Paths to privacy on the road to real estate transactions
By Genevieve M. Larson and Kelina M. Smith
This article was originally published in Daily Journal’s “Wealth with Withers” column on December 19, 2019. View the reprint from Daily Journal. Read more about the launch of the “Wealth with Withers” column.
California is home to a multitude of high profile and high net worth people, from famous celebrities in Los Angeles to prosperous entrepreneurs in Silicon Valley. While their industries and levels of wealth may vary, they generally all have one similar (and growing) concern: privacy. Because the majority of personal identifying information can be found through a simple online search, many clients of this echelon are seeking privacy safeguards, especially when it comes to their personal residence.
For years, the go-to method for concealing the owner of real estate in public records has been to create an entity, such as a limited liability company, to hold such property. As a result, the entity is listed as the record owner of title, and the client’s name is not included in the public record. The LLC is generally a disregarded entity for tax purposes, as everything flows through to the client as the sole member of the LLC. While this is a widely-accepted practice and sound means to achieve real estate ownership privacy, it is not necessarily the most efficient strategy for all clients. The issue with using an entity for the sole purpose of maintaining privacy is two-fold: first, there are administrative costs associated with maintaining an entity like an LLC, including an annual $800 franchise tax and a gross receipts tax, and second, there are separate public records for LLCs that must be filed with the California secretary of state, which can require the disclosure of the client’s name or other personal identifying information.
Enter, the privacy trust, sometimes referred to as a “blind trust,” which is simply a revocable trust that is used for the sole purpose of keeping the client’s name private and out of the public record. The client is the creator of the trust (i.e., the “grantor”) as well as the beneficiary of the trust, but a separate third party acts as the initial trustee of the trust. This initial third-party trustee should be someone that is not easily connected to the client (i.e., a family member), but rather a trusted party that is not uniquely connected to the client, such as a business manager or financial planner. The third-party trustee will be listed as the record holder of title for the property. The third-party trustee can either continue to administer the privacy trust for the benefit of the client, in which case there should be robust direction from the client to the third-party trustee regarding how the property should be managed and maintained, or the third-party trustee can resign and allow the client to become trustee after the deed is recorded, leaving the client alone to manage the trust and the underlying property.
Practically, a privacy trust and a standard revocable trust only differ in that the name of the client is not included in the title of the privacy trust, and the client is not named as the initial trustee of the privacy trust. Note, a privacy trust is not based on any specific legal principals or statutes, but is instead merely a revocable trust created under general California trust law and principles for the purpose of providing privacy as to the grantor.
While the name of the client will not appear in the public record, care should be taken to ensure that the client’s name is not inadvertently disclosed throughout various stages of the real estate acquisition process. Real estate agents and title company employees should be notified that the client’s personal information shall not be disclosed to anyone, and it could help to require a non-disclosure agreement with such third-parties in order to guarantee confidentiality.
In order for the privacy trust technique to be effective, the property must be initially acquired through the privacy trust. Because the deed for a subsequent transfer from the client to the privacy trust would show a documentary transfer tax of zero dollars, such deed would reveal that the underlying owner of the privacy trust is the same party as the previous owner of the property (i.e., the client). The same is true for transfers from the client to an entity.
It is worth noting that rules have been implemented by the Financial Crimes Enforcement Network (FinCEN) in order to prevent money laundering, and such rules require that, when there is an all-cash purchase of a residence over a certain value threshold in certain counties through the use of an LLC, FinCEN requires the disclosure of the underlying owner, not just the LLC manager. The understanding among title companies, which collect such information for FinCEN, is that such information is not publicly available. Counties in California subject to this rule include San Diego, Los Angeles, San Francisco, San Mateo and Santa Clara.
The use of a privacy trust does not require any ongoing administrative cost beyond the preparation and drafting of the trust, and there are no separate public records that require the disclosure of the client’s name or other personal identifying information. As such, if a client’s only concern is keeping his or her name off of the public record, a privacy trust is a more efficient strategy than creating an entity for the same purpose.
For additional “Wealth with Withers” columns, see:
‘The California Exodus: How to stay golden when migrating the Golden State,’ by Michelle Graham and Vivienne King
‘Preparing for sunset: What lawyers need to know about the gift and estate tax,’ by Elizabeth Bawden