The Corporate Transparency Act (CTA), which requires corporations, limited liability companies and other similar entities to disclose beneficial ownership information to the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), is expected to impose reporting obligations on certain types of trusts and various individuals related to trusts. However, the CTA does not explicitly address many types of trusts commonly used in US estate planning. In response, FinCEN recently released proposed regulations governing the CTA and has requested comments on how to apply the proposed regulations to certain kinds of trusts. This article provides a glimpse into how the CTA may apply to trusts and details timing and penalties for reporting to FinCEN.
THE CTA AND A NOTICE OF PROPOSED RULEMAKING
On December 7, 2021, FinCEN issued a Notice of Proposed Rulemaking (NPRM) to administer the beneficial ownership information reporting provisions of the CTA. The CTA is designed to combat illicit activities such as tax fraud, money laundering and terrorist financing.
Under the CTA, “reporting companies” must report certain identifying information of “beneficial owners” and “applicants” to FinCEN. The following information must be reported for each beneficial owner and applicant:
Full legal name
Date of birth
Current residential address for a beneficial owner and current residential or business address for an applicant
A unique identifying number from an acceptable identification document (e.g., a passport) or a FinCEN identifier
A copy of the relevant identifying document.
An applicant is the individual who files the document that forms the entity or first registers the entity to do business in the United States. A beneficial owner is an individual who (1) owns or controls at least 25% of a reporting company’s ownership interests or (2) exercises substantial control over the entity. The recently issued NPRM lays out how these reporting requirements may affect certain kinds of trusts, trust beneficiaries, trust settlors and trust officeholders. Review of subsequent developments, such as final regulations, is necessary to determine how the CTA will affect trusts overall.
HOW THE CTA IMPACTS TRUSTS
There are two ways that the CTA may apply to trusts: (1) individuals with power to dispose of assets of a trust that holds ownership interests of a reporting company may be considered as controlling the ownership interests held in trust, and, thus, be beneficial owners if such ownership interests amount to 25% or more of the entity’s ownership interests, and (2) business trusts, which include statutory trusts and Massachusetts trusts, may be considered reporting companies. FinCEN acknowledges that the framework of the CTA is not always clear with respect to trusts and has requested comments on the CTA’s applicability to trusts.
As described above, individuals may hold ownership interests in reporting companies through trusts. A trust beneficiary will be considered as owning such ownership interests if they have the right to withdraw, or demand distribution of, substantially all of the assets from the trust or if they are the only allowable recipient of both income and principal from the trust. Settlors with the power to revoke the trust or to otherwise withdraw assets of the trust will also be considered as owning such interests. Trustees will be considered to control such interests if they can dispose of trust assets. Moreover, any individual related to a trust with the power to dispose of trust assets may be considered as holding ownership interests in reporting companies held by the trust. The reporting company would be required to report identifying information of any such beneficiary, settlor, trustee or other individual who is considered as owning 25% or more of its ownership interests through a trust.
Domestic reporting companies include entities that are created by a filing with a secretary of state or similar office, and foreign reporting companies are entities formed under the laws of foreign countries and are registered to do business in the United States by the filing of a document with a secretary of state or similar office. Business trusts are created by filing a formation document with a secretary of state and are, therefore, likely to be considered reporting companies as indicated by the NPRM.
TIMING AND PENALTIES
Reporting companies that were formed before the effective date of the reporting regulations must submit the beneficial owner information to FinCEN no later than two years from the effective date of the final regulations. Any reporting company formed after the effective date of the regulations must submit the relevant information to FinCEN within 14 days of formation. FinCEN invites comments on the timing of the effective date of the final regulations.
Failure to provide beneficial ownership information to FinCEN under the CTA may result in both civil and criminal penalties. An individual or entity that fails to provide the required information will be liable for a civil penalty of up to $500 for each day a violation continues and may be fined up to $10,000 and imprisoned up to two years for a criminal violation.
A REQUEST FOR COMMENTS
FinCEN has requested comments on the following topics related to trusts:
Whether other types of trusts exist, besides business trusts (statutory trusts or Massachusetts trusts), that are created by the filing of a document with a secretary of state or similar office
The existence of data sources to determine the total number of trusts and what portion of the total are created or registered with a secretary of state or similar office.
FinCEN will be accepting comments until February 7, 2022.
Continued monitoring is required to determine how CTA reporting requirements will ultimately apply to trusts in the near future.