Separate Property Businesses

Question 1

Basic Rule:

Answer 1

If a spouse owns a business from before marriage or starts a business during marriage with SP funds, then the business is SP

1. Rents, issues, and profits of the business are SP
2. The business remains SP even though the spouse expends efforts on it during marriage

Exception – particularly in long term marriages where most of the wealth comes from the SP business, the community may be entitled to part of the increase in value of the SP business

Question 2

Pereira Approach

Answer 2

Used when the increase in value of business can be attributed to community effort
i. Cant be traced to market conditions, must be from the spouse’s efforts, some special skill or talent led to the growth

Formula: Initial Investment + (Initial Investment * Legal Interest Rate * # of Years)
1. Fair return on investment for SP proponent
2. Legal interest rate is 10% (or 7% if before 1955)
3. Any excess is given to the community and divided between the spouses
iv. This approach favors the community

Question 3

Van Camp Approach

Answer 3

Used when the increase in value can be attributed to something other than community effort

• When business growth is about the same as other similar businesses, if unusual economic events helped all such businesses, and if businesses grew without special skills or talent of the SP spouse

W receives nothing other than what was expended during the marriage

Formula: CP = (Reasonable Salary * # Years Married) – (Family Expenses * # Years Married);

SP = Current Value of Business – CP

1. Community gets reasonable value of SP spouse’s services (what their salary would be if they did not receive an actual salary, or their actual salary if its reasonable)
2. Remainder is SP
3. Community expenses are subtracted from CP

This approach favors the SP spouse.