I'm not in a position to experiment, and I don't really want to be the guinea pig, but as often as this topic comes up you'd think by now we'd have some solid guides. If an 18" wheel will clear brakes/suspension, then something like 215/55R18 on an 18"x7" wheel with the right offset seems like a great option. Less range of course, but plenty of options and I have to believe you can find tires in that size that offer better handling and ride comfort.
As for fender flares. Let me start by saying I'm not a lawyer nor do I know the laws of every state. I am a long time offroader who has had many lifted vehicles with oversized tires, and been given tickets, had to get a jeep "approved" by Utah state police, etc. In my experience you do not necessarily need fender flares. What you need is EITHER fender flares or mud flaps. They must extend to the width of the tire and technically cover from midpoint of the tire up. However, in my experience you can be "close enough" and even angle the mud flaps just a bit so the bottom corner just barely covers the tread. Obviously a nice set of fender flares is the best option, but a set of cheap appropriately sized universal mud flaps should be enough to keep you legal.