Separate Property Real Estate, Investments, and Stocks-apportioning Community Efforts
| Citation | Vol. 38 No. 3 |
| Publication year | 2016 |
| Author | Marc Kaplan |
Marc Kaplan
Marc Peter Kaplan, CFLS, was formerly a forensic CPA, went to law school to become a family law attorney only to have the courts and the Family Law Bar say that he should be a Special Master instead. Having now served more than twenty years as a neutral, he is a frequent lecturer on financial topics in family law and presents for Rutter Group Family Law Series. To contact Marc: marc@kaplanspecialmaster.com
One could write a book on analyzing Pereira/Van Camp issues and the pertinent components, cases, and holdings. Better yet, one could read Granberg and Blevins, Beyond Pereira and Van Camp, if you can find it. I have found it online in the past. I used to think Ron and Bob were "a little out there" in their positions exploring the labyrinth of issues they suggested could be litigated. I originally thought they might be fanning the flames of litigation, only to realize they are exploding the flames of litigation for the sake of exploring the issues that really need an in-depth look. I am grateful for their insight.
The many published business valuation cases utilize either Pereira1 or Van Camp2 to apportion community and separate property interests in a separate property business operated during the marriage. The court can apportion some of the business's marital income or growth to the community to reward the community for its efforts applied to the business during the marriage.3
Pereira—or "P," as I call it, for "personal efforts" or "personal services"—establishes a method of apportionment for cases in which the primary reason for asset growth of a separate property business during the marriage is the community efforts or services of the operating party. The court, once it finds that the efforts or services are the primary component for growth, will calculate a reasonable rate of return on that investment and award the original investment plus growth to the separate property estate and the remainder of the current value to the community.
Van Camp—or "VC," as I call it, for "Valuable Capital"—establishes a method of apportionment for cases in which the valuable capital (capital, labor of others, equipment, inventory, etc.) is the primary reason for growth in the business. In "VC" cases, the question for the court is only whether or not the community was adequately compensated for the marital efforts. If the community was adequately compensated, you are done, and there is no community interest. If the community was not adequately compensated, the amount the community was shorted is the community interest to be divided between the parties.
Family Code section 770 provides:
(a) Separate property of a married person includes all of the following:
(1) All property owned by the person before marriage.
(2) All property acquired by the person after marriage by gift, bequest, devise, or descent.
(3) The rents, issues, and profits of the property described in this section.
Emphasis added.
One would think, generally, that a separate property stock account or separate property rental property income is separate property. Most likely, if the investment is looked after with minimal time and effort, the owner would be correct in that characterization. If properties or investments are managed by others, then there would be little or no community efforts applied and hence no community claim. There are a few old cases covering apportionment starting with the Pereira and Van Camp in 1909, going to Marriage of Cozzi, 81 Cal. App. 2d 229 (1947) and a few others thereafter.4
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Most recently, I have seen a large number of disputes claiming an ownership in separate property real estate rentals or investments, especially when it is either the only asset or one of only a few assets in a marriage.
We know that Pereira and Van Camp can be applied to a stock portfolio to compensate the community for one spouse's efforts working the portfolio of investments. Beam v. Bank of America, 6 Cal. 3d 12 (1971). The Beam case discusses a stock portfolio, which is not a "business" in the classic context.
Mr. Beam inherited a sizable sum in the early 1940s, shortly after marriage, which he kept in cash and stocks. He did not work during the marriage but spent the majority of his time overseeing his $1.6 million stock portfolio. Almost thirty years later, the portfolio had not substantially increased in value, appreciating only approximately 12% in total over almost thirty years (4/10ths of one percent return per year)5 At trial, Mr. Beam claimed that the parties' property was all separate property. The only money used to live on was generated by his separate property investments. The trial court ruled in his favor.
Wife appealed, arguing that the court failed to properly compensate the community for income attributable to Husband's skill, efforts, and labors expended handling the sizable estate during the marriage. The California Supreme Court concluded that Mr. Beam had invested significant efforts during the marriage in managing his portfolio.
The court first looked at Pereira and Van Camp as applied to businesses. It noted that "our courts now uniformly hold that an apportionment of profits is required not only when a commercial enterprise is conducted but when there are...
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