In a California divorce, a spouse’s separate property is confirmed to that spouse and the community property is divided evenly between the spouses. However, it is very common for spouses to bring a separate property business into the marriage, and then continue to contribute community labor and funds to the business during the marriage. When community labor or funds are used to increase the value of a separate property business, the community is entitled to share in the increased value upon divorce.
The courts have developed two different methods of allocating earnings and profits between separate and community property. The first method of apportionment is known as the Pereira formula. Pereira is used when the increase in value of the separate property business during marriage was primarily the result of community labor and not outside market forces. The court first determines the value of the business at the time of marriage. The court will add that value to a reasonable rate of return, which is allocated as the business owner spouse’s separate property. The remaining value is community property.
When the nature of the business itself or outside market are primarily responsible for the increased value of the separate property business during marriage, the court will apply the Van Camp formula. Under Van Camp, the court will first fix a fair salary for the community labor contributed to the business. That amount is multiplied by the number of years during marriage and any amounts paid for community expenses are deducted from the salary amount. The remaining value is separate property.
While the court is free to choose the approach that is most appropriate and equitable in a particular situation, each spouse will most often prefer application of a different formula. Accordingly, effective counsel is crucial when there is a mixed separate and community business to divide in a divorce. At Boyd Law, we have the legal knowledge and experience to analyze which apportionment method is best for each client’s unique set of facts, and we will vigorously advocate on your behalf. Call us today for a free consultation.