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Florida's new limited partnership act: provisions of interest for estate planning and asset preservation purposes.

Despite continuing attacks by the Internal Revenue Service, family limited partnerships ("FLPs"), and their sister entities, family limited liability companies electing to be taxed as partnerships, continue to be popular estate planning tools for a host of tax and nontax estate planning purposes. Forming such partnerships in Florida has been desirable for estate planning and asset preservation purposes, in part, due to favorable features particular to Florida law. Florida's 2005 adoption of a completely new limited partnership act (1) will enhance the estate planning and asset preservation features of Florida FLPs.

In 2002, members of the Tax Law, Business Law, and Real Property, Probate and Trust Law sections of The Florida Bar created a special committee to study the existing Florida limited partnership statutes and the Uniform Limited Partnership Act promulgated by the National Conference of Commissioners on Uniform State Laws ("NCCUSL"). The committee worked for three years to develop hybrid legislation that was enacted by the Florida Legislature, with a few amendments, during the 2005 legislative session, and then signed into law by Gov. Bush as the Florida Revised Uniform Limited Partnership Act of 2005. (2)

From both estate planning and asset preservation perspectives, the act retains all of the old desirable features and adds several new ones, which should make Florida an even more popular situs for FLPs. This article will summarize selected provisions of interest for estate planning and asset preservation purposes.

Effective Date Provisions

Section 27 of the act provides that, except as otherwise provided, the act takes effect on January 1, 2006. Section 620.2204 contains special effective date provisions for existing relationships and [section] 620.2205 provides that the act does not affect actions commenced, proceedings brought, or rights accrued before it takes effect.

Revise References to the Act in FLP Agreements

Section 620.1102(1) defines "act" as the Florida Revised Uniform Limited Partnership Act of 2005, as amended. Accordingly, references to the Florida limited partnership act in FLP agreements need to be updated.

* "Transferee" and "Transferable Interest." Sections 620.1102(26) and 620.1102(25), respectively, adopt the NCCUSL terminology of (a) "transferee," to mean a person to which all or part of a transferable interest has been transferred, whether or not the transferor is a partner, and (b) "transferable interest," to mean a partner's right to receive distributions. Thus, the former term "assignee" is gone. See, e.g., former [subsection] 620.152, 620.153, and 620.154.

* Limited Partnerships Will Have Perpetual Duration. Under [section] 620.1104(3), a limited partnership will now have perpetual duration. There no longer will be a need to state a latest date upon which the partnership is to dissolve in the certificate of limited partnership filed with the Florida Department of State.

* Certificate of Limited Partnership Filing Fees Drop Almost by Half. Under former [section] 620.182(2), to file an original certificate of limited partnership with the Florida Department of State, a fee of up to $1,750 on the anticipated capital contributions had to be paid. Additionally, under former [section] 620.182(4), a capital contribution fee also had to be paid when the partnership wanted to increase its anticipated or actual capital contributions. Pursuant to [section] 620.1109(2), the filing fee is now a flat $965, and the additional capital contribution fee "trap for the unwary" is repealed.

* Nonwaivable Provisions. Section 620.1110 adds new nonwaivable provisions too numerous to list here. Practitioners should review and amend their form FLP agreements to make them consistent with these provisions.

* Limited Partner Management and Control. Under [section] 620.1303, limited partners can now be more active in partnership management and control. Cf. former [section] 620.129. Nonetheless, estate planners generally should avoid giving limited partners management and control rights because of potentially adverse transfer tax effects that accompany such rights.

* Limited Liability Limited Partnership ("LLLP") Remains Preferred Form of Limited Partnership. Section 620.1404(3) provides that obligations of a partnership incurred while it is an LLLP, whether arising in contract, tort, or otherwise, are solely partnership obligations. Accordingly, none of the partners is personally liable in those capacities for such obligations. That feature is why the LLLP form of partnership remains the preferred form of FLP. In the author's experience, the only reason for the use of the mere limited partnership form, rather than the LLLP form, is when the general partner liability feature of a mere limited partnership is required by lenders or other creditors.

* General Partner Management Rights; Other Partner Approval Rights. Section 620.1406 provides for general partner management rights and other partner approval rights too numerous to list here. In general, those rights are waivable in the FLP agreement. Estate planners should incorporate those provisions as they see fit in their model FLP agreements, rather than rely on the [section] 620.1406 default rules, which might produce undesired consequences.

* Standards for General Partner Conduct. Section 620.1408 provides for the default general standards of conduct for a general partner (duties of loyalty and care), which are nonwaivable to the extent specified in [subsection] 620.1110(2)(e), (f), and (g). Additionally, [section] 620.1408 bolsters the argument, for federal transfer tax purposes, that a general partner interest is separate, distinct, and qualitatively different from a limited partner interest, even if the general partner also owns limited partner interests. It also bolsters the argument that the general partner's fiduciary duties prohibit it from acting arbitrarily and solely for its own benefit.

* Profit, Loss, and Distribution Allocations. Section 620.1503 provides that partnership profits, losses, and distributions are to be allocated among the partners based on the value of partners' contributions. These default provisions are modifiable, and often partners will want different profit, loss, and distribution allocation methodologies in the FLP agreement.

* Interim Distributions. Section 620.1504, another default rule, provides that a partner does not have a right to distributions before the partnership dissolves and winds up unless the partnership decides to make an interim distribution. This is helpful from a transfer tax valuation standpoint in that it has a negative effect on the value of a partner's interest as compared to an interest entitled to interim distributions. This provision is modifiable by the FLP agreement, but because of the transfer tax valuation implications, careful consideration should be given to how and to what extent, if any, to override the statute.

* No Distribution on Account of Dissociation. Under [section] 620.1505, a person does not have a right to receive a distribution on account of dissociation, i.e., a withdrawal from the partnership. This provision is consistent with prior law, former [subsection] 620.143 and 620.144, and bolsters the federal transfer tax argument that the partnership should be valued as a going concern, taking into account marketability and minority interest discounts, and not merely at its usually higher liquidation value (the value of its underlying assets).

* Dissociation as Limited Partner. Consistent with prior law, former [section] 620.143, new [section] 620.1601 provides that a person does not have a right to dissociate as a limited partner before the partnership terminates. Like [section] 620.1505 described above, this provision has a similar negative transfer tax valuation effect.

* Dissociated Limited Partner Becomes Transferee. Section 620.1602 provides that a limited partner's dissociation generally converts the limited partner into a mere transferee.

* Partner's Transferable Interest. Under [section] 620.1701(1), the only interest of a partner that is transferable is his transferable interest and such interest is personal property.

* Effect of Transfer of Partner's Transferable Interest. Under [section] 620.1702, a person who obtains a partner interest without having been admitted as a partner obtains a mere transferee interest, and not a partner interest. The mere transferee is entitled only to receive distributions to which the transferor of the interest otherwise would be entitled and, upon the partnership's dissolution and winding up, to receive the amount otherwise distributable to the transferor. Nonetheless, a transfer of a partner's transferable interest in violation of a transfer restriction in the partnership agreement is ineffective as to a person having notice of the restriction at the time of transfer. A transferee who becomes a partner with respect to a transferable interest is liable for the transferor's obligations under [subsection] 620.1502 and 620.1509, but the transferee is not obligated for liabilities unknown to him or her when he or she became a partner.

* Judgment Creditor May Get Charging Lien, But Not Foreclosure of Partner Interest. Section 620.1703 provides that a judgment creditor is entitled only to a charging lien, and has no right to foreclose a debtor's interest in a limited partnership or to receive the underlying partnership assets. Cf. former [section] 620.153.

* Deceased Partner. Section 620.1704 provides that, if a partner dies, his or her personal representative may exercise transferee rights under [section] 620.1702 and, to settle the estate, may exercise the rights under [section] 620.1304 to get information. Cf. former [section] 620.155.

* Non judicial Dissolution. Under [section] 620.1801, except as otherwise provided for, judicial dissolution in [section] 620.1802, a limited partnership is dissolved, and its activities must be wound up, upon (a) the happening of an event specified in the partnership agreement; (b) the consent of all partners; (c) after the dissociation of a person as a general partner and certain other events do or do not occur; (d) the passage of 90 days after the dissociation of the last limited partner, unless before then the partnership admits at least one limited partner; or (e) the signing and filing of a declaration of dissolution by the Department of State under [section] 620.1809(3).

* Limited Partner Appraisal Rights. Under [section] 620.2114, a limited partner is entitled to appraisal rights and to obtain payment of the fair value of his or her limited partner interest in the event of a merger or conversion of the partnership, if the limited partner had the right to vote upon the merger or conversion. Such rights are not afforded by statute in the event of a sale of substantially all partnership assets. Nonetheless, in general, appraisal rights are not available for limited partner interests that are publicly traded or issued by a limited partnership that has at least 500 partners and the interests of all partners, including transferable interests, have a market value of at least $10 million, excluding the value of interests held by the general partners and other senior executives owning more than 10 percent of the rights to receive distributions from the limited partnership.

Conclusion

Florida is a leader in adopting and maintaining modern business entity statutes. With the act, Florida has adopted one of the most modern limited partnership statutory structures in the country. Clients with estate planning and asset preservation needs, and the lawyers who advise them, will be well served by the act for years to come.

(1) The text of the new act is available at www.flsenate.gov/statutes/. In "Search Bill Text," select Session: 2005, Chamber: Senate, and Search: 1056. Then select the hyperlink for sb1056er.html.

(2) Except as otherwise indicated (such as to the act and the former FLA STAT.), all section references are to the FLA. STAT. as amended by the act.

Brian C. Sparks is a shareholder and head of the estate planning and administration group at Hill, Ward & Henderson in Tampa. He served as the estate planning representative on behalf of the Tax Law and Real Property, Probate, and Trust Law sections to the committee that drafted the act.
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Author:Sparks, Brian C.
Publication:Florida Bar Journal
Date:Nov 1, 2005
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