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The mere structure of the FLP is inherent with practical problems on divorce. If a FLP is setup like the example above, the non-controlling spouse may not reap much from a monetary standpoint, absent a finding of fraud. Who wants to buy into a partnership where there is no control and no guaranty of return on the investment?

a. Valuation.

The value of the limited partner*s interest is susceptible to valuation in the same manner as that of the IRS. There will be major discounts because of the lack of marketability and restrictions on transferability.

The IRS has routinely upheld discounts for minority interests and lack-of-marketability at fairly substantial rates. Limited partnership interests will often be discounted at 30-40%, leaving it worth much less than a general interest.

Factors that will weigh heavily into the evaluator's determination are the restrictions placed on the limited partners' interests (i.e. possible non-transferability, lack of management and control, inability to withdraw during the term of years, etc.). Goodwill may well prove to be a relevant as well.

In Crowell v. Crowell, 2000 Tenn. App. Lexis 370 (decided May 30, 2000), the Tennessee trial court considered, in determining an award of alimony, the value of the wife's inherited separate property interest. The wife had inherited a 48.5% limited partnership interest in an FLP which held over $1,000,000 in assets, including a farm. She argued that her limited interest was of very little value to her because it was not liquid. She did admit, however, that the partnership property could

produce income, but that she did not intend to draw income from it, as it would be against the wishes of her mother, brother and herself. The trial court, factored the wife's interest "heavily" against her, despite her valuation arguments and the appellate court upheld its decision.

b. Inability to Force Distributions.

Depending upon how the management powers are allocated, the non-controlling spouse is faced with the reality that the ability to force distributions other than stated in the FLP will not be possible. In Cleaver v. Cleaver, supra, wife was one of the beneficiaries under her father*s testamentary trust. Part of the trust corpus was a 8.33% undivided interest in a partnership which was managed by the wife*s uncle Joe, who also owned a 75% interest. The trust provided that Joe had the total discretion on how to invest the earnings in the partnership business. He could distribute the earning to the trust, or reinvest in the business. Joe chose to reinvest the earnings in the business, as opposed to distributing them to the beneficiaries. Citing Heilbron v. Stubblefield, 203 S.W.2d 986, 989 (Tex. Civ. App. - El Paso 1947, writ ref d. n.r.e.) the court held that partnership management had the right to withhold earnings and determine the amount of earnings to be distributed, if any. Once the earnings were reinvested in the partnership, they became part of the “entity”. Since the earnings were never actually distributed to the trust, but instead reinvested directly into the partnership, there was no valid claim by husband to “community” income from the trust.

c. Destroying Family Harmony.

In addition to the lack of value and inability to manage the partnership, the non-controlling spouse is faced with the difficult decision of whether to join the FLP as a party to the divorce. In a true business setting this is somewhat of a no brainer decision. However, if the spouse*s children are also limited partners in the FLP there exists the distinct possibility that, if successful in defeating the FLP, the children will obviously be affected financially. As a result, the only thing the family law attorney can do is properly advise the client of the financial risks involved and the client must be the one who assesses the emotional risk at stake.

d. Setting Aside the Partition Agreement.

If there was a partition or exchange agreement executed prior to the formation of the FLP, the complaining spouse must set aside that marital agreement first, before attacking the FLP, in order to get to the characterization issue of the partnership interest. The statutory requirements and burden of proof mandated by the statute could make this approach an extremely difficult and risky endeavor. TFC §4.105. See also, Marsh v. Marsh, 949 S.W.2d 734, 738 (Tex. App. - Houston [14th Dist. 1997, no writ). If the attack fails, the contesting spouse could be liable for costs and attorney fees for breach of the marital contract. See, Tex. Civ. Prac. & Rem. Code Ann. §38.001. Even if the complaining spouse is successful in setting aside the marital agreement, the issue of fraud as it relates to the formation of the FLP is still left to be decided.

e. Tax Effects of Getting What You Ask For.

The adage, “be careful what you ask for because you may get it”, is especially true when contemplating invalidating a FLP. A detailed explanation of every tax trap is beyond the scope of

gained by setting aside the FLP. Counsel should consult with a tax expert before embarking on this path so the client can be fully advised as to the possible tax implications if successful.