Characterization of SP and CP Business Flashcards
How do you determine whether a business is a SP business?
1) Started before the marriage
2) Started during the marriage, with SP funds (otherwise CP business)
What happens if a SP business increases in value during the marriage?
The earnings and labor of the spouse during marriage grants the MEC a CP interest!
How do courts allocate CP shares of a SP business?
1) Pereira Formula
2) Van Camp Formula
When would you apply the Pereira Formula?
Use when the spouse’s management of the SP business was the primary cause of the increase in value!
Pereira Formula: SP Formula
SP =
FMV of SP busniess at time of marriage
+
[FMV of SP busniess at time of mariage x FRR x # of years of marriage)
ESSAY TIP: What should you use as the Fair Rate of Return?
Always use 10%!!!!
Pereira Formula: CP Formula
CP =
FMV at time of divorce/separation
-
SP
When would you apply the Van Camp Formula?
Applied when the increase in value of SP busniess was primarily because:
1) Inherent value of asst or investment
2) Market forces
3) Spouses salary, income or family expenses traceable to business were already compensated.
Van Camp Formula: CP Formula
CP =
[Reasonable value of spouse’s services - annual family expenses]
x
of years married
Van Camp Formula: SP Formula
SP =
FMV at time of divorce
CP
What happens if a CP business continues to be operated by one of the spouses during permanent separation and it appreciates in value during this time?
The increase in value becomes commingled, and is subject to a SP share (because labor of a spouse post-separation is SP).
Determined either through the Reverse Pereira or Reverse Van Camp formulas.
When would you apply the Reverse Pereira Formula?
When the main reason for the increase of the CP business’s value is due to the skills, efforts, and talents of laboring spouse.
Reverse Pereira Formula: CP Formula
CP =
Fair Market Value (FMV) of CP business at separation
+
[FMV of CP business at separation x Fair Rate of Return (FRR) x # of years of separation)
Reverse Pereira Formula: SP Formula
SP =
FMV of business at divorce
CP
When would you apply the Reverse Van Camp Formula?
When the main reason for the increase of the value of the CP business is due to the asset itself or the nature of the economy or busniess
In other words, when the managing spouse’s labor is irrelevnat!
