Family limited partnerships are often used by families with significant net worth to manage investments, protect family wealth, and plan for the future. Many couples facing divorce have asked, “How is a family limited partnership divided in a Texas divorce?” The answer depends on when the interest was acquired, whether it is community or separate property, and whether the partnership agreement addresses division in case of divorce.
Why Trust The Law Office of Ben Carrasco, PLLC?
At The Law Office of Ben Carrasco, PLLC, we focus exclusively on family law and represent clients throughout Central Texas. Our Stanford-educated and board-certified lawyer, Ben Carrasco, can explain partnership agreements, ownership interests, and Texas divorce laws.
Family Limited Partnerships
A family limited partnership (FLP) is a form of legal business entity that allows family members to own assets together. Often, one or multiple members control the partnership as general partners, while other family members own partnership interests as limited partners. Families can create FLPs to hold investment accounts, real estate, businesses, ranches, mineral rights, and more.
While couples may own the assets held by an FLP, divorce proceedings typically focus on dividing the spouse’s partnership interest in the FLP.
When the majority of a business is owned by two or more family members, it is said to be family-owned. Most family-owned companies are small companies with fewer than 500 workers. Family-owned companies accounted for 27.3% of all businesses in 2021.
Texas Community Property Laws Apply to Partnership Interests
FLPs are subject to Texas’ community property laws. Texas Family Code § 3.002 states that property acquired during a marriage is presumed to be community property. Texas Family Code § 7.001 states that a court must divide community property in a way that the court deems just and right.
Similar to other forms of investments, the court must first determine whether the FLP interest is community property, separate property, or a mix of both.
The Importance of Partnership Agreements
Partnership agreements often spell out specific rules governing:
- Transfer of ownership
- Voting rights
- Distributions from the partnership
- The partner who has management authority
- Whether family members can transfer partnership interests to third parties
Due to these contractual agreements, dividing an ownership interest in an FLP is not always as simple as transferring shares of a publicly traded investment or account balances.
Instead of dividing the underlying assets, courts and spouses may look to value the economic portion of the partnership interest and account for limitations in the partnership agreement. Partnership agreements should always be reviewed to determine what rights are included with the ownership interest.
Valuing the FLP
Valuing an FLP can be complex. Often, FLPs don’t hold stocks or bonds traded on public exchanges, which means their actual worth might be difficult to pinpoint.
Instead, the value of a partnership interest could depend on:
- The value of the assets owned by the partnership
- How much money the partnership earns
- Who the management authority is
- Transfer restrictions
- The rights included with the ownership interest
Valuation professionals often look at a variety of factors, including:
- Partnership asset value
- Partnership liabilities
- Income earned by the partnership
- The ownership percentage owned by the family member
- Restrictions on transferability
- Discounts for minority ownership interests if applicable
Due to the unique nature of each FLP, valuations usually require an extensive analysis of financial documents and the partnership’s organizational documents.
Hire a Property Division Lawyer
FLPs can involve complex legal and financial issues that are not present in most divorce cases. Because of this, many individuals hire a property division lawyer for assistance.
An experienced attorney can identify community property interests, review the partnership agreement, work with valuators, and clarify ownership rights and restrictions. A Texas property division attorney can see that the partnership interest is properly identified and valued before it’s divided.
Local Considerations
FLPs are common for families in Central Texas. Certain areas, such as Westlake Hills, Bee Cave, Lakeway, Georgetown, and Dripping Springs, have spouses who own partnership interests as part of an estate or financial plan.
Divorce cases involving FLPs are often heard in the Travis County Civil and Family Courts Facility at 1700 Guadalupe Street, Austin, TX 78701. If the parties live in Williamson County or Hays County, family limited partnership division cases are heard at the local county courts.
FAQs
Can a Family Limited Partnership Continue Operating After a Divorce?
Yes, an FLP can continue operating after a divorce. Depending on the operating agreement, an FLP can continue after a divorce with one spouse’s ownership interest altered. The decision to leave a spouse as a partner or provide them with another asset of equal value is determined by the partnership agreement, property division agreement, and facts of the situation.
What Happens If an FLP Owns Property in Multiple States?
If an FLP owns property in multiple states, this may be taken into consideration during divorce proceedings. An FLP can own assets all over the country. These can include real property and investment accounts in different states. Even though a Texas court can assess the worth of the partnership stake in a divorce, the presence of assets in other states can complicate how they’re valued and divided.
Can an FLP Hold an Interest in Other Businesses?
Yes, an FLP can hold an interest in other businesses. FLPs can own membership interests in LLCs, stock of closely held corporations, or interests in other partnerships. When an FLP holds interests in other business entities, there can be multiple levels of ownership and financial information to consider when valuing the partnership interest.
Can FLPs Be Amended During a Divorce?
In some cases, partnership agreements allow for amendments under specific situations. Amendments made during a divorce are sometimes viewed with more scrutiny. Depending on the timing and reason for the amendment, questions can be raised as to how the amendments impact ownership rights or the value of the partnership interest.
Get Legal Help Today
FLPs can be a great tool as part of a high-asset marital estate. However, they can cause problems when couples decide to divorce. If you have significant FLP interests, it is important to know how Texas courts divide them. The Law Office of Ben Carrasco, PLLC, can explain how the laws apply to your unique situation. Contact us today to get the answers you need.
