New York Nominee Trust Agreement | Validity, Seller's Awareness, and Legal Ramifications

To fully understand the implications of a nominee trust, several legal terms must be clarified:

• Nominee: The person who holds the title to the property in name only.
• Beneficial Owner: The actual investor who provides the purchase funds and expects to benefit from the property.
• Trust Agreement: The legal instrument outlining the relationship between the nominee and the beneficial owner.
• Constructive Trust: A remedy imposed by the court to prevent unjust enrichment when a nominee refuses to return property or proceeds.

New York courts may void the arrangement entirely if it lacks transparency or fiduciary responsibility.

Following the implementation of Real Property Law §240-c, real property transactions require transparency regarding the true beneficial owner. A nominee arrangement executed after this law’s enactment is presumed invalid unless there is compelling evidence that it served a legitimate and non-deceptive purpose. In such cases, the beneficial owner is typically restricted to recovering only the purchase funds and cannot reclaim title to the property.

Once the agreement is declared void, any transactions flowing from it—such as deeds, mortgages, or sub-sales—may also be legally ineffective. If the nominee sells the property to a third party who had no knowledge of the trust, the third party’s rights may be protected. However, if the third party was aware of the nominee arrangement, the sale may be overturned by the court.

When the seller is unaware of the nominee structure and believes they are contracting with the actual buyer, the transaction is typically upheld as valid. The nominee acquires legal title, and the hidden buyer has no ownership claim over the property. The beneficial owner may seek reimbursement from the nominee but not from third-party purchasers.

If the seller knowingly participates in the nominee arrangement, the contract is considered collusive and may be declared null and void. In this case, ownership rights remain with the seller. The beneficial owner cannot reclaim the property or assert any contractual rights. Furthermore, both the nominee and seller could face legal consequences for fraud or misrepresentation.

Under Article 175 of the New York Penal Law, actions involving falsified records or misrepresentation through nominee trusts can result in:

• Up to 4 years of imprisonment (Class E felony)
• Fines of up to $100,000 for individuals or $500,000 for corporations
• Disgorgement of unlawfully gained profits
• Revocation of real estate licenses or business permits

These consequences reflect the seriousness with which New York enforces transparency in real estate transactions.

If the nominee refuses to return the property or proceeds, the beneficial owner may seek remedies such as unjust enrichment claims or request the court to impose a constructive trust. However, success depends on the presence of a fiduciary relationship and clear evidence of fraud-free intent. Nominees may defend themselves by asserting ignorance of the true nature of the transaction.

Nominee trusts often attract attention from tax authorities, particularly when they are used to obscure real ownership. The following legal risks may arise:

• Real estate transfer tax evasion: Occurs when the nominee, not being the true purchaser, is listed in filings, leading to improper tax assessments.
• Income tax avoidance: The beneficial owner may fail to report rental income or capital gains derived from the property.
• Failure to disclose to tax authorities: Concealing nominee arrangements during real estate transactions may prompt investigations by the New York Department of Taxation and Finance (DTF) or the IRS, especially under N.Y. Tax Law §§ 658 and 1802.