Is Your San Diego Business Safe in a Divorce?

Many San Diego residents own businesses that continue to operate and generate income throughout the owner’s divorce. It is well established in California, absent an agreement otherwise, that a spouse is entitled to an interest in community property assets. Community property generally consists of all assets acquired during the marriage. We have previously blogged about the date of separation and its importance in the division of property in a dissolution proceeding. Business owners are confronted with a unique problem – is their business community property? What about the increase in value between the date of separation and trial?

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As a general rule, for the purpose of division of the community estate upon dissolution of marriage, the court shall value the assets and liabilities as near as practicable to the date of trial. Any income or assets acquired by a party between separation and divorce are separate property. However, the value of a particular asset is not determined until the date of trial. For example, consider this hypothetical. Husband and Wife decide to separate with intent to end the marriage accompanied by objective acts to demonstrate that intent. At the time of separation, the couple owns a house that is worth $150,000. Husband decides to move into a nearby apartment and Wife takes over all mortgage payments. Because they have a daughter still in high school, the couple decides not to file for divorce immediately. Two years later, because of market fluctuations, the house is worth $200,000. Although Husband moved out of the house and Wife made each mortgage payment following separation, they are both entitled to share in the increase in profit. The court may make orders to account for the mortgage payments made by Wife, but Husband will generally share in the increased value. Real property values can fluctuate dramatically between the date of separation and trial because parties may separate months or years before their case is finalized. If the asset is a typical community property asset such as a family home the value is determined as close as possible to the date of trial.

There is an exception to this general rule. Under California Family Code section 2552(b), “Upon 30 days’ notice by the moving party to the other party, the court for good cause shown may value all or any portion of the assets and liabilities at a date after separation and before trial to accomplish an equal division of the community estate of the parties in an equitable manner.” Any party may petition the court to value an asset at the date of separation rather than closer to trial by showing that this alternate valuation is fair. A date of separation valuation of property is appropriate when the hard work and actions of one spouse alone and after separation, greatly increases the “community” estate, which then must be divided with the other spouse. However, if the asset increases in value from non-personal factors such as market fluctuations or inflation, it is fair that both spouses share in that increased value.

When a spouse operates a community property business after separation, there is a sense of unfairness when applying the general rule that the business must be valued as of the date of trial. The law recognizes that an increase in value of these businesses is primarily a reflection of the contribution of the owner’s services. This exception applies especially to professional businesses such as law practices, medical practices, or contracting businesses. If the skill and reputation of the owner accounts for an increase in the assets value, the court may value the asset at the time of separation and divide the property accordingly.

Please contact us if you are considering a divorce from your spouse or have questions regarding property valuation. San Diego Family Law Attorney Nancy J. Bickford is the only board-certified divorce lawyer in San Diego who also holds an MBA and a CPA. Don’t settle for less when determining your rights. Call 858-793-8884 in Del Mar, Carmel Valley, North County or San Diego.