CONTRIBUTIONS AND IMPROVEMENTS (FROM ONE SOURCE OF FUNDS TO ANOTHER) Flashcards
What are the two approaches CA uses to determine how SP business are divided when there were CP contributions?
The approaches used are the [Pereira] and [Van Camp]
Describe the Pereira approach and how is SP calculated under this approach?
The Pereira approach favors the CP estate and is used by courts when the spouse’s management skills are the primary reason for the business growth.
1) Begin with the separate property capital (the value as of the date of marriage), and assign it a reasonable rate of return—perhaps 10% per annum.
2) The value of the business on divorce that exceeds the total of the separate property capital plus the increase attributable to the rate of return over the life of the marriage is community property.
3) Thus, if at the date of marriage, the business is worth $100,000, and at divorce after 20 years it is worth $500,000, the separate property is $100,000 plus 10% on $100,000 for 20 years, or $200,000, for a total separate interest of ($100,000 + $200,000) = $300,000. The community interest is thus $500,000 less $300,000, which is $200,000
Describe the Van Camp approach and how is SP calculated under this approach?
The Van Camp approach favors the SP estate and is used by courts when the character of the business is the primary reason for the business growth.
CP interest = Fair market value salary – family expenses – salary taken SP interest = value of business - CP interest (from above)
Fair market value salary = Fair market value of spouse’s managerial services for each year family had SP business during marriage.
Family expenses = Actual family expenses paid with business earnings for each year family had SP business during marriage.
Salary taken = Actual salary taken, if any, by the managing spouse for each year family had SP business during marriage.
When will a court need to use the Pereira or the Van Camp approaches ?
The well-known Van Camp and Pereira rules apply when community property enhances the value of separate property → when a spouse owns, or invests in, a separate property business before marriage, and the value of the business increases during marriage. California courts use two approaches where CP funds or labor enhance the value of a SP business:
How are SP improvements from CP funds treated ?
Most community property cases hold that improvements do not purchase an ownership interest in the realty. Instead, improvements usually give rise to reimbursement claims.
Explains what happens when CP is used to improve the OTHER spouse’s SP?
When a spouse makes community payments to improve the other spouse’s separate property, the general presumption is that the community made a gift to the other spouse’s SP, and thus there is neither a right to reimbursement nor a community interest in the improved SP. The gift presumption may be overcome only by evidence of an agreement to reimburse.
Explains what happens when CP is used to improve a spouses own SP
When a spouse uses CP to improve that spouse’s own SP, the CP is entitled to reimbursement for the cost of the improvement or the increase in the value to the SP, whichever is greater.
Explains what happens when a spouse makes SP contributions to the other spouse’s SP
A party will be reimbursed, without interest, for contributions/improvements that can be traced from their SP to the other spouse’s SP and that is used for down payments, improvements, and reducing the principal of a loan, unless there is a written waiver of the right to reimbursement or a written transmutation.
Explains what happens when a spouse makes SP contributions to CP property or business:
A party will be reimbursed, without interest, for contributions/improvements that can be traced from their SP to CP and that is used for down payments, improvements, and reducing the principal of a loan, unless there is a written waiver of the right to reimbursement. (Remember: “DIP.”)
For business: Reverse Pereira and Van Camp will apply when SP contributes to a CP business after separation/dissolution.
