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FLPs and divorce, Part 2

by Dinnebier & Demmerle on September 17, 2014

Family limited partnerships and divorceIn our most recent posting, we took a somewhat abbreviated look at a wealth-preserving, tax-saving financial arrangement for high net worth families known as a family limited partnership, or FLP.

To recap, the primary benefits of establishing a FLP include:

  • Transferring wealth to family members
  • Protecting gifted assets from creditors/spouses
  • Reducing tax burden

Next, we will look at the role an FLP can play in a divorce.

Like many trusts, a FLP provides tax benefits, but unlike many trusts, the FLP provides more flexibility, particularly as to changes/amendments and termination. For example, the partnership agreement may state that in the event of a divorce within the partnership, the FLP itself terminates. This is a simple solution to something that could potentially prove complex and difficult: the division and/or sale of the partnership assets.

California, as most of us know, is a community property state. The laws regarding community and separate property come to bear prominently in many divorces. So how does an FLP fit in? If assets put into the FLP are entered into the trust as separate property, they remain so. In the event of divorce, these assets may not be considered community property. That said, however, any community property assets from which a FLP might be comprised could become the object of contention in divorce proceedings.  As a community property state, California law dictates that community property must be equitably divided.

Finally, there is the divorce scenario in which the spouse of a FLP member (partner) proposes to pursue a share of the FLP assets or income owned by the other spouse. In short, that’s a no go. Again, the laws governing FLPs protect the partner/member and those assets, in such a case.

Family limited partnerships are obviously a complex subject that we have only sketched out briefly here for informational purposes. An experienced estate planning attorney is your best resource for matters relating to FLPs including whether that particular financial tool is appropriate for your financial situation.  If you are a member of a FLP, or the spouse of a member of an FLP, and you are considering divorce, it may be in your best interest to consult a family law attorney at Dinnebier & Demmerle. We are Orange County’s premier family law specialists, close by in Tustin, and we are ready to go to work on your behalf. To set up a consultation at your convenience, please contact us at 714-838-1099.

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