Responding To Our Clients’ Business And Divorce FAQs
Issues relating to business assets and a divorce can quickly become extremely complicated. When you need reliable divorce counsel, Nelson Kirkman is here to provide it. On this page, we have answered some of our Orange County clients’ most frequently asked questions about businesses and divorce so we can help you be well-informed.
Will community property be reimbursed for the increase in value of a separate property business?
In certain situations, yes. Community property may be reimbursed based on the increase in value of a business that was owned before the beginning of the marriage.
Can a long marriage turn a separate property business into a community property business?
No, if a business was owned by a party before the marriage, no matter how long it lasts, it will be characterized as separate property in the property division decree. A business acquired during the marriage will typically be community property. The marriage will not change the characterization of the business unless there is a written agreement to do so.
Who will the court award a community property business to?
Generally, the business will be awarded to the operating-spouse. If both parties work in the business, the court will choose the party more important to the business continuing as a going concern.
How does the court determine what portion of the increase in value of a separate property business to allocate to community property?
If the increase in value of a separate property business results from a natural enhancement of assets, it is unlikely that community property will be reimbursed at all (Estate of Ney). If the increase in value is based on the work and effort of the operating spouse, the community may be entitled to a reimbursement for a portion of this increase (Cozzi v. Cozzi). Community property will not be given an ownership interest in the separate property business but may receive a reimbursement amount based on the court’s goal of achieving substantial justice.
How many ways are there to allocate an increase in value of separate property business to community property?
There are two general approaches the court may use to allocate an increase in value of a separate property business to community property. They are the Pereira approach and the Van Camp approach. The court may also apply each approach to certain years of the marriage or use another methodology if it represents the best option to achieve substantial justice.
What are the differences between the Van Camp and Pereria approaches?
The Van Camp approach examines the compensation of the operating spouse to determine if they were adequately compensated throughout the marriage. If so, there will be no reimbursement. Likewise, if the operating spouse was undercompensated but used business distributions to pay community expenses, there will be no reimbursement. The Pereira approach determines an investment return on the value of the separate property business at the time of the marriage, and any other increase in value beyond that figure is reimbursed to community property.
Can the court use approaches beyond Van Camp and Pereira?
The most common approach beyond Van Camp and Pereira is a mix of these two, commonly known as the Brandes approach. This involves using Van Camp for certain years and Pereira for others. Additionally, the court may split the difference between the two approaches (Todd v. C.I.R.).
Can the reimbursement approach selected make a significant difference to the outcome?
Yes, the approach selected can have a dramatic impact on the reimbursement from a separate property business to community property in the divorce process. It is critical that experts on the topic represent the interests of both you and your business.
How does the court decide to use the Van Camp or Pereira approach to allocating the increase in value of a separate property business?
If the increase in value of a separate property business is primarily due to the work and individual efforts of the operating spouse, the Pereira approach is the most common formula selected. As such, it is most commonly found in cases of professional services firms and professional practices. If the business is capital intensive and the increase in value can be attributed to market factors such as patents, an effective leadership team, and competitive advantages, the Pereira approach is most likely to be applied.
Will community property always be reimbursed based on the increase in value of a separate property business?
No, there is not always a reimbursement to community property based on an increase in value of a separate property business. Based on the facts and the approach selected by the court, the increase in value may go entirely to separate property.
Learn More About Business Assets And Community Property Law
Contact us at Nelson Kirkman for even more answers to your questions about asset division in California. Schedule a consultation by contacting our Newport Beach office. Please call 949-430-6952 or send us an email to reach us.