Month: December 2024

Corporate Transparency Act (CTA) & Trusts

Posted by CSG Firm on

The Corporate Transparency Act (CTA) introduces significant new reporting obligations for entities, including trusts, which meet specific criteria. The following is a breakdown of the critical points and implications for practitioners and clients alike:

Overview of CTA and Trust Implications

1. Beneficial Ownership Information (BOI) Reporting

  • Trusts are not considered “reporting companies” because they are typically created by agreements rather than state filings. However, trusts may still be affected if they have ownership or control over a reporting company.
  • Individuals such as trustees, beneficiaries, settlors, or trust protectors might qualify as beneficial owners under the CTA if:

    • The trust owns at least 25% of a reporting company.
    • They have substantial control over the reporting company.

2. Key Definitions

  • Beneficial Owners: Individuals with substantial control or ownership of 25% or more of the reporting company. This can include:

    • Trustees with authority over trust assets or the reporting company.
    • Beneficiaries with significant distribution rights or powers.
    • Settlors with revocable trust powers or swap powers.
  • Substantial Control: Includes decision-making authority, power to remove or replace key personnel, or influence over significant decisions.

3. Reporting Timelines

  • Pre-2024 entities: Initial BOI reports due by January 1, 2025.
  • Post-2024 entities: BOI reports must be filed within 90 days of formation or registration.

4. Penalties for Non-Compliance

  • Civil penalties: At least $500 per day of non-compliance.
  • Criminal penalties: Up to $10,000 and/or two years in prison for willful violations.

Trust Scenarios and Compliance

1. Trustees as Beneficial Owners

  • A trustee is likely a beneficial owner if:

    • The trust owns 25% or more of a reporting company.
    • The trustee controls company assets, decisions, or appoints board members.

2. Beneficiaries as Beneficial Owners

  • A beneficiary might be considered a beneficial owner if:

    • They are the sole distributee of trust assets.
    • They can withdraw all or substantially all trust assets.
    • They hold powers such as removing trustees or directing asset distributions.

3. Settlors as Beneficial Owners

  • Settlors of revocable trusts or grantor trusts with retained control may be beneficial owners. The person who creates a revocable trust in Florida is known as the settlor or grantor. The settlor is responsible for:

    • Creating the trust.
    • Designating the trustee and beneficiaries.
    • Naming a successor trustee, among others.

4. Corporate Trustees

  • For corporate trustees:

    • If owned by identifiable individuals, their ownership interests in the corporate trustee must be analyzed relative to the trust’s ownership in the reporting company.
    • Publicly traded corporate trustees typically do not meet the 25% threshold.

Best Practices for Practitioners

1. Review and Analyze Trust Structures

  • Evaluate trust terms to identify potential beneficial owners under the CTA.
  • Assess whether aggregated interests (e.g., multiple trusts with the same trustee or beneficiary) meet the 25% threshold.

2. Documentation and Agreements

  • Amend operating agreements, shareholder agreements, and LLC agreements to:

    • Require owners to provide BOI.
    • Include provisions for timely updates when ownership changes occur.

3. FinCEN ID Recommendations

  • Encourage individuals expected to be beneficial owners (e.g., trustees, beneficiaries) to obtain a FinCEN ID. The Financial Crimes Enforcement Network is a bureau within the U.S. Department of the Treasury which protects the financial system from illicit activity/financial crime, including money laundering, terrorist financing, among others. This simplifies reporting and shifts the burden of updates to the individual.

4. Filing Strategies

  • Consider timing for initial reports for pre-2024 entities. Filing closer to the January 1, 2025, deadline may avoid the need for updates due to interim changes (e.g., death of a beneficial owner).

5. Education and Compliance Plans

  • Educate clients on their obligations under the CTA.
  • Develop procedures to monitor changes in beneficial ownership or control and ensure timely reporting to FinCEN.

Conclusion

The Corporate Transparency Act introduces complexities for trusts and related entities. By identifying potential beneficial owners and establishing robust compliance procedures, practitioners can help clients navigate these new obligations effectively. Early planning, clear documentation, and proactive communication are essential to mitigate risks and avoid penalties.

The foregoing is a brief and very general overview of the topic and the need for specific and experienced legal and tax advice is emphasized.

If you have any additional Questions regarding the foregoing or have any legal issue or concern, please contact the law firm of CASERTA & SPIRITI in Miami Lakes, Florida.