In an effort to detect and prevent money laundering, tax evasion and other corrupt financial schemes, the United States Congress passed the Corporate Transparency Act (“CTA”) in 2021. The provisions of the CTA go into effect on January 1, 2024 and will create new reporting requirements not only for companies, but also individuals who have engaged, or plan to engage, in certain planning activities.
This piece provides a brief overview of the law, its requirements, and how it might impact planning efforts. In addition, there is a checklist of what you or your clients should do to prepare to meet the requirements of the CTA.
What Does the CTA Do?
The CTA requires that many entities begin reporting certain information to the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury. This information will not be publicly available, but can be disclosed by FinCEN to federal law enforcement agencies and certain other enforcement agencies.
Some key definitions related to these requirements:
A reporting company is a corporation, a limited liability company, or other entity that is created by filing a document with a secretary of state or any similar office under state or Indian tribe law. This would generally exclude general partnerships and almost all trusts. In addition, companies with over 20 employees, more than $5,000,000 in gross revenue, and a physical operating presence in the United States are not required to file under the CTA.
One part of the information that must be submitted about a reporting company is about its beneficial owners (including their name, date of birth, address and passport copy). A beneficial owner is any individual who, directly or indirectly:
exercises substantial control over the company; or
owns or controls at least 25% of the company’s ownership interests.
For those reporting companies that exist as of January 1, 2024, the CTA requires an initial report of this information by January 1, 2025, as well as further reporting of any future material changes within 30 days of such changes.
For reporting companies created after January 1, 2024, the initial filing must be made within 30 days of formation or registration of the company. In addition, for these entities, information about the “company applicant” will also be required. A company applicant is:
a person who files the document to create the company with the secretary of state or other governmental authority, or
who first registers a foreign reporting company with a governmental authority, or
directs/controls the filing of such a document by another.
Failure to comply with the requirements of the CTA may lead to stiff penalties, such as fines of up to $500 per day and criminal sanctions, including jail time.
Impact on Trusts
While private trusts are not currently listed on the entities that must report under the CTA, that could be changed in the future. In addition, if a trust owns or controls at least 25% of a reporting entity, or a trustee exercises substantial control over a reporting company, then that trust will have to report under the CTA.
For example, a trust that owns an interest in a closely-held business organized as an LLC would trigger reporting requirements for that trust and its beneficial owners. The CTA explicitly identifies the following as potential beneficial owners of the trust.
A trustee of the trust or other individual with the authority to dispose of the trust assets.
A beneficiary who is the sole permissible recipient of income and principal from the trust; or has the right to demand a distribution of or withdraw substantially all of the assets from the trust.
A grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust.
In addition, a beneficial owner may include those quasi-fiduciary positions, such as trust protectors, persons holding powers to veto certain trustee actions or powers to remove trustees, or distribution advisors.
Finally, the CTA includes provisions that aggregate ownership by an individual directly with ownership as a beneficiary of a trust.
Impact on Family Offices
In the United States, most family offices are organized as corporations, LLCs, or LPs, and therefore would be subject to the requirements of the CTA. However, a large family office may fall under the large operating company exemption (described above) if its operations are sufficiently large.
Furthermore, if the family office is registered as an investment advisor under the Investment Advisors Act of 1940 (as is often the case for multi-family offices) or is venture capital fund advisor under the Investment Company Act of 1940, it will be exempt from the requirements of the CTA.
Impact on Foreign Nationals
In terms of estate planning, the CTA is likely to have a large impact on foreign nationals. While the CTA does not change taxation on foreign nationals, it will expose ownership of certain assets. In particular, the CTA will give the U.S. government greater insight into the actual ownership of commercial and residential real estate in the United States as well as when a transfer has occurred that triggers existing estate tax requirements.
Given this potential for taxation, foreign nationals who own real estate in the United States that could trigger estate taxation upon their death should consider purchasing a U.S.-based life insurance policy. Such a policy can provide liquidity when U.S. estate taxes are due and nonresident foreign nationals can own such a policy outright without it being subject to U.S. income or estate taxes.
What to Do
Given the harsh penalties for non-compliance, it is imperative that individuals coordinate with their legal and other counsel to determine if they are subject to the CTA and what steps they must take to be compliant with its provisions.
Here are some steps we recommend taking with regards to the CTA:
Not Something to Be Ignored
The CTA is not something that should be ignored. The law will likely create a significant burden for a variety of people, including those whose current planning involves various corporate entities and foreign nationals with real estate holdings in the U.S. Given the steep penalties for non-compliance, it is important to have a plan in place to manager the CTA’s requirements.
At Robin Glen, we use our expertise in income and estate tax, private capital, and insurance analysis and design to create unique solutions that deliver impactful results for our clients and advisor partners.
If you or your client have questions about the CTA and how it impacts their planning, reach out. We can help.