Attorney
A couple hundred years ago, protecting your family’s wealth meant marrying your cousin. (Hello European royal families!) Today, thankfully, there are many other ways to secure your family’s assets and legacy. One of the ways ultra-high net worth families here in the Albuquerque area do this is by setting up a family limited partnership, or its cousin the family LLC.
These legal entities are created when a family controls assets that it knows would be heavily taxed or potentially broken up and sold off if they were passed unfettered to the next generation. Creating a family limited partnership (FLP) or family LLC reduces this risk by centralizing control and placing conditions upon the use or sale of entity-owned assets.
It’s a good plan for taxes. It’s a good plan for succession. But it can make things complicated when a couple with an ownership interest in a FLP or family LLC gets divorced.
New Mexico’s Community Property Law Blurs Ownership
New Mexico is a community property state, which means property acquired during the marriage generally belongs to both spouses, regardless of whose name is on it. FLPs and family LLCs are not excluded from this.
So, if the value of a spouse’s interest in a FLP or family LLC increases during the marriage, some or all of that growth may be considered community property, even if only one spouse’s name appears in the partnership agreement.
Interests received as a gift or inheritance, or that predate the marriage, may remain separate property, but that isn’t a bright line rule. If a couple’s household was supported by funds from the FLP/LLC, or one or both spouses worked for a business owned by the FLP/LLC, you can make the argument that at least some of the owning spouse’s interest in the family entity is now community property.
A Spouse Has “Ownership” But is Not an Owner
This community property-based “ownership” is more of a legal fiction than anything official. Most partnership and operating agreements restrict who can hold an interest in the FLP/LLC and how it can be transferred.
This matters in divorce, because it usually means you can’t hand off interest in the entity to the non-owning spouse. Typically, a settlement must be reached that allows the owning spouse to keep their full interest while the other spouse walks away with cash, some sort of spousal support payment (aka alimony) spread out over the years, or property outside the FLP/LLC.
Tax Accounting ≠ Divorce Accounting
Once a community property claim interest in a FLP/LLC is established, the next step is putting a dollar value on it. This is where things get tricky.
FLPs and family LLCs are often designed to reduce the appraised value of the interests inside them. The value of the assets is reduced by deducting a discount for lack of marketability (DLOM) and a discount for lack of control (DLOC) since the operating agreement limits each individual member’s ability to sell their interest on the open market or direct how the entity is run. Because of this, each ownership interest is worth less, on paper, than a proportional slice of the underlying assets.
Estate planners use that gap to their advantage. In a divorce, it becomes the thing both sides argue about.
The spouse holding the interest often wants those discounts applied in full because a lower valuation will mean a smaller buyout. The other spouse’s team will often push back, arguing that a discount built for estate tax purposes shouldn’t automatically carry over to a divorce, where the “buyer” isn’t a stranger but someone with every incentive to keep the underlying asset intact.
There’s no state statute or New Mexico case law that specifies exactly how this difference of opinions should be resolved. Instead, couples typically come to an agreement at the negotiating table.
Serving Families with Dignity & Compassion
If your divorce involves an interest in a FLP or a family LLC, you need an attorney who understands both family law and finance. Bob Matteucci is that guy. Bob is a former business owner who ran his family’s multi-generation, multi-million dollar retail shoe business. It was going through the divorce process himself that inspired Bob to get his law degree and become the sort of lawyer he wished he had when he was going through the divorce process.
Bob helps couples work toward a resolution that protects the family, the business or other assets held in an FLP or family LLC, and both spouses’ financial futures. Please contact him today to set up a meeting and discuss your case.