Introduction

The introduction to the final regulations issued under the Corporate Transparency Act (“CTA”) by the Financial Crimes Enforcement Network of the United States Treasury (“FinCEN”) states that, “[i]llicit actors frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the U.S. financial system.” In an effort to combat this, the CTA requires certain entities called “reporting companies” to file with FinCEN information regarding the identity of the entities’ beneficial owners, as well as any changes to the beneficial owners. The potential penalties for not timely filing these beneficial ownership information (“BOI”) reports include fines and jail time.

Although the world of illicit actors, shell companies, and ill-gotten gains at first seems unrelated to the estate planning world in which trusts typically are created for the decidedly non-illicit purposes of passing assets from one person to another in a desirable way, the very broad nature of the CTA ensures that these two worlds now will be very much intertwined.

What You Need to Know:

• The Corporate Transparency Act (“CTA”) may add responsibilities to trustees of trusts which own interests in certain entities.
• In general, a non-statutory trust is not an entity which is required to file any reports in connection with the CTA, but if a trust owns an interest in another entity, the trustees, the beneficiaries, the settlor, and other individuals who may play a role in the administration of the trust could be deemed beneficial owners of the entity which would require certain personal information of such individuals to be filed with the Financial Crimes Enforcement Network of the United States Treasury (“FinCEN”).
• Many routine trust changes (including, for example, a change of a trustee’s address, a change in trustees, a change of beneficiaries, or the death of the settlor, trustee, or beneficiary) may require additional reports to be filed with FinCEN.
• Any trust or series of trusts which own interests in entities must be carefully and continually reviewed in order to accurately report beneficial owners.

Trusts Are Not Reporting Companies

The basic definition of a reporting company is a corporation, limited liability company, or other similar entity that is created or in the case of any foreign entity, registered to do business, by filing a document with a Secretary of State or similar office under the law of any United States state or Indian Tribe. This seemingly simple definition actually is deceptively complex (the definition’s intricacies and a list of specific types of exempt entities have been addressed in other alerts. However, because typical non-statutory trusts are not created by filing of a document with any state, such trusts clearly are not reporting companies. 

But Trusts May Have Interests in Reporting Companies

The fact that trusts are not reporting companies for the purposes of the CTA does not mean that they, and importantly their creators, their beneficiaries, and their trustees, are not impacted by the CTA.

Among the information that must be included in a reporting company’s BOI report is personal information about each beneficial owner of the reporting company. A “beneficial owner” broadly is defined as any individual who directly or indirectly (i) owns or controls at least 25 percent of the ownership interests in the reporting company; or (ii) exercises substantial control over the reporting company. While the 25 percent test seems straightforward, the substantial control test is intentionally broad, and almost any individual who can make important decisions impacting the reporting company may be deemed to exercise substantial control.

The possibility that a trust has direct or indirect ownership of, or has control of, a reporting company makes attention to the CTA critical for trustees. When a trust has an interest in a reporting company, the beneficial owners whose personal information must be reported to FinCEN include:

1. any trustee or individual with the authority to act on behalf of the trust who has the power to dispose of trust assets when the trust and such individual together or separately hold at least a 25 percent ownership interest in the reporting company;
2. any trustee or individual with the authority to act on behalf of the trust that owns a majority of the voting power or voting rights in the reporting company;
3. any trustee or individual with the authority to act on behalf of the trust who controls a majority of the voting power or voting rights of the reporting company;
4. any trustee or individual with the authority to act on behalf of the trust who directs, determines, or has substantial influence over important decisions made by the reporting company;
5. any trustee or individual with the authority to act on behalf of the trust who has the right to remove and replace senior officers of the reporting company;
6. any trustee or individual with the authority to act on behalf of the trust who has the right to remove and replace a majority of the board of directors of the reporting company;
7. a grantor with the right to revoke the trust when the trust and the grantor together or separately own at least a 25 percent ownership interest in the reporting company; 
8. a grantor with the right to withdraw the assets of the trust when the trust and the grantor together or separately own at least a 25 percent ownership interest in the reporting company;
9. a beneficiary who is the sole permissible recipient of income and principal of the trust when the trust and beneficiary together or separately own at least a 25 percent ownership interest in the reporting company; and 
10. a beneficiary who has the right to demand a distribution of or withdrawal of substantially all of the assets from the trust when the trust and beneficiary together or separately own at least a 25 percent ownership interest in the reporting company. 

Despite this extensive list, questions remain. For example, it is unclear whether an individual who is a trustee of several separate trusts which collectively own or control a reporting company is a beneficial owner. This question is compounded when there are multiple trustees who must act together. There are similar uncertainties when there are multiple current beneficiaries of a trust which has sufficient ownership or control over a reporting company, or when an individual is a beneficiary of multiple trusts which collectively have sufficient ownership or control over a reporting company. FinCEN has been very clear that the examples provided are not exhaustive, and, in any event, it is possible that FinCEN would take the position that all of the described persons in all of the foregoing examples are beneficial owners.

Is Reporting the Trustee’s Responsibility?

The reporting company has the ultimate responsibility for filing BOI reports with FinCEN. However, a trustee of a trust which owns or controls the reporting company arguably may have some duty to help the reporting company gather and report the required information. 

In addition to filing initial BOI reports when the new rules go into effect on January 1, 2024, the CTA requires reporting companies to file updated reports within thirty days from any change in beneficial ownership information. In the context of trusts, among many other examples, this could include (i) the change of address of a grantor, beneficiary, trustee, trust advisor, or trust protector; (ii) the resignation, removal, replacement, or appointment of a trustee, trust advisor, or trust protector; (iii) death of a beneficiary; (iv) the transfer of an interest in the trust to another beneficiary; or (v) any combination of these examples. Trustees now must be cognizant that they arguably may have this new information gathering responsibility as well.

Summary 

While the last thing a trustee may have considered is her or his role in combating money laundering or the financing of terrorism, the CTA now makes that consideration part of the job. And, because of the nuances and complexities involved in determining who owns and controls a reporting entity in which a trust holds an interest, any trust or series of trusts with such interests must be carefully and continually reviewed in order to accurately report beneficial owners.