Know what to do when there is an increase in value of separate business properties during marriage
But if a business is acquired prior to the marriage, it is considered the separate property of the business owner-spouse and the other spouse does not have any interest in that separate property business. However, if the separate property business increases in value during the marriage, the community may be entitled to reimbursement of a portion of that increase. And if the increase in value is due in part to the effort of a spouse, the community will be allocated a share of that increase in value.
The California courts have used several different theories to approach these types of allocations to require that the separate property owner must repay the community for any unreimbursed community effort expended on the separate property business during the marriage.
One of the theories commonly used is called Pereira, named after a precedent setting California case, which assigns to the separate property business a reasonable interest rate of return on the value of the business as it existed on the date of the marriage and credits the community with the remaining portion of the increase in value. This may create an issue over what interest rate is applied to the value of the separate property business.
The other widely used theory is Van Camp, also based on a precedent setting California case, which gives the community a right to reimbursement of an amount equal to the total under-compensation of the business owner-spouse during the marriage and assigns the remainder of any increase in value to the separate property of the owner-spouse.
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