The Corporate Transparency Act ("CTA") was enacted as part of the National Defense Authorization Act and establishes that certain types of business entities must report to the Financial Crimes Enforcement Network ("FinCEN") certain information about their beneficial ownership.

The CTA became effective on January 1, 2024 and has an impact on estate planning structures, including irrevocable and revocable trusts, due to interests held in various types of business entities. Reporting companies may be required to report personal identifying information to FinCEN on Executor(s) of estates, trustee(s) of trusts, settlor(s) and/or beneficiaries of trusts, under the beneficial ownership interest ("BOI") reporting obligations of the CTA, as discussed below.

What Information Must be Reported?

A reporting company must identify itself and provide four pieces of information about each "beneficial owner": (i) name, (ii) date of birth, (iii) residential address, and (iv) unique identifying number and issuing jurisdiction from acceptable identifying document (e.g. a passport or driver's license), and an image of the document containing the identifying number.

When Must Information be Reported?

The CTA effective date is January 1, 2024, but the deadline to comply with the CTA depends on when the entity was created or registered. Reporting companies created or registered before January 1, 2024 will have one year (until January 1, 2025) to file initial reports. Reporting companies created or registered after January 1, 2024 but before January 1, 2025, will have 90 days after receiving notice of their creation or registration to file initial reports. Reporting companies created or registered after January 1, 2025, will have 30 days after receiving notice of their creation or registration to file initial reports.

Who the CTA Applies to

The CTA requires reporting companies to report information on beneficial owners to FinCEN.

What is a "Reporting Company"?

Reporting companies are generally privately held companies. Publicly traded companies, certain other regulated entities and large operating companies are included in a group of 23 types of entities that qualify for an exemption under the CTA. There are two types of reporting companies: domestic and foreign. A domestic entity is a corporation, LLC, or other entity created by filing a document with a secretary of state or a similar office under the law of a state or Indian tribe. A foreign entity is a corporation, LLC, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office. 

Estates and trusts are not reporting companies because they are not formed by filing a document with a secretary of state. However, if an estate or trust holds an interest in a reporting company, an executor, a trustee, settlor, and/or beneficiary may be considered a beneficial owner of that reporting company.

Further, private foundations and other tax-exempt entities that are described in IRC Section 501(c) and exempt from tax under IRC 501(a) are exempt as reporting companies under the CTA.

Who is a "Beneficial Owner"?

A beneficial owner is an "individual" who, directly or indirectly, either (1) exercises "substantial control" over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company. 

  • The final regulations define "ownership interest" to include:
  • Any equity, stock or similar instrument; preorganization certificate or subscription; or transferable share of , or voting trust certificate or certificate of deposit for, an equity security, interest in a joint venture, or certificate of interest in a business trust:
  • Any capital or profit interests;
  • Convertible instruments or futures:
  • Warrants, rights or option or privileges to acquire equity, capital or other interests in a reporting company regardless of whether they are characterized as debt;
  • Puts, calls, straddles or other option or privilege of buying or selling ownership interests; or
  • Any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.
  • Note- FinCEN specifies that the underlying reality of ownership, not its form, drives the identification of beneficial owners.

When evaluating whether an individual meets the 25 percent ownership or control test, the individual should consider the collective ownership interests that the individual holds individually, and through ownership or control of one or more intermediary entities. 

FinCEN has determined that rules of constructive ownership or attribution by familial relationships would not apply when determining "ownership interest" or "substantial control."

Since beneficiaries, settlors, executors and trustees can each be considered beneficial owners, the ownership interests held in an estate or trust could be considered simultaneously as owned or controlled by multiple persons.

What is "Substantial Control" of a Reporting Company?

The CTA does not define "substantial control" for purposes of determining whether an individual is a beneficial owner. However, the final rules set out specific indicators, two of which are (i) authority over the appointment or removal of any senior officer or dominant majority of a board or similar body of a reporting company, or (ii) direction, determination, or decision of, or substantial influence over important decisions made by a reporting company. 

The CTA final BOI rules provide examples of important decisions, which may include:

  • The nature, scope, and attributes of the business of the company including the sale, lease, mortgage, or other transfer of any principal assets of the company;
  • The reorganization, dissolution, or merger of the reporting company;
  • Major expenditure or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the company; and
  • Amendments of any substantial governance documents of the company, including articles of incorporation or similar formation documents, bylaws, and significant policies or procedures.

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