Anonymity in Texas Real Estate

Introduction

Anonymity in holding assets is a prized and scarce commodity. Clients of law firms frequently ask how they may anonymously own real estate and interests in entities (LLCs and corporations). This is more difficult (and more expensive) than it sounds. Anonymity is not just a box to check on a form—quite the contrary. It takes effort, a tolerance for creativity and risk, and a sizeable budget for legal fees. The days of easy and inexpensive anonymity in real estate transactions (to the extent those days ever existed) are gone.

Seeking to have one’s assets made anonymous inevitably puts a person in questionable company. The Pandora Papers (released in 2021) reveal the extent to which the criminal and the corrupt use anonymity techniques to secretly own properties ranging from chateaux on the French Riviera to beachfront mansions in Malibu.

The media and government typically blame anonymous shell companies as being the mechanism that enables such corruption. In the real world, the complexity and cost of achieving relative anonymity far exceeds setting up any one such simple device. Multiple entities in multiple jurisdictions, all combined into a layered package, are required to attain the highest degree of anonymity.

THE LEGAL CONTEXT

Litigation Nation

Corrupt foreigners have obvious reasons for wanting to move their assets into the safety of U.S. banks and real estate. For others, the driving force toward anonymity is not illegality but the risk of litigation and fear of a judgment affecting one’s personal assets. Just as U.S. banks and real estate are relatively safe, U.S. courts—where anyone can sue anyone for anything and seldom pay a price for doing so—most definitely are not.

Why is there so much litigation in America? Three reasons: first, contingent-fee arrangements allow attorneys to profitably pursue dubious cases and utilize the legal system to harass legitimate businesspersons into settlement; second, because the American justice system for the most part imposes no penalty upon frivolous lawsuits (The loser pays rule prevails in Canada and elsewhere but not in the U.S.); and third, litigation in the U.S. is an integral part of the policy-making process.

When new legislation passes congress and is signed by the president, that is not the end of the matter. Court challenges by special interests (fed by dark money) are a routine and expected part of the process. Only after the dust of litigation settles can Americans clearly see what the new rules will be.

Another factor is the rise of litigation financing. There are specialized lenders who will provide law firms with funds necessary to pursue even the most complex and expensive lawsuits—all in exchange for a piece of the action. Lawsuits are speculative investments for hedge funds now. This is an odious business (part of Wall Street’s financialization of everything) and inimical to the common-law tradition of fair and just resolution of legitimate disputes between parties with standing.

Given pervasive litigation and Wall Street’s eagerness to fund it, is it not both rational and legitimate to seek a measure of anonymity? Does doing so make one a presumptive criminal? The answer is still no but suspicion of persons seeking anonymity is now the rule. Anyone engaged in such efforts will encounter wariness (and worse) from banks, lenders, title companies, and others from day one.

Transparency Bias in U.S. Real Estate

The American system of state-level LLC filings and county-level real property recordings is designed to facilitate disclosure, not concealment. This is a general institutional bias that weighs against anonymity in business and real estate transactions across the U.S. Though some states are more permissive than others, anonymity has never been a simple matter. It has always taken a certain level of creativity and determination to even partially remove one’s identity and assets from public view.

SARs, GTOs, and BOIRs

For many years now, banks have been required to file suspicious activity reports (SARs) with the FBI in order to expose and prevent financial crime. Bank algorithms screen all transactions, large and small, for indicators of suspicious activity. When this is detected, SARs are automatically generated (over 50,000 each year) and sent to the federal government.

Additionally, Geographical Targeting Orders (GTOs) require reporting of suspicious behavior in real estate transactions. GTOs are in effect where money laundering is common in luxury real estate markets such as New York, Miami, and many more metro areas. Cash is especially suspect. And when it comes to the meaning of cash, the reference is not just to green folding money but includes transactions in which a loan is not required for closing. It is interesting that society has arrived at a place where not incurring debt is suspicious.

Beginning in 2024, FinCEN beneficial ownership reports (BOIRs, 31 CFR Chap X Part 1010) mandate disclosure of the true parties in interest behind registered entities such as LLCs, corporations, and limited partnerships. This requirement to report personal information on principal owners applies to both new and existing entities and includes an obligation to file supplementary reports as BOI changes. Reporting rules do not (for now) apply to unregistered investment vehicles—meaning vehicles that do not require payment of a state-level formation fee—which include sole proprietorships, trusts, general partnerships, and certain joint ventures.

Beneficial ownership information is available only to the federal government, law enforcement, and prosecutors (including state prosecutors). However, given the tendency for regulation to expand and for information to disseminate, it is unlikely that these limitations will be long-lived.

Investors need to be aware of social and legal trends. The trend now is toward greater transparency, not less, especially in transactions that involve cash, foreign entities, and expensive properties. This has profound implications for anyone seeking to remain anonymous in real estate transactions.

DESIGNING AN ANONYMITY STRATEGY

Key Anonymity Questions

Before designing an anonymity strategy, one must ask four key questions:

(1) From whom does one seek to be anonymous?

(2) At what level of society and government does one seek to establish anonymity?

(3) In what country or geographical area does one seek to be anonymous?

(4) What financial resources are available for achieving anonymity goals?

Our assumption here is that the United States is the locus of both operations and applicable law.

Anonymity Goals in Real Estate

Real estate investors commonly have three goals relating to anonymity:

(1) “How can I hold title to property without revealing that I am the true party in interest?” (This pertains to status of title, meaning where true ownership resides.)

(2) “How can I transfer property held in my personal name to my LLC without showing that it came from me?” (This pertains to chain of title, meaning the recorded link between seller and buyer.)

(3) “How can I blend anonymity features with the liability shield of an LLC in order to form a more effective asset protection structure?”

Real Estate Gatekeepers

In formulating an anonymity strategy for real estate investing, several important participants in the process must be considered:

(1) title companies that examine and insure both status and chain of title;

(2) county clerks who maintain real property records to accurately reflect the chain of title;

(3) lenders who are subject to due-diligence rules (DDR, 81 FR 29398), expanding know-your-customer (KYC) policies, and SARs filing requirements; and

(4) real estate brokers and attorneys. Licensed professionals are increasingly cautious about incurring liability for themselves and their clients when working with anyone pursuing anonymity.

Given the tightening regulatory environment, these gatekeepers can no longer be expected to be mere order-takers. They are increasingly aggressive in seeking to verify the identity, source of funds, and intentions of their clients. Investors pursuing anonymity will hear questions such as:

“What is the source of that cash?”

“What island in the Caribbean did you say this entity was formed in?”

“Who exactly are you in business with? Did you say his first name is Ivan?”

“I’m sorry . . . did you say you want me to act as your trustee? For free?”

It is conceivable, perhaps inevitable, that real estate gatekeepers will one day be required to file SARS or BOI reports. The trend is toward unofficially deputizing such persons across the financial and real estate industries.

What consequences await gatekeepers who do not comply? At the very least, potential indictment as a co-conspirator (conspiracy being the favorite catch-all indictment used by prosecutors everywhere). The implications are obvious for anyone pursuing an anonymity strategy. Who can you trust in a world where everyone, including your attorney and real estate broker, is a de facto federal agent?

Attorneys and Client Anonymity

As to attorneys in particular, several consequences are already apparent.

(1) More law firms will refuse to file LLC formation paperwork or act as registered agent unless all beneficial owners of the client’s entity are fully disclosed to the firm in advance of filing. Since organizers of LLCs (usually an attorney) must be reported to FinCEN, business lawyers will be forever tied to the names of their clients (the good, the bad, and the ugly) in a law enforcement database.

(2) It is out of the question to expect that a client will be able (as in years past) to deliver large sums of cash into a lawyer’s trust account without significant explanation and disclosure.

(3) In real estate transactions and LLC filings, lawyers will be increasingly sensitive to even the appearance of impropriety.

(4) No sensible lawyer will unquestioningly agree to be a trustee for a client’s trust, an attorney-in-fact in a transaction, or otherwise act as a front for a client’s anonymous businesses and investments. Not only is there the potential co-conspirator problem, but trustees have no liability barrier and if the trust is sued, it is the attorney-trustee who will be named as primary defendant.

Given both: (1) transparency trends and (2) the explosion of fraud everywhere, it is astonishing that some new clients arrive at a law firm and decline to provide valid identification. These persons can now expect to have their cases summarily declined (and perhaps be escorted off the premises by security).

TRANSACTIONAL ANONYMITY IN REAL ESTATE

Anonymity and the Chain of Title

In a real estate transaction, there is no effective method of defeating, ignoring, or bypassing the chain of title. Each link in the chain is represented by a transfer publicly recorded in the county clerk’s office—and one cannot break the chain of title and still preserve one’s status as record owner. A broken link equals questionable title, and questionable title equals unsellable property.

So what is the response to the question posed above, “How can I transfer property held in my personal name to my LLC (or other entity or person) without showing that it came from me?” The answer is that you cannot and still maintain a clean chain of title.

A creative technique is to cause the property to pass through a number of intermediate transfers so that its origin is progressively more remote in the chain. The more these intermediate transfers appear to be bona fide sales for consideration, the more likely the original transferor is to remain in the background, hopefully beyond scrutiny. This is a way of stretching out the chain of title but not avoiding it. What one achieves is transactional distance—a form of relative rather than absolute anonymity.

Anonymity and the Status of Title

For purposes of this discussion, status of title refers to how title is officially stated in the county clerk’s real property records. Is title held personally and individually? Is an entity the owner? Is it community property of husband and wife?

Title to property can be held in a surprising variety of capacities—as an individual, a corporation, a limited liability company, a general or limited partnership, in a trust, and so forth—or as a combination of any of the foregoing. Property law is flexible in this respect. What if an investor wants to hold 50% of the title in a personal name, 25% in an LLC, and the remaining 25% in a family living trust? No problem. Whether or not it is wise to structure ownership in such a way is another matter (probably not).

Searching real property records and determining the identity of actual stakeholders and decisionmakers behind entities, trusts, and layered structures can be challenging in the absence of a mandatory public disclosure regime. For now, the FinCEN database if off limits to the public.

Unrecorded Interests

An obvious solution to the anonymity problem is to pay cash but not record the deed in the real property records. There is no law or requirement that deeds must be recorded. Unrecorded conveyances are legal and binding between grantor and grantee (even though they are void as to a creditor or subsequent purchaser without notice of the transaction—see Apex Fin. Corp. v. Garza, 155 S.W.3d 230 (Tex.App.—Dallas 2004, pet. denied).

An “unrecorded instrument is binding on [the grantor and grantee] to the instrument, on the party’s heirs, and on a subsequent purchaser who does not pay a valuable consideration or who has notice of the [unrecorded] instrument” (Prop. Code Sec. 13.0001(b)).

Unrecorded deeds are valid between the parties even if they are unnotarized, since notarization is (usually) only required if an instrument will be recorded. “As between a grantor and a grantee, deeds are valid even without a valid acknowledgement.” Haile v. Holtzclaw, 414 S.W.2d 916 (Tex. 1967).

It is likewise possible to purchase, own, and convey property without ever buying a policy of title insurance or entering the offices of a title company or lender.

The drawback for the seller when a deed is unrecorded is that the seller’s name remains both as owner in the publicly recorded chain of title and also the person to whom the appraisal district will send the tax bill.

The drawback for the buyer is that unrecorded interests are difficult to sell, at least for market value. How would a prospective buyer verify the seller’s ownership or the absence of liens? What about the recorded chain of title, since there now appears to be a break? Buyers and lenders in the real world usually want title insurance and require a valid chain of title.

ANONYMITY AND THE EARNEST MONEY CONTRACT

Anonymity Begins with the Contract

Anonymity is a deliberate strategy. It is not an add-on or after-thought.

Since an earnest money contract includes names and addresses, anonymity in real estate begins there. If a contract has already been signed without regard to anonymity then that contract will need to be voided and a new one written.

Although earnest money contracts are seldom recorded, they can still be the start of anonymity issues since dealing with realtors, appraisers, inspectors, surveyors, title company personnel, and neighbors is often a semi-public process—and the people involved invariably chatter. They also generate a lot of discoverable paper.

Contracts can either convey a lot of information about the parties or just a small amount of it. For instance, is there any reason to list one’s home address as opposed to a postal box? A home phone versus an office or cell phone? It is generally prudent to avoid providing more personal information than is essential to make the deal—and say nothing to a realtor that you do not expect to be shared with other participants in the process.

And/Or His or Her Assigns

There are a couple of choices worth considering at the contract stage: either show the purchaser as an LLC or an anonymous trust (see below); or, alternatively, list a personal name for the buyer but follow it with the phrase “and/or his or her assigns.” The latter provides a means of switching into the preferred method of holding title just prior to closing. It would also be extremely useful to include a special contract provision enabling the buyer to make such an assignment at any time before closing without notice to or consent by the seller.

ANONYMITY TRUSTS

Taking Title as a Trust

It is possible to take title in the name of a trust (ABC Trust for example) without mention of a trustee’s name. County clerks will accept such a deed for filing. When combined with a postal box address, this device can at least for a time (the duration of ownership) serve to conceal the true party in interest.

While a deed into an anonymity trust can be recorded without issue, the problem—technically speaking—is that a trust is not a legal entity that can hold title. A trust is not an entity but a relationship—specifically a contract between trustor and trustee, each with rights and duties as a consequence of the contractual relationship. A contract cannot hold title to real property. Title must be held by an entity or a natural person. So what is to be done with deeds that do not expressly state the name of the trustee?

This issue was ruled upon by the 5th Circuit Court of Appeals in Fugedi v. United Rentals, CA (Aug. 29, 2022), an unpublished opinion that may be found online.

The court held that established rules of deed construction in Texas allow interpretation of the deed so as to effectuate the intent of the parties; therefore, in a situation where a conveyance is made directly into a trust without naming the trustee, the intent of the parties may be inferred from the facts of the case. Failing to name a trustee falls into the category of a non-material error (lack of capacity) that may be remedied by a correction instrument. The court states:

[N]o Texas court has gone so far as to hold that all deeds naming a trust as a grantee are null and void or that the error is not correctable under the deed correction statute. Indeed, there have been cases in which Texas courts have not voided a deed even when confronted with a trust holding property in its own name . . . [I]t appears that the deed [in this case, which does not name the trustee] is valid under Texas law.

Texas courts have long recognized a certain amount of flexibility in naming the grantee, and Texas state court decisions indicate that courts would read the original deed to convey to Fugedi in his capacity as trustee rather than to the trust itself. Every deed of conveyance must have a grantee. But it is a mistake to suppose that any mere formalities are necessary to its validity. . . . The grantee need not be named. If, from the whole instrument, a grantor and grantee can be ascertained . . . it is a deed which is legally effective as a conveyance. [Since the trustee] is the only individual who could take the property for the benefit of the trust. The identity of the proper grantee can be [easily] ascertained from the context. . . .

A second curative deed that names the trustee would work just as well and perhaps better than a correction instrument.

Texas Property Code Section 114.087 (effective in 2023) is in harmony with the 5th Circuit’s view. As a matter of law, true ownership of trust property resides in the name of the individual who is acting in the capacity of trustee. “The trustee of a trust is considered for all purposes to be the named party to an instrument that names the trust as a party” to a real estate transaction. This is true even if the trustee is not named. (Note that Section 114.087 does not prohibit a conveyance of real property into the name of a trust without mentioning the trustee.)

Planning with a Deed in the Drawer

Problems arise when a title company is later asked to insure title as part of a proposed sale out of an anonymity trust. The title company will look at the existing deed and correctly assert that a flaw exists, namely that a deed into a trust without naming the trustee fails as a matter of law. The title company will insist on curative action, specifically a re-deeding of the property into the trust but this time with express mention of the trustee’s name.

How does an investor plan for this process? It should be arranged early on for the previous seller to execute two deeds: one that omits the name of the trustee along with a second one that includes the trustee’s name—but then file only the first deed in the property records. The second deed is held in reserve (a “deed in the drawer” technique) in anticipation of a future title company’s objections, ready to be produced and recorded at that later time.

Note that a title company is likely to require either a copy of the trust agreement or a certification of trust pursuant to Property Code Section 114.086—so a written trust agreement must in fact exist.

Clearly, the use of anonymity trusts is an aggressive investor technique for those who do not mind: (1) being lectured by a title company on the subject of trusts not being legal entities and then (2) being required to re-deed the property in order to clean up the chain of title. All of this may be just fine with an investor who has a back-up deed in the drawer ready to go. In fact, this constitutes mission accomplished since anonymity objectives have been met during the investor’s period of ownership.

Clients occasionally ask their lawyers to create an anonymity trust with their LLC as beneficiary, but there is problem with this approach: structurally, the trustee is outside of the LLC’s liability barrier and thus remains personally exposed to litigation (the naked trustee problem).

ENTITY STRUCTURING

Transfer Vehicles

A simple method of achieving relative anonymity in the chain of title involves establishing a transfer vehicle—an LLC, for example. The first step is to establish the LLC; the second is to transfer the property into its name; the third step involves transferring an interest in the entity to some third person or entity, accomplished by means of an unrecorded sale and assignment of LLC membership interest.

As a matter of public record, the LLC continues to own the asset (no change in legal title has occurred) but the person owning the LLC has changed. There would be nothing in the real property records (chain of title) or in the appraisal district records that identifies the new principal acting behind the LLC.

There would be no warranties of title or title insurance accompanying such a transfer. Another downside for the buyer is that the LLC is acquired with whatever actual and contingent liabilities that come with it—so buyer due diligence is required.

Trusts as Transfer Vehicles

A trust may also be used as a transfer vehicle. This involves: (1) establishing the trust with a written trust agreement; (2) deeding the property into the trust; and then (3) transferring the entire beneficial interest in the trust to a buyer by means of an unrecorded assignment of beneficial interest. There is no public recording indicating that the buyer (the new owner of the trust beneficial interest) is the true beneficial owner of the property.

Trusts have a drawback, however: there is a trustee (an individual) who is exposed to lawsuits without a liability barrier (since trusts, unlike LLCs, have no such barrier). Many clients assume that an attorney will be willing to act as their trustee in order to facilitate anonymity. This is increasingly doubtful. After CTA/FinCEN, it will be a minor miracle if one is able to find an attorney willing to serve as trustee of a client’s trust. If an attorney agrees to do so, it will likely be in exchange for prior disclosure by the client of the trust’s purpose, source of funds, and the identity of all beneficial owners—along with significant attorney compensation coupled to offset the risk.

The Two-Company Structure

The two-company structure remains the classic way to go—not just for real estate investors but for any business that deals with the public and simultaneously owns hard assets. Layering and other techniques can create additional benefits within the two-company structure in order to enhance it; but the goal remains separation of activities from assets. There is no more fundamental principle of asset protection.

Assets should be held in a holding company (often a series LLC) while dealings with tenants, contractors, vendors, and the public at large should be conducted by a separate management LLC. The management company owns no meaningful assets and operates as a near shell. It is, in effect, an intentional target for lawsuits.

The holding company, on the other hand, remains largely invisible and immune. Why? Because it does not directly conduct business with third parties and therefore can raise the defense of no privity. In the American legal system, the absence of privity almost always means that a lawsuit will be unsuccessful (although not inexpensive, since the defendant still must pay attorney’s fees and costs to obtain a summary judgment).

Layered Structures

Layering is vital to maximizing anonymity. It is unreasonable to expect to be able to form a single entity (of any type in any jurisdiction) that will achieve the highest possible degree of both asset protection and anonymity.

Building a layered structure is one of the many points in the process where fees and costs enter the picture: if one cannot afford this, one cannot afford to maximize anonymity. Seeking anonymity means working against an international tide of increasing disclosure and transparency. Even partial resistance takes real creativity, effort, and expense. Is one’s legal budget $2,500 or $25,000? The players in the Pandora Papers likely spent $50,000 or more on each entity including on and offshore attorneys, trustees, nominee directors, local agents, filing fees, and a bribe or two.

Trust as LLC Member and Manager

In order to increase anonymity, an LLC may be combined with a trust that acts as both sole member and manager. The trust’s mailing address can be shown as a postal box.

The trust can (for a time at least) be named in state LLC filings without reference to the trustees who control it. Signatures on annual filings can be by a non-principal, perhaps a lawyer or CPA if one will agree to do it. The Texas PIR requires only the title of the person signing, and the title of authorized representative seems to work fine for now.

The use of anonymity trusts in entity formation is a creative technique. However, Texas (as well as other states like Wyoming and Nevada) accept filings in this format without issue, both at the initial stage and later in LLC annual filings. Note that LLC governing documents must be significantly customized to accommodate this feature.

Assumed Name Certificates (DBAs)

Assumed names are useful for entities as a means of achieving relative anonymity in everyday business dealings. As a rule, an LLC should do as much business as possible by and through its assumed name. A bank account should be opened that shows the DBA as the primary account name. Checks should be printed that way, and contracts and leases should be signed using the assumed name whenever possible. Even though research at the county clerk’s office or the secretary of state may uncover underlying ownership, an assumed name is still an important part of the overall layering process. In asset protection, incremental steps matter.

Can an assumed name be used to hold real estate? Can property be deeded into an assumed name as grantee? The answer is no. An assumed name filing does not create an entity or legal person. It is merely public notice that someone will be using a different front-name in their business transactions. A deed into an assumed name as grantee means that there has been no transfer at all.

Anonymity and the Texas Homestead

The Texas homestead is already protected from judgments by Article XVI, Section 50 of the Texas Constitution as well as Property Code Chapters 41 and 42, so anonymity techniques are not generally required.

Living trusts are often used for the homestead because they are excellent for probate-avoidance. A living trust may hold legal title (so long as the trustee’s name is shown) and maintain the homestead tax exemption but only so long as the trust is a qualifying trust as defined by Property Code Section 41.0021 and Tax Code Section 11.13. As evidence of compliance, some appraisal districts require that the deed into trust state that the current owner will continue to have the right to occupy the property without rent, cost, or charge (except for taxes and other costs and expenses) for life, until the trust terminates on a certain date, or until the trust is revoked or terminated by a recorded instrument. This mirrors the statutory language.

However, a homestead living trust is not an anonymity device. It will be apparent to anyone reading the public record that a certain named individual resides at the address in question.

It is unusual to place a homestead in an LLC or otherwise use anonymity techniques for the homestead. Nonetheless, there may be legitimate reasons for seeking homestead anonymity. An example is Tax Code Section 25.025 which allows state judges, district attorneys, peace officers, victims of family violence, and others to restrict public access to their home address. Non-public officials may have good reasons of their own for wanting similar treatment. In such cases, a version of an investor anonymity trust can be used, but the homestead tax exemption might be lost. This is a risk. It may not be possible to preserve anonymity and the homestead tax exemption at the same time.

Note that appraisal districts across the state, like county clerks, follow their own internal rules and procedures—so the successful fusion of homestead anonymity with qualifying trust cannot be predicted with any level of certainty.

CONCLUSION

Relativity

All of this leads us to consider Einstein’s theory that traveling at lightspeed is impossible because doing so would require both infinite energy and infinite mass. A spacecraft can therefore approach this cosmic speed limit but never actually reach it. Given increasing legal constraints, one must now concede that anonymity is like that as well.

Consequently, we should distinguish between absolute anonymity, which is nearly impossible to achieve in an interconnected and increasingly regulated world, and relative anonymity, a more attainable goal. Since one can approach absolute anonymity but not actually arrive there, an effective asset protection strategy should seek to maximize relative anonymity by moving the needle as far as possible in that direction. How far can that be? It depends on the circumstances as well as a willingness to be creative, unconventional, and spend considerable funds on legal and tax support.

The Future of Anonymity

Anonymity is not a simple business. Texas is not Switzerland or the Cayman Islands, especially after the advent of the Corporate Transparency Act and expanded FinCEN regulation. Protecting personal and financial information in real estate transactions requires creativity and a willingness to engage in non-traditional approaches. The future of anonymity strategies used in connection with cash, foreign entities, and real estate is less than bright.

The time is approaching when achieving even relative anonymity will be possible only if: (1) the buyer is legally prepared in advance with an entity structure built for the specific purpose; (2) the purchase price of real estate is paid in cash or crypto directly to the seller, without a gatekeeping intermediary; and (3) a title company is not used as an escrow agent or closing venue for the transaction. Outside of these parameters, the degree of available anonymity is shrinking.