Anonymity in Texas Real Estate

Including Discussion of the New FinCEN Beneficial Ownership Rules

by David J. Willis J.D., LL.M.

Introduction

This article addresses legitimate privacy alternatives for the Texas real estate 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, your family, and your residence into the public domain only provides potential adversaries with a roadmap to your identity 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.

Consider this a 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—and they have a real or imagined grievance, 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.

In the pursuit of anonymity, it is important to recognize that the American system of filings and public recordings is designed to facilitate disclosure, not concealment. Anonymity may be relatively achievable in the U.S., but it inevitably involves creative and expensive techniques. Accordingly, anonymity is not for the faint of heart or the faint of wallet.

The Pandora Papers

The determined pursuit of anonymity by the global elite was highlighted by the “Pandora Papers” in 2021. It comes as no surprise that people ranging from former prime minister Tony Blair, Shakira, and the president of Ukraine (plus various oligarchs, African dictators, and billionaires) use secretive offshore tax havens. Even the finance ministers of Pakistan and Brazil are siphoning money out of their countries and parking it offshore, often in the United States. Thanks to aggressively favorable laws passed by certain U.S. states (Delaware, South Dakota, Wyoming, and Nevada among others), America is now the world’s largest “offshore” haven for both stashing cash and doing so anonymously.

There is, however, a countervailing trend. New federal laws and regulations—in particular, the Corporate Transparency Act now being implemented by the treasury department’s financial crimes division (“FinCEN”)—are making anonymity increasingly problematic. These new rules are an unprecedented expansion of federal power into entity formation, an area that has traditionally been the province of states. Formerly, establishing an entity was a state affair except of course for the necessity of obtaining a tax identification number from the IRS. Going forward, there will be a distinct federal component to the entity-formation process.

New FinCEN Rules Applicable to Entities

FinCEN recently issued a notice of proposed rule-making in which both domestic and foreign companies will be designated as “reporting companies.” FinCEN states that that the “ultimate goal of this regulatory proposal is to combat, to the broadest extent possible, the proliferation of anonymous shell companies that facilitate the flow and sheltering of illicit money in the United States.” FinCEN claims that new reporting rules will “help stop bad actors  from using legal  entities to hide illicit funds behind anonymous shell companies or other opaque corporate structures.” See FinCEN’s NPRM issued December 7, 2021. What will inevitably occur, however, is that certain legal structures will become synonymous with bad actors.

FinCEN’s new reporting rules are a step beyond existing reporting requirements imposed on title companies and banks. Companies will now be expected to self-report key information, including names and addresses of persons who have substantial control or any “beneficial owner” who owns or controls 25% or more of a reporting company. There is a window to file these “Beneficial Owner Information Reports” (Since the government loves its acronyms, these are called “BOIs”). Reporting companies, domestic and foreign, created before the effective date of the final FinCEN regulation will have a year to file their initial reports. Reporting companies formed afterwards will have 14 days to file. But it doesn’t end there—FinCEN will expect updates as time goes on and circumstances change, within 30 days of the change.

The initial phase of FinCEN regulation in this area will be finalized in 2022, so these requirements are indeed upon us. FinCEN states: “Once finalized, these proposed regulations will affect a large number of entities doing business in the United States,” an understatement if there ever was one.

FinCEN’s rules are likely to expand in number and scope over time. FinCEN has said as much. Needless to say, achieving and maintaining anonymity in entity structuring becomes a more challenging project in this environment. As for penalties for non-compliance, don’t ask. They are predictably awful for anyone who provides or attempts to provide false or fraudulent information. “Failure to act” is also a violation.

New Federal Database

Information collected pursuant to FinCEN reporting will be held in a (supposedly) non-public federal database available only to government agencies including law enforcement—which is to say that huge chunks of data will inevitably be leaked, hacked, or otherwise find their way into both the public domain and the hands of foreign intelligence services (think China).

Treasury Secretary Janet Yellen calls all of this a “dramatic step forward” in achieving beneficial ownership transparency in the case of “malign” actors and entities participating in real estate transactions. Such is the righteous tone and tenor of the new reporting and enforcement regime.

Civil Forfeiture is the Point

Despite FinCEN’s of moral terms like “bad actors,” the new rules were not created in order to make companies more virtuous; the real motive here is to enable the U.S. treasury to seize all or a portion of funds and assets involved in certain real estate transactions. As with so many things in life, it’s about the money.

The practice of civil forfeiture, often accomplished without charges or suit ever being filed, is already out of control in the United States. Confiscating cash, vehicles, guns, and houses from “suspects” is the main financial lifeline for many police departments across the country. Expect FinCEN to take civil forfeiture to the next level. In its NPRM, FinCEN literally boasts of the prospects, declaring that previous forfeitures have yielded “luxury properties in New York City, Los Angeles, Beverly Hills, and London, mostly titled in the name of shell companies, as well as paintings by Van Gogh, Money, Picasso, a yacht, several items of extravagant jewelry, and numerous other items of personal property.” Do you notice a theme here? In your hands, these things are extravagant. By transferring them to the government, justice is served, even if the owner is never accused or convicted of a crime.

Company Applicants under FinCEN’s Rule

This part of the new FinCEN rule is worrisome for lawyers who form LLCs and other state-chartered entities for their clients. FinCEN says that a “company applicant” is anyone who directs or controls the filing of entity-formation documents, whether for oneself or for another. This is true whether or not the company applicant has any control over or beneficial interest in the entity. So will business lawyers now be considered to be company applicants? Will they be required to file FinCEN reports that could harm the interests of their clients? If a lawyer is deemed to be a company applicant, does that now make him or her co-liable for the misdeeds of the client? Will attorney offices fear raids by the feds to inspect their records for FinCEN compliance?

This is potentially a huge problem as it directly conflicts with the attorney-client privilege. A widespread current practice is for lawyers to sign LLC formation documents for their clients as “organizer,” a state-law term that is substantially identical to “company applicant” as used by FinCEN. There has previously been no downside for lawyers who do this. In fact, most clients expect their lawyers to sign these documents as a matter of routine. Going forward, however, lawyers may take a hard look at this practice and—in order to avoid liability as the company applicant—start asking clients to sign their own certificates of formation.

Another question: will lawyers now have to implement the kind of KYC (“know your customer”) rules that banks so aggressively impose upon new depositors? Uncertain. As a sidenote, FinCEN refer to the KYC rules by their acronym CDD (customer due-diligence) rules.

Litigation Nation

Oligarchs and dictators from less-developed countries have obvious reasons for wanting to move their assets into the safety of U.S. banks and real estate. As for the rest of us, the driving force behind the search for anonymity is the prevalence of litigation. Just as U.S. banks and land are relatively safe, U.S. courts—where anyone can sue anyone for anything—are not.

Why is there so much litigation in America? Three reasons: first, contingent-fee arrangements allow attorneys to profitably pursue dubious cases and then utilize the legal system to harass legitimate businesspersons into settlement; second, because the American justice system for the most part imposes no penalty upon those who file frivolous lawsuits (The “loser pays” rule exists in Canada and elsewhere but not in the U.S.); third, courts are heavily utilized in the U.S. as a principal part of the overall social rulemaking apparatus. When new legislation passes congress, that is not the end of the process. It is routine for lawsuits to then be filed by special interests, often fed by dark money, seeking to challenge all or specific parts of a new law. Only after the dust of litigation settles do Americans have a clear idea of what the final rules will be.

Another more recent factor in the rise of litigation is institutional litigation financing. There are specialized lenders who will now provide a law firm with funds necessary to pursue even the most complex and expensive lawsuits—all in exchange for a piece of the action. This is an odious business, part of Wall Street’s financialization of everything, and inimical to the common-law tradition of just resolution of legitimate disputes between parties who have proper standing. So far as we know, retail lenders like Capital One are not in this business yet, but they could be soon. Litigation financing is most definitely a trend.

How is anonymity like the speed of light?

Einstein’s theory of general relatively states that achieving the speed of light is impossible because doing so would require not only infinite energy but infinite mass. A spacecraft can approach this universal constant but never actually reach it. Anonymity is like that.

In considering issues of anonymity in real estate, 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 not actually 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 as well as an investor’s willingness to be creative, unconventional, and spend lots of money on legal and tax support.

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 in order to form an effective asset protection structure?

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 recording documents to reflect chain of title; and title companies, which examine and insure both the status of title and the chain of title. Lenders also play a role, since it is impossible to get a loan if the chain of title is not in order.

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 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 (It’s not).

Looking past who nominally holds title, and determining who is really the beneficial owner, can be challenging; but in most ordinary cases it is possible to trace this information through local real property records, assumed name filings at the county or state level, and through business filings made with the secretary of state and state comptroller. Add the Internet, and there is more information available on each of us, our companies, and the properties in which we invest every day. It is both rational and legitimate to seek to minimize the extent such data is publicly available.

The key is to make 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 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 or lender. 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. Title insurance demands a sound chain of title.

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, 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, 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 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. However, this is only a way of stretching out the chain of title but not eliminating it. 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 an LLC. This method has a drawback, however: there is now a trustee (an individual) who is exposed to lawsuits without the liability barrier provided by an LLC or corporation.

Pre-Closing Anonymity

Acquisition of real property begins with negotiation of an earnest money contract, which usually calls for the name and address of the buyer and seller. 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 a paper trail. Also, people involved in the process invariably communicate about pending transactions.

It is important to realize that contracts can either convey a lot of information 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 your office or cell phone? Do not provide any more personal information than is essential to make the deal. And 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.

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. However, 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 such event, the investor should promptly transfer the newly-acquired property into an asset-holding LLC after closing.

Does this transfer 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 adverse 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.

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 assignment of LLC membership interest. The LLC continues to own the asset, 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 reveals the identity of the new principal.

Note, however, that Texas registered entities must file an annual Public Information Report with the 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 do so by accessing the comptroller’s records after the next annual PIR is filed. This vulnerability may be mitigated by using a trust along with layering techniques, including having a generic “authorized person” sign the PIR.

Limited partnerships can also be used as anonymity structures. These are often set up as a group of corporations or LLCs with a shell entity acting as the general managing partner who is the only one shouldering general liability. Limited partner entities may be in turn be owned by other entities. LPs are often used to buy office buildings, apartment complexes, and shopping malls.

Layered Structures

Layering is essential to achieving maximum anonymity. It is unreasonable to expect that your attorney will be able to form a single entity (of any type in any jurisdiction) that will achieve a high 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 you cannot afford the proper structure, you cannot afford anonymity. Again, one is working against the tide of a system that is demanding increasing disclosure and transparency with every year and every congressional session that goes by. Resisting this tide takes real creativity, effort and expense.

A glance at the asset protection diagrams on our website will show a progression of complexity where simpler structures quickly give way to layered ones. While the basic two-company structure is probably the best arrangement for most real estate investors, and a limited amount of anonymity can be built in, it is not nearly as effective as a layered structure in achieving maximum anonymity.  Remember: anonymity lies on a sliding scale: you can have a little, a lot, or some amount in between.

The two-company structure is intended to separate assets from activities. 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 an entirely 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 remains largely invisible and immune from lawsuits. Why? Because the holding company has no legal connection (privity) with anyone, meaning it does not directly conduct business with anyone. 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 through the discovery process and summary judgment).

Layered structures add multiple liability barriers. Take a look at our graphic entitled “Triple Firewall with Anonymity.” This structure is notable because it preserves the division of activities from assets that is at the core of the two-company structure, but adds additional liability horizontal firewalls. And by including a series LLC as a holding company, the structure adds vertical firewalls between individual series that are insulated and isolated from one another.

Anonymity Trusts as Sole Member and Manager of an LLC

Given the annual reporting requirements in all states, however, layering of LLCs is not enough. Recall that in Texas the annual PIR requires the name, title, and mailing address of each officer, director, member, general partner, or manager. The form must then be signed by someone who, at the very least, is an authorized representative.

In order to make a layered structure maximally anonymous, it should be combined with a trust that is listed as sole member and manager of at least one of the LLCs involved, preferably the base level LLC (the one closest to the individual principal). If you look at the graphic of our “Hub-Sub Structure,” that is what is happening in that case.

The trust at the core of the structure can be named in public LLC filings without reference to the trustees who control it and the trust’s mailing address can be shown as a postal box. Signatures on annual filings can be by a non-principal, perhaps a lawyer or CPA. The Texas PIR requires only the title of the person signing. The title “authorized representative” seems to work just fine.

Anonymity Trusts in Real Estate Transactions

In order for a buyer to acquire property anonymously, title can be taken in the name of the “ABC Trust” (for instance) 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 and trustee, each with rights and duties as a consequence of that relationship.

Problems arise 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 because the trust is not entity—and this is true. The title company instead wants title to be held by named individuals acting as trustees of the trust. The correct formulation is a matter of both phraseology and disclosure.

When the pending transaction reaches this point (usually when the title commitment has been produced) one can expect a title company to require curative action, specifically a re-deeding of the property with specific mention of the trustee’s name. It may also require either a copy of the trust or a certification of trust pursuant to Property Code Section 114.086.

Given that a trust is not a true legal entity, this outcome is inevitable. The question is, how to plan for it? One method is to arrange early on for the 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 record only the first one. 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.

The use of anonymity trusts in transactions is 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 using a deed that discloses the names of the trustees. But this may be just fine with an investor who has duly anticipated the issue, has his back-up deed ready to go, and has met his anonymity objectives during the investor’s period of ownership.

Assumed Name Certificates (DBAs)

Can property be deeded into an assumed name as grantee? Does a DBA exist as an entity that can hold property? The answer is no. An assumed name filing is merely public notice that a person or entity will be using a different front-name in business transactions. It does not establish a new entity. The result is that use of an assumed name as grantee in a deed likely means there has been no transfer at all.

Assumed names are nonetheless useful devices for achieving relative anonymity. As a rule, an LLC owned by a real estate investor should do as much business as possible by and through its assumed name. A bank account should be opened that includes the DBA name, and checks should be printed that way. Leases and most contracts should be signed using the assumed name whenever possible. Even though research at the county clerk’s office may uncover underlying ownership behind the DBA, an assumed name is still an important part of the overall layering process.

Can an LLC act as beneficiary of a trust? Does this help with anonymity?

Clients occasionally ask their lawyers to create a trust with their LLC as beneficiary. But what about a liability shield, an essential aspect of asset protection? While this approach may yield some anonymity benefits, the trustee is personally exposed—and this is the main drawback of any trust, since persons acting as trustees are named individually in suits against the trust (This is the reason no sensible lawyer will agree to act as trustee for a client’s investment trust). In this scenario, the trust and the trustee are outside of the LLC’s liability barrier rather than within it. Special circumstances would need to apply to make this approach worth the risk.

Anonymity and the Texas Homestead

The Texas homestead is already protected from judgment execution 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. But the need for homestead anonymity can legitimately arise, as is recognized by 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.

One can use an anonymity trust (trustees not named) to own a homestead, but this can create a problem when it comes to the homestead tax exemption. The law does allow for a trust to hold homestead title and maintain the 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, 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 reading the deed that the owner of the homestead continues to reside at the address in question. A possible solution is to a arrange a meeting with representatives of the appraisal district to demonstrate that although the deed does not include the necessary language, the trust agreement does include it. Since appraisal districts, like county clerks, follow their own rules and procedures across the state, the results of this approach cannot be predicted with certainty.

Conclusion

By now, it should be clear that anonymity is not a simple business. Texas is not Switzerland or the Cayman Islands, so protecting personal and financial information in a real estate transaction involves substantial creativity as well as a willingness to engage in non-traditional approaches. Real estate investors should steer clear of seminar and Internet gurus who make overblown claims concerning trusts and asset protection systems they are marketing, especially those claiming to achieve anonymity. Trust agreements and other documents available online should also be avoided, since these are almost always junk and seldom suitable for Texas which has a unique Property Code and Business Organizations Code.

Lastly, the time is fast approaching when achieving anonymity in a real estate transaction will be relatively possible only if: (1) the buyer is legally prepared in advance with an asset protection structure built for the specific purpose; (2) the purchase price is paid in cash or crypto directly to the seller; and (3) a title company is not used as an escrow agent or closing venue for the transaction. Outside these parameters, the degree of available anonymity in real estate is definitely shrinking. Institutional participants in the process (lenders and title companies) now have increased duties as reporting agents to the federal government, even beyond what they have had in the past. Is this truly a “dramatic step forward” as the treasury secretary has claimed? You be the judge.

DISCLAIMER

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 © 2022 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.