As you prepare to close on your dream home, you’re likely vetting potential movers, interior designers and landscapers. But have you determined the best way to hold title to the property?
Most buyers don’t even consider this issue and take title in their own names, either as sole owner, joint tenants with right of survivorship, or as tenants in common (for co-owners with no right of survivorship). Married couples often own as tenants by the entirety, which gives each spouse an equal and undivided interest in the home and includes survivorship rights.
But celebrities and high-net-worth buyers often turn to other options. “Entities such as trusts, family limited partnerships or limited liability companies are preferred for several reasons,” said Paul Krasker, a real-estate attorney in West Palm Beach, Fla. “Confidentiality is at the top of the list, estate-planning concerns are secondary, and then homestead and liability concerns.”
Confidentiality is the reason many celebrities use LLCs to own their homes, since that allows them to shield their identity and avoid having their true name and home address posted in county registries, which are easily accessible online in many states.
But due to new laws designed to crack down on money laundering and tax evasion, buyers may find that even an LLC doesn’t protect their personal information from disclosure these days.
“Anonymous shell companies have been used to launder money by a variety of nefarious actors, and it’s been identified as a key national security and corruption risk,” said Ian Gary, executive director of the Financial Accountability and Corporate Transparency Coalition, which seeks to combat the impacts of corrupt financial practices.
Mr. Gary said that the United States is one of the easiest countries in the world to create an anonymous shell company. “It requires less information to create an anonymous shell company here than to get a library card in all 50 states,” he said.
As a result, buyers using LLCs or similar entities to purchase their homes need to be aware of state and federal disclosure laws that might impact them.
More Jumbo Jungle
The Corporate Transparency Act, enacted as part of the National Defense Authorization Act for Fiscal Year 2021, requires disclosure of the beneficial owners of certain entities—those who either exercise substantial control over the entity or who own not less than 25%—to the Financial Crimes Enforcement Network.
This law requires corporations, LLCs and “similar entities” to report the name, date of birth and address, as well as an identification number from a document such as a driver’s license or passport. Updated reports must be filed if there are any changes in beneficial ownership. The reporting requirement kicks in for newly formed entities right after final Treasury regulations implementing the statute become effective, although existing entities have a two-year grace period to file.
Experts don’t think this law will affect the use of LLCs to hold title. “A significant majority of buyers set up an LLC to reduce liability or as an investment vehicle, so they really don’t care,” about the requirement to disclose, said Neil B. Garfinkel, a real-estate attorney and managing partner of Abrams Garfinkel Margolis Bergson in New York City. “They’re not trying to hide anything. They’re using the LLC for the purpose it was created.”
Since 2019, New York state has required disclosure of the name and address of every manager or member of an LLC that buys or sells any one- to four-family residence in the state. The disclosure forms are filed with the state. Since the law doesn’t include corporations, partnerships or trusts, buyers could maintain their confidentiality by using one of those entities rather than an LLC.
Here what to know if you’re thinking of using an LLC to hold title to your home.
Don’t fear the LLC…
The Corporate Transparency Act requires disclosure to FinCEN, but there is no requirement for public disclosure. “Assuming the individual isn’t up to some nefarious purpose, they shouldn’t have any qualms about having their beneficial ownership information in a nonpublic database accessible to law enforcement,” said Erica Hanichak, government affairs director for the FACT Coalition.
Get an expert opinion…
Using an LLC isn’t just a privacy issue; the way you take title can also affect estate planning, taxation and homestead exemptions. “There are implications down the road—gift tax and estate implications potentially—so buyers need to speak with a trusts-and-estate attorney or tax planner about the best way to set up these vehicles,” said Mr. Garfinkel.
Mr. Krasker said he explores the reasons why a client is purchasing a particular property. For example, if someone is buying a home in Miami Beach to gain the benefits of Florida residency, he has them take title in their individual names or as a trust because the use of an LLC can prevent a homeowner from claiming the homestead exemption in Florida without a complicated legal workaround.
Use a trust…
Dana Koch, a real-estate agent with The Corcoran Group in Palm Beach, said his clients frequently use trusts, which aren’t subject to disclosure laws, to take title to their mansions. But he said that the names of celebrities and high-net-worth buyers often leak, not from the brokers or attorneys but from contractors brought in by buyers to do renovations. “Palm Beach is a small town,” he said. “The only way you don’t figure out who bought is if they drive their car in and never leave.”