DAVID J. WILLIS ATTORNEY
Copyright © 2015. All rights reserved worldwide.
ANONYMITY IN TEXAS REAL ESTATE
by David J. Willis, J.D., LL.M.
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 in the public domain provides others with a roadmap to your identity, 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. Of course this investor does the filing work himself, without assistance from an asset protection attorney, because he is smarter than any asset protection 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 lawsuit. As long as you have what they want – cash or property – it is only a matter of time before they come for you. Recognition of this reality should lead sensible investors to proactively limit exposure by implementing an asset protection plan.
Why does this state of affairs exist? Two reasons: first, because of contingent fee arrangements by which some attorneys take dubious cases and then utilize the legal system to harass legitimate business persons; and second, because the American justice system imposes no significant penalty upon those who file frivolous lawsuits.
This article is aimed at real estate investors who own a dozen, fifty, or even a hundred investment properties in Texas. If one’s goal is to assemble an international consortium to purchase Rockefeller Center or Trump Tower, this article is not for you. You should also read Asset Protection in Texas.
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, i.e., 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, the recorded links between sellers and buyers)? (3) How can I combine the anonymity of a trust with the liability shield of an LLC?
When discussing anonymity issues, two important parties must be considered: (1) county clerks, who maintain the real property records, and whose job includes filing original documents so as to accurately reflect the chain of title; and (2) title companies, which issue insurance to owners and lenders insuring both the status and 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 joint tenancy with a spouse, 25% in an LLC, and the remaining 25% in a family living trust? It can be done. Whether or not it is wise to structure 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.
Note that 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.
Chain of Title
There is no effective method of defeating, ignoring, or bypassing 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 one cannot break the chain and still preserve one’s status as record owner. A broken link equals questionable title. Questionable title equals unsalable property.
What one 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 dealing with realtors, appraisers, inspectors, surveyors, title company personnel, and neighbors leaves an extensive paper trail. And people involved in the process inevitably gossip about pending transactions.
There are two advisable choices: 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 the lender will likely require that the principal obligor on the note and the name of the grantee on the deed to be one and the same. In that event, the investor should immediately transfer the new property into an LLC.
Does this raise due-on-sale issues? Unlikely. It is seldom that a lender will accelerate a performing loan because it has been transferred into an investor’s personal company, but technically it could happen (read 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 promptly into the investor’s LLC.
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 PO 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(s) owning the LLC would have changed. There would be nothing in the county clerk’s records (the chain of title) or in appraisal district records that reflects the principals who are now behind the LLC.
Note, however, that filed entities must file an annual Public Information Report (PIR) with the Texas Comptroller that lists members or shareholders. Eventually, therefore, someone truly determined to discover the real nature of the transfer can 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, particularly in the short term.
Limited partnerships are also common anonymity structures, usually in larger commercial transactions. LPs are often set up as a group of corporations or LLCs with a shell entity as the general partner. These may be owned by other entities. LPs are relatively expensive structures more typically used to buy office buildings and shopping malls, so will not discuss them further here.
Land Trusts and Anonymity Issues
Establishing a trust ("anonymity trust" would be our term) in order to own property is an alternative to forming an LLC or corporation for this purpose. In the case of such a trust, one would "sell" the property by executing an "Assignment of Beneficial Interest" to a third party. As in the foregoing section, the entity would continue to be the owner, but the real party in interest (the beneficiary of the trust in this case) would have changed. Knowledgeable readers will now ask: "But what about the way the trust’s ownership is reflected on the deed? Isn’t it necessary to reveal the name of the trustee in the grantee clause – for example, "John Jones, Trustee of the ABC Trust?"
If this were a law school class, the answer would be yes. Naming the trustee is the established common practice with regard to titling trust property. However, it should be noted that county clerks are happy to accept for filing a deed that conveys property into the "ABC Trust" – with no mention of the trustee. 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, for the most part, "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.
A trust is not technically a legal entity, at least not in the same sense that registered entities such as LLCs and corporations are legal entities. Accordingly, the practical consequences of titling trusts in the name of a trust without mentioning the trustee are usually twofold: first, a title company involved in subsequent sale of the property will likely insist on seeing the trust agreement – which is not a problem, so long as a written trust agreement actually exists, as it should; second, the title company may require that the property be re-deeded (i.e., that the deed into the trust be re-executed and re-recorded) which again is no problem, since by then one's anonymity interests have probably been served.
The most effective strategy is to anticipate these title companies demands and (1) make sure that a written trust agreement is available to be produced; and (2) execute two deeds, one that does not name the trustee (to be recorded) and one that does (to be held in the file if needed later).
Will your lawyer act as trustee? Probably not. If the trust is sued, it is the trustee who will be individually named as a defendant – and most lawyers will not knowingly paint a target on their backs for litigation purposes unless adequately compensated for the risk.
One factor in the choice of a trust vs. an LLC 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 – unless designed for limited use as anonymity devices – they are widely recommended as a means of avoiding probate on the homestead. Read our article Land Trusts in Texas.
Assumed Name Certificates (DBAs)
Can property be conveyed "into a DBA?" 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 name in business transactions. It does not in and of itself establish a new entity or a new structure or even purport to do so. The result is that use of a DBA alone to hold title to property runs the significant risk that there has been no transfer at all. Title insurance would be unavailable for conveyances out of the DBA. Result? This practice is fatally flawed and should be avoided.
Having said the foregoing, it is nonetheless true that DBAs are highly useful devices in the anonymity process. 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 essential part of the asset protection layering process that contributes to the goal of being as anonymous as possible.
Anonymity Using a Two-Company Structure
We recommend the separation of assets from activities. This is a fundamental principle of asset protection. 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, dealings with tenants, contractors, vendors and the like should be conducted by a separate shell management company. The two-company structure can be effectively used for anonymity purposes without any add-ons other the usual DBAs 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) 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. It may also be useful to split the two LLCs between two states. We suggest Texas and Nevada.
The Chinese Puzzle Box
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 the series LLC 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.
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. Before discussing those, it would be useful to answer two common questions: 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 unless an entity is approved as a trustee by the state (a marathon process).
Let’s begin by looking at use of an LLC as a beneficiary of a land trust. This method consists of three steps: first, creating a land trust, of which the LLC is the 100% beneficiary; second, conveying property into the trust by recorded warranty deed, naming only the trust (not the trustee) as grantee; and third, establish a series (Series A, for example) to own and hold a 100% beneficial interest in the trust. The type of land trust used in this case should be an anonymity trust, our term for a trust that does not disclose the name of its trustee or beneficiary in the public records.
The goal of anonymity is achieved by this method since the property is titled of record in the name of a trust, pursuant to a trust agreement that is not recorded anywhere. But what about a liability shield? The trustor and trustee are personally exposed – and this is the principal drawback of this structure, since persons acting in these roles are often named individually in suits against the trust.
Mixing Trusts and LLCs: Anonymity Trust as Initial Manager of an LLC
A second method of mixing a trust with an LLC is to form the LLC using an anonymity trust as initial manager and sole member. The trust is listed solely by its name, without reference to a trustee, and a postal box is used as its address. The attorney acts as registered agent and organizer, signing the COF as an authorized officer. Anonymity in the filing process is achieved. Moreover, the investor now possesses an anonymity trust that can be used for other purposes.
This is a creative and innovative approach that works in practice (i.e., Secretaries of State accept this structure for filing purposes) despite the fact that a trust is not a legal entity. Note that the documentation for this anonymity technique, including the trust agreement, is quite complex.
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 they are marketing. 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 the area of asset protection.
Information in this article is proved 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 © 2015 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.