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Family Limited Partnerships
Family limited partnerships and limited liability companies (collectively, FLPs) are ubiquitous in estate and asset protection planning. The odds are that you will encounter one or more FLPs in discovery with increasing frequency. The question is, what do they mean to the divorce negotiations and settlement, and how can you be certain that your client gets a fair deal? When these entities are set up for estate and asset protection planning, the very mechanisms that reduce values for estate and gift tax purposes and make it harder for creditors to reach the assets will also make it more difficult for you to negotiate a fair and equitable distribution settlement, and a reasonable alimony and child support payment based on the income generated by the entity. This article explains and highlights in general terms how these mechanisms work, and provides a checklist of issues that you can use to attack these entities – thereby obtaining a better settlement for your client.
The Hurdles
There are several hurdles to overcome in order to settle the distribution of an FLP. Some of these include:
- Discounts. If your client's ex-spouse had formed a family limited partnership, he or she may claim that the value of the underlying partnership assets have to be substantially discounted in determining equitable distribution. While the status of such discounts is uncertain (the IRS challenges them for tax purposes, and some state courts have questioned their applicability to divorce cases), the issue may have to be addressed.
- Control. If the distributions from the FLP are subject to substantial restrictions, they may arguably be beyond the control of your client's ex-spouse. Thus, the FLP could generate substantial earnings, yet the ex-spouse may claim that he or she has no access to them. Furthermore, the FLP agreement may designate a person who is not party to the action as general partner (or manager for an LLC) and grant him or her veto power over distributions.
- Decreased Assets. A general partner or manager may extract a substantial portion of the earnings of the LLC in the form of salary, thus minimizing the earnings allocable to your client's ex-spouse. The partnership (operating) agreement may have severe restrictions on sale or transfer of FLP interests.
How does the matrimonial attorney confront these roadblocks to a settlement?
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