What Should Trustees Know About the Corporate Transparency Act (CTA)?

The Corporate Transparency Act (CTA) goes into effect on January 1, 2024, and it presents a significant change to trustees' responsibilities. This article explains what the CTA is, clarifies the new reporting requirements, and details how it affects trustees.

What Is the Corporate Transparency Act (CTA)?

The CTA is a new law issued in September 2022 and adopted on January 1, 2023. new rules create a central registry of beneficial ownership of legal entities, including LLCs, and establish reporting responsibilities to those who have beneficial ownership.

These new requirements are meant to align the US reporting rules with other reporting countries' transparency guidelines related to the beneficial ownership of legal entities. The United States does not currently have a centralized or complete store of information about who owns and operates legal entities within the US.

The federal government's concern is that unless the entity has an account at a financial institution, the vast majority of states require little to no disclosure of contact information or additional information about an entity's officers or others who control the entity. For example, in the proposed rules, the drafters of these new requirements suggest “the number of legal entities currently operating in the United States is difficult to estimate with certainty, but Congress recently found that more than two million corporations and limited liability companies are being created under the laws of the states each year."

What Is Beneficial Ownership?

FinCEN (Financial Crimes Enforcement Network, under the United States Department of Treasury) defines beneficial ownership as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25% of the ownership interests of such reporting company.”

Generally, under the proposed regulations, a domestic reporting company would include any entity that is created by the filing of a document with a secretary of state or similar office of jurisdiction within the United States. A foreign reporting company would be any entity created under the law of a foreign jurisdiction that is registered to do business within the United States. These reporting entities include corporations, limited liability companies, partnerships, and legal arrangements like trusts.

What Information Must Be Reported?

The CTA requires reporting companies to submit four pieces of information to FinCEN for each beneficial owner and individual who files an application to form a domestic entity or registers a foreign entity to do business.
These are:

• The individual's full legal name
• Date of birth
• Current residential or business street address
• A unique identifying number from an acceptable identification document (e.g., a passport or driver's license) or the individual's FinCEN identifier.

Who Must Report These Entities to FinCEN?

Individuals who have substantial control are responsible for reporting. This includes those with control over one or more intermediary entities that, separately or collectively, exercise substantial control over a reporting company, including direct control as well as arrangements or financial or business relationships (formal or informal) with other individuals or entities acting as nominees, or any other contract, arrangement, understanding, relationship, or otherwise.

This is a very broad definition and may include certain employees of a company, such as senior officers or trustees of a trust.

When Must the Information Be Reported?

Existing entities have one year to file to submit an initial report—this means all existing entities must be reported by January 2024.

There is a safe harbor for any person who has reason to believe that a report submitted by them contains inaccurate information. This person must voluntarily and promptly—and consistent with FinCEN regulations—submit a report containing corrected information no later than 90 days after the date on which they submitted the inaccurate report.

Also, it is important to note that any new entities formed during 2023 must submit a report within 30 days.

FinCEN emphasizes that once an individual has acquired an ownership interest in an entity through inheritance, that individual owns now that ownership interest is potentially subject to the beneficial owner reporting requirements. Individuals who may receive ownership interests in an entity in the future through a right of inheritance do not have ownership interests until the inheritance occurs.

What Are the Penalties for Not Reporting?

Failure to comply with the CTA’s reporting requirements can lead to civil and criminal penalties, including a maximum civil penalty of $500 per day (up to $10,000) and imprisonment for up to two years. While fines and penalties are generally uninsurable by law, trustees can be insured for defense for alleged negligence.

How Does This Affect Trustees?

This is a complex new law. If the trust has alternative assets with beneficial ownership of a reporting entity, the trustee has significant reporting requirements to track. Trusts often have created family-limited partnerships, special purpose vehicles, and LLCs to own various investments. Each time a new vehicle is created, it triggers a reporting requirement. Additionally, when a settlor passes, adult inheritors/beneficiaries may now have beneficial ownership that will trigger a reporting requirement. The trustee will need to file the required information with FinCEN, including providing a passport or driver’s license of the beneficiary.

It is the trustee's responsibility to stay up to date on new regulations, and the CTA represents a significant change to the trustee's job. By staying informed, a trustee can avoid litigation and be more defendable in the event of a claim.