Recently, the Financial Crimes Enforcement Network (FinCEN) adopted a significant piece of legislation called the Corporate Transparency Act (CTA). This important rule has flown under the radar for many, but it is essential to take note of, especially if you are thinking of including a trust as part of your estate plan or if you are a current trustee or beneficiary under a trust agreement.

What is FinCEN?

First things first – what exactly is FinCEN? FinCEN is the financial watchdog of the United States. It is a bureau within the US Department of Treasury tasked with safeguarding the financial system from financial crimes including, among other things, money laundering and tax evasion. Its goal is to promote national security through the collection and analysis of financial information.

Corporate Transparency Act Overview

The CTA was enacted to combat financial crime by imposing new requirements that Reporting Companies report information about their Beneficial Owners. As the name suggests, the CTA is all about transparency – ensuring that the folks behind the curtain are known, especially those who may be attempting to hide illicit activities.

 

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Reporting Requirements

A Reporting Company is any entity that was established in the United States by filing a document with the Secretary of State. Most smaller entities or businesses, like Limited Liability Companies (LLCs), Partnerships, or closely held Corporations will be subject to the CTA’s reporting requirements. However, 23 entities are exempt from reporting Beneficial Owner information (BOI), such as tax-exempt entities and large operating companies.

A Beneficial Owner is any individual who either exercises substantial control over or owns at least 25% of the ownership interests in a Reporting Company. The CTA requires Reporting Companies to report information about their Beneficial Owners, including:

• Name
• Date of Birth
• Residential Address
• A unique identifying number from either a passport or U.S. driver’s license, the name of the issuing State of the passport or U.S. driver’s license, and a picture of the passport or U.S. driver’s license

Impact on Trustees and Beneficiaries

You might be wondering how this impacts you as a trustee or beneficiary. In Connecticut, Trusts serve various purposes, including privacy, asset protection, probate avoidance, charitable giving, wealth management, and providing for minors. If you are considering establishing a trust as part of your estate plan, you must consider:

1. Whether your trust will be established as a Reporting Company – meaning that it will have to file its own Beneficial Owner Information Report, otherwise known as a BOI Report; or
2. Whether your trust is being established to own or hold a Reporting Company.

Trusts are generally not formed by filing with the Secretary of State, but instead are formed by a Trust agreement. This means that most trusts will not be considered a Reporting Company. However, a beneficial owner can own or control a Reporting Company through a trust.

Whether a trustee, beneficiary, grantor, or settlor is required to file a BOI Report depends on the trust agreement and each party’s role in a particular trust.

For example, a Trustee of a trust will be a Beneficial Owner if he or she exercises substantial control over a Reporting Company or owns or controls at least 25% of the ownership interests through a trust. A beneficiary, grantor, or settlor will be a Beneficial Owner if he or she owns or controls interests in a Reporting Company through a trust arrangement.

 

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When determining whether a beneficiary, grantor, or settlor is a beneficial owner, it is important to consider:

• Whether the beneficiary is the sole income beneficiary or has the right to demand a distribution or withdrawal of substantially all of the trust assets; and
• Whether the grantor or settlor retains the right to revoke the trust in whole and/or withdraw the assets from the trust

There are many facts and circumstances that determine whether a trust is subject to the CTA’s reporting requirements and who is considered the Beneficial Owner. FinCEN’s new regulations pose a significant shift in how many trusts operate.

While the aim of the Corporate Transparency Act is to increase transparency and combat financial crimes, it also presents concerns regarding the privacy of those involved and may require additional paperwork. If you have questions or concerns regarding your trust and navigating the intricacies of the CTA’s reporting requirements, the experienced estate planning attorneys at Reed Wilson Case can help you!

Disclaimer: The information provided in this article does not, and is not intended to, constitute legal advice and is for general informational purposes only.

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