Helping Trusts Comply with the Corporate Transparency Act

The Corporate Transparency Act takes effect on January 1, 2024 and companies in existence before that date will have one year in which to file an initial beneficial ownership report (BO Report).  Helping trusts manage their compliance, however, raises special concerns for trustees and their attorneys.

Beneficial Ownership and the Corporate Transparency Act

Congress adopted the Corporate Transparency Act (the "CTA") to create a nationwide registry of corporate beneficial ownership in order to fight money laundering. The CTA empowers the U.S. Treasury, acting through its Financial Crimes Enforcement Network ("FinCEN") to collect from every reporting company formed or registered to do business in the U.S. a BO Report that (a) identifies each beneficial owner of the reporting company, and (b) provides, for each beneficial owner, five pieces of personally-identifiable information ("PII") include the individual's full legal name, date of birth, home residential address and a photocopy of the individual's drivers license or passport. 

Reporting companies include corporations, limited liability companies, limited partnerships and other entities that are either formed by the filing of a document with a secretary of state or that are registered to do business in the U.S. through such a filing. 

Entities that are neither formed by filing a document with a secretary of state nor registered to do business by filing a document with a secretary of state are not "reporting companies" and will not need to file.

In the U.S., most trusts (apart from Delaware statutory trusts) are formed as a matter of private contract and do not file any document with a secretary of state.  As a result, most trusts in the U.S. will not be reporting companies.

But, if a trust (whether formed in the U.S. or elsewhere) owns an interest in a reporting company, the trust (including the trustee, settlor and trust beneficiaries) will need to grapple with the question of whether any of them must be identified as a beneficial owner of the reporting company.  That's where the problems start.

Unique Challenges for Trusts

Wealthy individuals often utilize trusts to minimize tax obligations, facilitate inter-generational transfers of wealth and to maintain their privacy.  While the Corporate Transparency Act has no impact on taxation or wealth transfers, it can sometimes require the trustee, settlor or beneficiaries of a trust to disclose their PII as part of a reporting company's BO Report. 

Under FinCEN's regulations, a reporting company must identify as a beneficial owner each individual who, directly or indirectly, either (a) owns 25% or more of the ownership interest in the reporting company, or (b) exercises substantial influence over the reporting company.  If a non-natural person (such as a corporation, LLC or trust) is the direct owner of an interest in the reporting company, FinCEN's regulations require that the interest be imputed to at least one individual.  Where the direct owner is a trust, FinCEN's regulation provide that the applicable individual might be the trustee, the settlor or the beneficiary, depending on the circumstances.

Section 380(d)(ii)(C) of the FinCEN beneficial ownership regulation provides that the interest of a trust in a reporting company should be imputed (1) to the trustee, if the trustee has the authority to dispose of trust assets, (2) to the beneficiary, if the beneficiary is either (A) the sole permissible recipient of income and principal from the trust, or (B) has the right to demand a distribution of or withdraw substantially all of the assets from the trust, or (C) the trust's grantor or settlor, if that grantor or settlor has the right to revoke the trust or otherwise withdraw the assets of the trust.  

As a consequence, where a trust owns an interest in a reporting company, the reporting company will need to collaborate with the trust to determine whether the trust's beneficial ownership should be imputed to the trustee, the grantor/settlor or the beneficiary.  

This may be challenging in those circumstances where a wealth individual utilized the trust structure to make an investment in the reporting company in the hopes of remaining anonymous or avoiding the disclosure of personal details.  

This will also be challenging because reporting companies would not otherwise have access to their investor's trust agreements or other arrangements.  Traditionally, information would flow from the reporting company to its investors.  The CTA upends this perspective, requiring the investors to report their PII to the reporting company.  

Financial advisors and professional trust companies will need to retain counsel and become conversant with these issues when advising their clients about the need to comply with the Corporate Transparency Act.

Individuals, and the reporting companies in which they invest, may also want to consider utilizing the services of online filing services (like FinCEN Report Company, for example) that allow individuals to maintain the integrity of their PII will also making that PII available to the reporting company for BO Report filing purposes. 

Trust Companies Should Begin Now to Prepare

Because the CTA takes effect on January 1, 2024, trust companies and financial advisors should begin now to prepare,  Where needed, they should retain counsel and become familiar with the CTA and with their clients who may need to manage their PII in the context of BO Reports.