Anonymity Trusts In Texas Real Estate

Topics Covered

Anonymity Trust Methodology
Anonymity and the Texas Homestead
Closing into an Anonymity Trust
Legal Developments Favoring Anonymity
The FinCEN Residential Rule
Real Estate Gatekeepers and Title Companies

Introduction

Anonymity in holding assets is a prized and scarce commodity worldwide. However, anonymity is not just a box to check on a form—quite the contrary. The U.S. system of local real property recording is built for disclosure, not concealment. Anonymity requires creativity, effort, and expense along with a tolerance for risk, sometimes accompanied by pushback from a local appraisal district. And now that FinCEN has issued its Residential Rule (details below) there may also be a federal reporting requirement to deal with.

Generally speaking, layering of entities is inescapable if one seeks to maximize anonymity. Considerable attorney fees may be involved. Note also that anonymity must be built into an asset protection structure from the beginning. It is not an add-on.

This discussion assumes that one wishes to have anonymity and homestead tax benefits. If tax benefits can be dispensed with, then anonymity plus asset protection can more easily be achieved with a Wyoming LLC. Investors from overseas seeking to conceal or launder funds are willing to do exactly that, perhaps with an offshore entity as an in-between layer.

Tax Code Section 25.025 allows state judges, district attorneys, peace officers, victims of family violence, and others to restrict public access to their home address. This privilege does not extend to the public or to real estate investors.

Methodology

Use of a trust to achieve anonymity in the real property records is an edgy technique that involves naming a trust as grantee without expressly naming a trustee. The scenario goes like this: a trust agreement is executed followed by a warranty deed conveying real property into the trust. The traditional way for a trust to hold property is by expressly stating the name of the trustee, e.g., “John Jones, Trustee of the 123 Oak Street Trust;” however, it is possible to list the grantee in a deed as only the trust—e.g., the “123 Oak Street Trust”—with no reference to a trustee. Anyone seeking to know who the principals are and what assets they have has their work cut out for them since trust agreements are generally private, unrecorded documents. When combined with a postal box address, this device can at least for a time serve to conceal the true party in interest.

County clerks will accept such a deed for filing (so long as it is properly executed and acknowledged) but recording the deed is not the problem. That comes later. Issues can arise when the investor decides to transfer the property out of the trust since no trustee was named in the deed who can now sign as grantor.

A solution is to have a second (unrecorded) deed into the trust which has been held privately ( “deed in the drawer” technique) in order to be ready for this eventuality. This deed is similar to the first deed into trust except that the trustee is now named. When a future title company raises objections, this second deed is then presented and recorded as means of bypassing those objections.

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 may constitute mission accomplished since anonymity objectives have been met during the investor’s period of ownership.

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. Nevertheless, some clients want to take the extra step to maximize their anonymity by utilizing a trust. Problem is, a homestead living trust is not inherently an anonymity device. Since a trustee is usually named, it will be apparent to anyone reading the public record that a certain named individual resides at the address in question.

Another issue is achieving and maintaining the status of qualifying trust with the appraisal district. A living trust may 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.

The standards and behavior of appraisal districts with regard to homestead trusts vary substantially across the state, particularly in terms of the barriers that an appraisal district may raise in order to attempt to deny the homestead exemption. One must recall that appraisal districts are collection agencies that can be expected to resist any practice that denies them revenue. Appraisal districts 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 in any particular county. The lawyer drafting the trust (and deeds into it) cannot any guarantee a successful outcome in this area.

Closing into an Anonymity Trust

There are really only two ways for an anonymity trust to take title:

(1) The client-buyer receives title in his personal name or an owned entity and then conveys it into the anonymity trust. This of course places personal identifying information into the title chain. Such disclosure can be mitigated (but not eliminated) by inserting one or more layers of persons or entities into the chain of title after the personal name but before it finally arrives at the trust.

(2) Alternatively, the seller of the property can agree to convey title into the anonymity trust directly, per the client-buyer’s instructions, to wit, into the name of the trust alone without naming the trustee.

The second alternative will require planning and documentation at the contract stage (before the contract is signed) by including a custom contract addendum that stipulates the form of the deed that the seller will deliver at closing. The question then becomes whether or not a title company will insure title that is framed in this manner (i.e., a trust without a trustee). If title insurance is not a concern, or a title company is not closing the transaction, then this is not problem.

Legal Developments Favorable to Anonymity Trusts

A technical problem is that a trust is not a legal entity that can hold title. In fact, a trust is not an entity at all but is instead a relationship—specifically a contract between trustor and trustee, each with rights and duties as a consequence of the contractual relationship.

The rule in Texas is generally that title to realty must be held by an entity or a natural person. A contract (a trust) cannot hold title to real property. So what is to be done with a deed that does not expressly state the name of the trustee?

Two legal developments enhance the viability of using an anonymous trust for real estate:

(1) Fugedi v. United Rentals, CA, an unpublished 2022 opinion of the 5th Circuit Court of Appeals which ruled that failure to name a trustee in a deed is a non-material error regarding a party’s capacity that can be remedied by a correction instrument; and

(2) Property Code Section 114.087 which deems that trust property resides in the name of the individual who is acting in the capacity of trustee, and this is true whether or not the trustee is named in the deed. Therefore, 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. It is worth noting that Section 114.087 does not prohibit a conveyance of real property into the name of a trust without mentioning the trustee.

More on the Fugedi Case

The Fugedi 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.

Delegation to a Trust Agent

Another development that may favor an anonymity strategy is Property Code Section 113.018, added in 2017, which permits a trustee to appoint an agent and delegate certain powers to that agent “to act for the trustee in any lawful manner for purposes of real property transactions.” The agent can be anyone so long as the appointment is in writing and notarized (there is no requirement that it be recorded). The appointment—or “delegation” as the statute puts it—can be supplied on demand to third parties as evidence of authority. It is valid for six months.

The FinCEN Residential Rule

FinCEN (an arm of the treasury department) has promulgated its Residential Rule which requires reporting of the identity of principals in certain residential real estate transactions. FinCEN targets non-financed (including all cash) transactions and specifically mentions trusts in the residential rule: “Illicit actors . . . often hold residential real estate in the name of a legal entity or trust, in an effort to obscure their identities and their ownership interests in the property. Transfers that are both non-financed and involve a transferee that is a legal entity or trust are of higher risk for money laundering. . . .”

A trust must be reported as a beneficial owner if it exercises substantial control or owns more than a 25% interest. This is a new and evolving area with new rules that are emerging. FinCEN will be including a new sub-part to Chapter X of the Code of Federal Regulations for this purpose. Until then, much of the best information on the residential rule is available is on the FinCEN website.

It should be noted that information reported to FinCEN goes into a secure federal database that is (supposedly) available only to federal and state law enforcement. FinCEN does not mandate disclosure to anyone else, either at the county level (when recording documents in the real property records) or at the state level (when forming new entities).

FinCEN’s expansion into the realm of trusts is significant. A trust agreement is a private document that need not be filed or recorded anywhere. Trusts are not registered entities created by paying a filing fee to the state. As a result, trusts, including those that hold real estate, have traditionally enjoyed a high degree of confidentiality. This could be changing.

Given that FinCEN’s aim is to achieve maximum transparency in real estate transactions (at least when it comes to reporting personal identifying information to the federal government), the whole idea of achieving anonymity by using a trust could become more problematic going forward.

Real Estate Gatekeepers

Given the tightening regulatory environment, real estate gatekeepers (brokers, lawyers, title companies, etc.) can no longer be expected to be mere order-takers. They are increasingly aggressive in seeking to verify theidentity, 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 trust 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?”

The trend is toward unofficially deputizing such persons across the financial and real estate industries. It is conceivable, perhaps inevitable, that real estate gatekeepers will one day be required to engage in more federal reporting than is now the case.

Title Company View of Anonymity Trusts

Since the 2008 real estate crash (when land trusts were prominent), title companies have become suspicious, if not outright hostile, to investor land trust transactions—so expect skepticism from a future title company if one has used an anonymity trust to hold title to real property. The title company will want to see the trust agreement so a written trust agreement must therefore exist. It must also be properly drafted and executed so that it will be accepted as valid. Otherwise, the title company may choose to ignore the trust altogether (act as if it never existed in the chain of title) and require signatures from all persons having an actual or potential interest in the property before insuring a new owner.