This article addresses legitimate privacy alternatives for the Texas investor or business person when engaging in real estate transactions. Why is privacy important? First, because information is power, and it is preferable that your opponents have as little power as possible over you; and second, because we live in a combative and litigious world—and placing gratuitous, vital information about yourself and your family into the public domain may provide adversaries with a roadmap to your identity, business strategy, and assets.
Every day there is a John Smith who files to form an LLC under the name “John Smith Investments LLC” and then lists himself (and often his unsuspecting wife) as initial managers at his homestead address, placing this and other core personal information in the public domain. Of course this investor does the filing work himself, without assistance from an asset protection attorney, because he is smarter than any lawyer—even though he may have been educated as a software engineer or a medical doctor. After all, the law is easy, right? Just a matter of filling out a few forms?
Guiding rule: every member of the public, every single business partner, every single contract party, every single buyer, every single seller, every single title company, every single attorney, every single vendor, and every single agent or broker should be viewed as a potential adversary in a future lawsuit. As long as you have what they want—cash or property—it may be only a matter of time before they come for you. Recognition of this reality should encourage sensible investors to proactively limit exposure by implementing an asset protection plan.
It is important to recognize that the American system of filings and recordings at the courthouse is built to facilitate disclosure, not concealment. Anonymity is relatively achievable in real estate, but it inevitably involves a creative (and sometimes cumbersome and expensive) work-around.
Why is there so much litigation? Two reasons: first, because of contingent-fee arrangements by which some attorneys take dubious cases and then utilize the legal system to harass legitimate businesspersons into settlement; and second, because the American justice system for the most part imposes no significant penalty upon those who have filed failed or frivolous lawsuits. The “loser pays rule” exists in certain other countries (Canada for example) but not the U.S.
Common Questions Pertaining to Anonymity
Three anonymity-related questions frequently present themselves: (1) how can I hold title to property without revealing that I am the true party in interest (this question has to do with status of title—where does true ownership reside)? (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—what is the recorded link between seller and buyer)? (3) How can I blend anonymity features with the liability shield of an LLC?
When discussing anonymity, two important groups in the real estate world must be considered: county clerks, who maintain the real property records and whose job includes filing documents to reflect chain of title; and title companies, which examine and insure both the status of title and the chain of title.
Status of Title
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 title in his or her 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.
Looking past who nominally holds title (and determining who is really in control) can be a challenging exercise, but in most cases it is possible to trace this information through local real property records, DBA filings at the county or state level, or through the Secretary of State and Texas Comptroller—not to mention miscellaneous data accessible on the Internet. The exception occurs when a cautious individual or entity has made a deliberate and diligent effort from the beginning to remain as anonymous as possible. It is nearly always impossible to add anonymity to an existing asset protection structure. It must be built-in at the outset.
Note that it is possible to purchase, own, and convey property without recording transfer documents. There is no law or requirement that all deeds must be recorded. 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. But the reality is that unrecorded interests are difficult to sell. How would a prospective buyer verify the seller’s ownership? Also, buyers in the real world often want title insurance, and their lenders will (by law) require it.
How is anonymity like the speed of light?
In considering issues of anonymity, one should distinguish between absolute anonymity, which is difficult to achieve in an informed and interconnected world, and relative anonymity, which is a more attainable goal. Think of it as a sliding scale. You can approach the goal of absolute anonymity but be never quite arrive there. Accordingly, an effective asset protection strategy seeks to maximize relative anonymity, moving the dial as far as possible in that direction. How far can that be? It depends on the circumstances and an investor’s willingness to be creative and unconventional.
Chain of Title
There is no effective method of defeating, ignoring, or bypassing the chain of title. Each link in the chain of title is represented by a deed or other conveyance recorded in the county clerk’s office—and one cannot break the chain and still preserve one’s status as record owner. A broken link equals questionable title. 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, at least not if you are going to be deeding the property to the LLC outright—as opposed, for instance, to using a more creative approach.
One alternative is to arrange for the property to pass through one or more intermediate transfers so that its origin is progressively more remote in the chain. The more these intermediate transfers have the appearance of bona fide sales for monetary consideration, the more likely the original transferor is to remain in the background, beyond immediate scrutiny. Again, it is a question of relative rather than absolute anonymity.
Another alternative would be to deed the property into a trust which then privately transfers the beneficial interest in the trust to the LLC. This method has a drawback, however: there is now a trustee (an individual) who is exposed without a liability barrier.
Acquisition of real property begins with negotiation of the earnest money contract, which calls for the name and address of the buyer. Although earnest money contracts are not usually recorded, they can be the start of anonymity issues, since dealing with realtors, appraisers, inspectors, surveyors, title company personnel, and neighbors is often quite public and leaves an extensive paper trail. Also, people involved in the process inevitably gossip about pending transactions.
There are two advisable choices at the contract phase: either purchase property in the name of an LLC or trust; 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 for holding title at the last minute, before closing. This option may be unavailable if the property is financed, since lenders require that the principal obligor on the note and the name of the grantee on the deed be one and the same. In that event, the investor should promptly transfer the newly-acquired property into an asset-holding LLC after closing.
Does this raise due-on-sale issues? Unlikely. It is seldom that a lender accelerates a performing loan because it has been transferred into an investor’s personal company for asset protection purposes, but technically it could happen. In actual practice, the potential consequences of leaving investment property in a personal name substantially outweigh any risk involved in moving it promptly into the investor’s LLC. So it is nearly always a step worth taking.
Returning to the subject of earnest money contracts: it is important to realize that contracts can either convey a lot of information or just a small amount of it. Be attuned to this. For instance, is there any reason to list one’s home address as opposed to a postal box? A home phone versus your office or cell phone? Do not provide any more personal information than is essential to make the deal. Do not say anything to a realtor that you do not expect to be conveyed to the other side, the realtor’s duty of confidentiality notwithstanding.
Use of LLCs, Corporations, and Limited Partnerships as Transfer Vehicles
Another method of achieving relative anonymity in the chain of title involves establishing a registered entity (an LLC, for example) that is filed with the Secretary of State. The first step, of course, is to establish the LLC; the second is to transfer the property to the entity; the third step involves transferring an interest in the entity to some third person or entity, accomplished by means of a “Sale and Assignment of LLC Membership Interest.” The LLC continues to own the asset, but the person owning the LLC will have changed. There would be nothing in the real property records (chain of title) or in the appraisal district records that reveals the principals who are now in control of the LLC.
Note, however, that registered entities must file an annual Public Information Report with the Texas Comptroller listing the “name, title, and mailing address of each officer, director, member, general partner, or manager” (see Comptroller form 05-102). Eventually, therefore, someone truly determined to discover the real nature of the transfer may potentially do so by accessing the Comptroller’s records after the next annual PIR is filed. This vulnerability may be mitigated by using a trust and certain anonymity layering techniques including having an “authorized person” sign the PIR, a permitted practice.
Limited partnerships are also common anonymity structures, particularly in larger commercial and syndicated transactions. LPs are often set up as a group of corporations or LLCs with a shell entity acting as the general managing partner. These member-entities may be in turn owned by other entities. LPs are more expensive and elaborate structures that are typically used to buy office buildings and shopping malls.
In an anonymity trust, title is taken in the name of (for instance) the “ABC Trust” with no mention of a trustee. While county clerks have no problem accepting such deeds for filing, the problem is that a trust is not actually a legal entity that can hold title (even though trusts often act like legal entities in the real world). Why is this so? Because a trust is not an entity but a relationship, specifically a contractual relationship between trustor, trustee, and beneficiary, each with rights and duties as a consequence of that relationship. Anonymity trust techniques can work in a practical sense in the real world (and are frequently used as such), but they are still a dodge around academic law as it is taught in the classroom.
Accordingly, problems may occur when a title company is later asked to insure title as part of a proposed sale. The title company will correctly assert that a deed into an anonymity trust fails as a matter of law, and this is true. The issue is what the title company will require now in order to move forward, which will usually be two things from the seller: a copy of an acceptable trust agreement or, alternatively, a “certification of trust” pursuant to Property Code Section 114.086; and a re-deeding of the property with specific mention of the trustee’s name.
How to plan for this? One method is to arrange for the seller to execute two deeds when conveying property into an anonymity trust: one that omits the name of the trustee along with a second one that includes the trustee’s name—but record only the first one for now. The second deed should be 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.
We neither encourage nor discourage the use of anonymity trusts of this type. They can certainly be effective. Just note that they are for aggressive investors who do not mind being lectured by a future title company on the subject of trusts not being legal entities, and then being required to re-deed the subject property before it can be sold with a title policy. But this may be just fine with an investor who has nonetheless maintained anonymity during his or her entire period of ownership.
Assumed Name Certificates (DBAs)
Can property be deeded into a DBA as grantee? Does a DBA exist as an entity that can hold property? The answer is no. An assumed name filing is, after all, merely a public notice that a person or entity will be using a different front-name in business transactions. It does not in and of itself establish a new entity, nor is there the equivalent of a trust agreement behind it. The result is that use of a DBA alone to hold title to property likely means there has been no transfer at all. Title insurance would be unavailable for conveyances out of the DBA. So this practice should be avoided.
Having said the foregoing, it is nonetheless true that assumed names are highly useful devices in anonymity layering. As a rule, each LLC an investor owns should do as much business as possible through its DBA. A bank account should be opened in the DBA name and checks should be printed that way. Leases and contracts should be signed using the DBA. Even though research at the county clerk’s office may uncover underlying ownership behind the DBA, an assumed name is nonetheless an important part of the layering process.
Anonymity Using a Two-Company Structure
In nearly every business it is best to separate activities from assets, but this is particularly true in the case of real estate investing. Hard assets should be held in a holding LLC (preferably a series company that stays out of sight and does little or no public business) while dealings with tenants, contractors, vendors, and the public at large should be conducted by a separate LLC designated as a management company. The management company owns no meaningful assets and operates as a near shell. It is an intentional target for lawsuits while the holding company is largely invisible. Why? Because the holding company has no legal connection (privity) with anyone, meaning it has not conducted business directly with anyone. In the American legal system, no privity almost always means no successful lawsuit.
The two-company structure can also incorporate anonymity techniques. In certain cases, it may be useful to split the two LLCs between two states, what we call the “two-state solution.”
Mixing Trusts and LLCs: LLC as Beneficiary of a Trust
Benefits can be achieved by mixing a trust and an LLC. There are a couple of possibilities in this area. Before considering those, however, one should know the answers to two common questions: yes, an LLC (or a series of an LLC) can be the beneficiary of a trust; and no, an LLC generally cannot be the trustee. The trustee must be a natural person unless an entity is approved as a trustee by the state (a marathon process involving massive disclosure).
One option is to utilize an LLC as a beneficiary of a land trust. But what about a liability shield, a very important aspect of asset protection? The trustee is personally exposed—and this is the principal drawback of any trust, since persons acting as trustees are named individually in suits against the trust. This is one reason why no sensible lawyer will agree to act as trustee for investment trusts established by his or her clients.
From Our Case Files: Anonymity and the Homestead
The Texas homestead is already protected by Article XVI, Section 50 of the Texas Constitution as well as Property Code Chapters 41 and 42, so it is an unusual circumstance when further measures such as anonymity are called for. But it can happen, as in the case of an attorney client of ours who unknowingly did work for an organization that turned out to be a front for terrorists. The attorney agreed to act as escrow agent in a real estate transaction that was in fact a cover for laundering several million dollars from illicit foreign sources. When he realized the transaction’s true nature, he notified the FBI instead of transmitting the funds as directed. He immediately became the subject of threats of retribution. In order to safeguard the physical address of his home, an anonymity trust (at a postal box) was created to hold title to the residence, making it appear in the public record that the attorney owned no property at all.
This created a problem, however, for the homestead tax exemption. The law does allow for a trust to hold homestead title and maintain the 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, most 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. The problem, of course, is that such language makes it obvious to everyone that the owner of the homestead continues to reside at the address in question, which would make our attorney client an easy target. As a solution, a discreet meeting was arranged with representatives of the appraisal district to show them although the deed did not include the necessary language, the trust agreement did include it. The appraisal district was persuaded and all was well.
By now, it should be clear that anonymity is not a simple business. Texas is not Switzerland, so protecting personal and financial information in this state involves substantial creativity as well as a willingness to engage in non-traditional approaches. Steer clear of seminar gurus who make overblown claims concerning the trusts and asset protection systems they are marketing, especially those claiming to achieve anonymity. Trust agreements and other documents available on the Internet should also be avoided. These are almost always junk and seldom suitable for Texas, which has a unique Property Code and Business Organizations Code.
Information in this article is provided for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is retained and expressly retained in writing to do so.
Copyright © 2020 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his web site, www.LoneStarLandLaw.com.