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This article addresses legitimate privacy alternatives for the Texas investor or businessperson 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 litigious world . . . and offering gratuitous, vital information about yourself provides others with a roadmap to your strategy and assets. Guiding rule: every single business partner, contract party, buyer, seller, or broker should be viewed as a potential opponent in a lawsuit.

For reasons of space, we limit the scope of this article to issues routinely encountered by our clientele, who typically own a dozen, fifty, or even a hundred investment properties in Houston, Dallas, or Austin. If your goal is to structure an anonymous international consortium to purchase Rockefeller Center or Trump Tower, this article is probably not for you.

This should be read in conjunction with our companion article Asset Protection in Texas.

"Anonymity" is a common goal among real estate investors. Three questions frequently present themselves:

The questions are different but related. The first has to do with the status of title – i.e., where true ownership resides; and the second has to do with the chain of title – the links between sellers and buyers reaching back into history to original land grants from the sovereign. We will deal with the third question in the section entitled "Mixing LLC´s and Trusts."

When discussing anonymity issues, two important parties must be considered:

It is possible to purchase, own, and convey property without recording relevant documents. There is no law or requirement that deeds and the like 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. Also, buyers in the real world often want title insurance, and their lenders will (by law) require it.

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 very flexible in this respect. You want to hold 50% of the title in the personal names of yourself and your spouse as joint tenants, with 25% being held by your LLC, and the remaining 25% being owned by your family living trust? No problem. Whether or not it is wise to structure your ownership in such a way is another matter.

Looking past who nominally holds title – in other words, determining who is really in control – can be a challenging exercise, but in the end it is almost always possible to trace this information through the local real property records, assumed name (DBA) filings at the county or state level, or through the Secretary of State and Texas Comptroller – not to mention miscellaneous data easily accessible on the internet. So in considering issues of anonymity, one should distinguish between absolute anonymity, which is difficult if not impossible to achieve in an informed and interconnected world, and relative anonymity, which is a far more attainable goal. Think of it as a sliding scale. An effective asset protection strategy maximizes relative anonymity, moving the dial as far as possible in that direction. How far can that be? It depends on the circumstances and business plan of the client.

Let´s start with this foundational principle: there is no effective method of "defeating" the chain of title. 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 outright.

Each link in the chain of title is represented by a deed or other conveyance that is likely recorded in the county clerk´s office – and you cannot break the chain and still preserve your status as record owner. A broken link equals questionable title. Questionable title equals unsalable property – or nearly so.

What you can do is arrange for the property to pass through one or more intermediate transfers so that its origin is progressively more remote in the chain. Additionally, the more these intermediate transfers have the appearance of bona fide sales for consideration then 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 is to use an LLC or trust as a "transfer vehicle," a method described in detail below.

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 recorded, they can be the start of anonymity issues, since realtors, appraisers, inspectors, surveyors, title company personnel, and neighbors inevitably gossip about pending transactions. There are two advisable choices when acquiring property: either purchase it 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, immediately before or at closing. Note that this option will be unavailable if the property is financed, since the lender will require that the principal obligor on the note and the name of the grantee on the deed to be one and the same.

Investors using their personal credit to acquire rental properties should use the second option and then, after closing, immediately transfer the new property into their LLC. Does this raise due-on-sale issues? Highly unlikely. This author has never seen a lender accelerate a loan because a borrower transferred a property to his or her personal company – but technically it could happen (See our companion web article Due on Sale in Texas). In actual practice, the potential consequences of leaving investment property in a personal name substantially outweigh any risk involved in moving it immediately into the investor´s LLC.

It is important to realize that earnest money contracts can 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 PO box? Your 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.

Another method of achieving relative anonymity in the chain of title involves establishing a registered entity – an LLC, for example – filed with the Secretary of State. The first step is to establish the entity; 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 would continue to own the asset, but the person(s) owning the LLC would have changed. There would be nothing in the county clerk´s records (i.e., the chain of title) or in the appraisal district records reflecting the name of the individual who now owns the LLC.

Note, however, that filed entities must file an annual Public Information Report (PIR) with the Texas Comptroller that lists the entity´s members or shareholders (This contrasts with the Certificate of Formation which is filed with the Secretary of State and requires the names of the LLC´s initial managers). Eventually, therefore, someone truly determined to discover the "real" nature of the transfer could do so by accessing the Comptroller´s records after the next annual PIR is filed. It is worth noting that this level of determination goes well beyond the average and would also take time . . . so, in the right circumstances, use of an LLC as a transfer vehicle can serve as effective camouflage.

Corporations are another alternative, but corporate filings at the Secretary of State´s office are dramatically waning in favor of the simpler, more easily managed LLC. In our office, LLC filings outnumber corporation filings by ten to one. It is worth noting that the new series LLC (which contains insulted "series" or compartments for different assets) is becoming the vehicle of choice for real estate investors. See our article entitled LLC´s in Texas – Series LLC.

Limited partnerships are also common anonymity structures, particularly in larger commercial transactions. LP´s are often set up as a group of corporations with a shell corporation as the general partner. These corporations are often owned by other corporations. LP's are expensive entities typically used to buy office buildings and shopping malls. They will not be discussed further in this article.

Establishing a trust is an alternative to forming an LLC or corporation. In the case of a trust, one would execute an "Assignment of Beneficial Interest" to convey ownership of the trust to a third party. Again, the trust would continue to be the owner, but the beneficiary of the trust (the "real" party in interest) would have changed. Knowledgeable readers will now ask: "But what about the way the trust´s ownership is reflected on the deed? Doesn´t the grantee clause have to read (for example) "John Jones, Trustee of the ABC Trust?"

Even though showing the name of the trustee is the established common practice with regard to titling trust property, the answer is no. Why? First, neither the Texas Trust Code nor any other statute requires that trust property be titled this way; and second, because county clerks are happy to accept for filing a deed that shows only the "ABC Trust" as grantee. Not persuaded? Try it. If an original document describes the parties and property with reasonable certainty, the subject property lies within the county, and the instrument is executed and duly acknowledged before a notary, clerks will accept it for filing. County clerks are not "document police."

However, when the property is eventually conveyed out of the trust, the trustee´s signature will be required as the individual with the authority to grant the conveyance. No way around it. Property cannot be conveyed without a signature – and it is an individual´s signature that must be acknowledged before a notary, even if that individual is acting merely as the authorized representative of an entity.

The practical consequence of titling trusts in the name of the trust, without mentioning the name of the trustee, is that any title company involved in subsequent sale of the property will insist on seeing the trust agreement – which is no problem at all, so long as a written trust agreement actually exists. As it should.

While some may argue that a trust is not a "legal entity" (at least not in the same way that registered entities like LLC´s and corporations are), it is nonetheless true – in the real world – that trusts, without disclosing the name of a trustee, commonly hold title to property, are regularly sued in the courts, enter into contracts, and frequently file and obtain evictions in Justice Court. Examples abound. As a practitioner, not an academic, this author works in the world as it is.

One factor in the choice of an LLC vs. a trust as a transfer vehicle depends upon whether or not it is necessary or advisable to establish a liability barrier – which should always be the preference in the case of investment property. Trusts have no such barrier, so they are recommended primarily for non-investment property or, in the case of a living trust, probate avoidance on the homestead (The homestead does not need a liability barrier since it is already protected from judgments – see Homestead Exemptions in Texas). Everyone who owns a home and has heirs should consider a living trust for their homestead. Our article Living Trusts in Texas is recommended reading.

Similar issues arise when conveying property into a DBA while not mentioning the name of the underlying entity. There is a difference, however: when property is conveyed into a trust without mentioning the trustee, the property is nonetheless conveyed into the correct name. After all, the trust has been created as a named entity as a result of a signed, written document (even though trust agreements are generally not filed of record).

On the other hand, if property is conveyed into a DBA, the question arises whether the DBA "exists" in the same way. An assumed name filing is, after all, merely a public notice that a person or entity will be using a different name in business transactions. It does not in and of itself establish a new entity or even purport to do so. The result is that use of a DBA alone to hold title to property runs the risk that there has been no transfer at all. Title insurance would be unavailable for conveyances out of the DBA. Result? This practice is highly problematic. While one might get away it from time to time, it is unlikely that it would survive judicial scrutiny in the event of a dispute.

DBA´s are highly useful devices in the anonymity process – as a rule, your LLC should be doing as much business as possible through its DBA – but owning real property in the name of the DBA itself, without mention of the underlying entity, is not recommended.

This office recommends the division of assets from activities. Assets should be held in an LLC, preferably a series company that stays in the background and does little or no public business; by contrast, activities – dealing with tenants, contractors, vendors including executing leases and contracts, and the like – should be conducted by a separate shell management company. Each of these LLC´s stands alone, meaning there is no cross-ownership.

In certain circumstances, the two-company structure can be effectively used for anonymity purposes without any add-on´s other the usual DBA´s for each company. For instance, the management company can purchase properties or assets (and, in so doing, conduct business with a seller, one or more brokers, rehab contractors, etc.) and then, after closing and fix-up, transfer the property to the holding company. Result? The holding company is largely immune from a successful lawsuit because it has no connection – "privity" is the legal term – with anyone.

As a result of this strategy, the owner(s) of the holding company is relatively remote and anonymous by a couple of steps. Not a perfect strategy (none is) but a very good one. In certain cases, it may be useful split the two LLC´s between two states. We suggest Texas and Nevada.

Our two-company strategy contemplates separate, stand-alone entities without cross ownership. Another alternative is to establish an entity within an entity – an LLC that is owned by another LLC, for instance. If this is your choice, we recommend that the primary operating LLC be a Texas company owned by a Nevada LLC. We favor series LLC´s in most cases because of the additional firewall protection between individual series.

One can go a step further and establish a three-level puzzle box – a Texas LLC that is owned by a Nevada LLC that is owned by an offshore LLC (e.g., a Panamanian company). This provides good anonymity and almost unbeatable asset protection if structured correctly.

Certain benefits can be achieved by mixing a trust and an LLC. There are three elements to this approach: (1) establish a land trust, of which your LLC is the 100% beneficiary, to hold certain real estate; (2) convey the property into the trust by recorded warranty deed, naming only the trust (not the trustee) as grantee; and (3) establish a series (e.g., Series A) in the organizational minutes of the LLC to own and hold the 100% beneficial interest.

First let me answer questions I am frequently asked: Yes, an LLC (or a series of an LLC) can be the beneficiary of a trust? And no, an LLC cannot be the trustee. The trustee must be a natural person.

What is accomplished by this structure? Both anonymity and the protection afforded by a liability shield. The property is titled of record in the name of a trust, pursuant to a trust agreement that is not recorded anywhere (anonymity); and should an opponent get so far as to discover this, then it will be revealed that the 100% beneficiary of the trust –the true party in interest – is an LLC (liability shield). Some clients find this approach excessively complicated. Others consider it the best invention since sliced bread. You decide.

Can a trust be a member and manager of an LLC? The answer, apparently, is yes. Recently, this office experimented with filing a Texas LLC and listing a trust (rather than a natural person, LLC, or corporation) as its initial manager. This was accepted for filing by the Secretary of State. Remember, the initial filing (the Certificate of Formation) does not have to list initial members – only initial managers. It is the Comptroller´s annual Public Information Report (PIR) which asks for the names of members. This is usually due the year following formation. It remains to be seen if the Comptroller will accept the name of a trust as a member for purposes of the PIR – so for now, this strategy remains experimental but promising.

It is of course possible to grant power of attorney to a third party to conduct a transaction on your behalf – and then later settle up by transferring the subject asset(s) to the intended person or entity. Lawyers are occasionally asked to serve in this role; however, a lawyer will not knowingly paint a target on his back (for litigation purposes) unless adequately compensated for this risk (expect the fee to be more than nominal).

Another way to utilize an attorney´s services to achieve anonymity is to ask that he serve as general counsel to the LLC that is acquiring the asset. The general counsel of a company is widely considered to be an authorized representative of a company for purposes of execution of official documents (It is not always necessary for the LLC´s manager or a corporation's president to sign documents). Again, expect to compensate the attorney for the risk.

Lawyers are also asked to serve as trustee for an investment trust engaged in a particular transaction. Because trustees are now being sued left and right, this office will no longer agree to serve in this role regardless of the fee.

Anonymity, like asset protection generally, is a relatively achievable goal and is worth pursuing. However, the reader is cautioned against non-lawyer seminar "gurus" who make overblown claims concerning an AP system or structure they are marketing. These are almost always of questionable legality and effectiveness. Such schemes are seldom suitable for Texas, which has a unique Property Code and Business Organizations Code. Consult a lawyer who is a specialist in this area.

Information in this article is proved for general informational and 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 expressly retained in writing to do so.

Copyright © 2012 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, http://www.LoneStarLandLaw.com.