
Despite the divorce numbers, shockingly, less than five percent of married couples properly protect themselves with a prenup.
A properly executed prenup is a voluntarily-entered, formal legal agreement that should be drafted by an experienced attorney that practices in the area of Domestic Relations law—not by your “buddy the real estate lawyer who can figure it out” and certainly not by using any online DIY kit. Doing so to save a few thousand dollars on legal fees would be exceptionally risky considering that divorce litigation itself can easily cost $100,000 or more and could end up costing you both half of everything you own and part your future income. (How would that affect your FIRE (financial independence, retire early) plan?)
State laws regarding the requirements and enforceability of prenups vary widely from state to state and are specific and unforgiving. Some states also require that each party has their own lawyer in place with whom they have reviewed the wide variety of legal issues the prenup typically covers, including:
- Separating premarital assets including businesses or medical practices, savings, and real estate (like the condo you bought before you met)
- Dictating the division and distribution of a variety of physical assets acquired during the marriage
- Setting terms for any required spousal maintenance at divorce
- Controlling what happens in the event of death, incapacity, inheritance, estate planning, and many other predictable conflicts issues including the division and attribution of income earned during marriage
- Ensuring full and accurate disclosure of all assets by each party. Failure to disclose any assets can not only jeopardize the applicability of the prenup to that one asset, it can invalidate the entire agreement in the worst cases
- Implementing the agreement well in advance of the marriage so that it is free of any duress or eleventh-hour presentation that could extort the other party to sign it under the threat of calling off the wedding. This means your prenup should ideally be done and signed months before the wedding, but late is better than nothing
- Seeing that parties have independent counsel (or at least had full opportunity to consult with counsel and were explicitly advised to do so) and addressing any other formalities required by state law
- And last but not least, determining the liability and division of premarital debt including student debt, which is commonly six figures for many doctors.
Finally, age doesn’t protect you. Younger doctors are increasingly marrying later when they each often have some savings and a starter home, in addition to their practice and significant future income to protect. Older doctors, especially those entering a second or third marriage, have the higher risk of divorce and additional risk factors. Put bluntly, they will have less time to earn, save, and rebuild wealth than they did after the first divorce in a substantially more demanding medical business climate. Ensure your financial “happily ever after” now, regardless of whether your marriage lasts a lifetime or not. There is no circumstance I’ve seen as an attorney where avoiding a tough conversation and a small expense before a wedding wasn’t regretted in a later divorce.
Attorney Ike Devji has practiced in the areas of asset protection, risk management, and wealth preservation law exclusively for the last 15 years. He helps protect a national client base with over $5 billion in personal assets that includes several thousand physicians and is a contributing author to multiple books for physicians and a frequent medical conference speaker and CME presenter.