January 1, 2024 is quickly approaching and it will be a milestone for small businesses and their owners. Why? Because it is the effective date of the Corporate Transparency Act (the “Act”) – historic legislation that requires certain companies to report information about the company and the company’s owners with the U.S. Financial Crimes Enforcement Network (FinCEN).

More specifically, new companies covered by the Act (“Reporting Companies”)[1] will be required to report information about the company, the persons who file or direct or control the filing of the documents that create a domestic company or register a foreign company (a “Company Applicant”), and the beneficial owners of the company – individuals who have substantial control over a Reporting Company or own or control at least 25 percent of the ownership interest in a Reporting Company (“Beneficial Owners”). Existing companies will have to report information about the company and its Beneficial Owners, but not about any Company Applicant, by December 31, 2024.

What does this have to do with trustees and trusts?

While private trusts are not Reporting Companies and do not have direct filing obligations, trustees and trusts may be Beneficial Owners required to provide information for Reporting Companies to be reported to FinCEN. Doing so is not optional. Failure to provide required information to a Reporting Company for reporting to FinCEN can subject an individual to substantial penalties. Willfully causing a Reporting Company not to file a required report or to report incomplete or false beneficial ownership information to FinCEN may result in civil or criminal penalties – civil penalties up to $500 each day a violation continues, or criminal penalties including imprisonment up to 2 years and a fine of up to $10,000.

In addition, operating agreements and limited partnership agreements typically impose an obligation on shareholders, members, and partners to provide to the company or partnership all information required for the company or partnership to comply with its regulatory obligations and consent to the disclosure of information as required for the company or partnership to comply with its regulatory obligations.

Who is a beneficial owner?

If compliance is compulsory for trustees and trusts that are Beneficial Owners, the question then is, who is a Beneficial Owner? There are two categories of Beneficial Owners based on control and ownership, respectively.

Substantial control. A person who has substantial control over a Reporting Company is a Beneficial Owner. This includes senior officers, important decision-makers, and a broad catch-all category of persons with any form of substantial control over a Reporting Company. A trustee of a trust may have substantial control over a Reporting Company if they are on the board, the trust owns or controls a majority of the voting power or voting rights of the company, or the trust has rights associated with financing or interest. The trust itself is not the Beneficial Owner. It is the trustee, trustees, or others with relevant powers and decision rights under the governing trust agreement who are treated as Beneficial Owners by reason of their substantial control.

Ownership interest. All individuals who own or control at least 25% of the ownership interests[2] in a Reporting Company are Beneficial Owners. Again, in the instance of a trust, the trust itself is not the Beneficial Owner. Rather, we look to the constituent parties to the trust, including:

• The trustee, trustees, and other parties with decision-making rights with respect to the interest in the Reporting Company owned by the trust, such as investment advisers;
• The settlor of a revocable trust with the power to revoke or amend the trust agreement;
• A beneficiary who is the sole permissible recipient of trust income and principal; and
• A beneficiary who has the right to demand a distribution of or withdraw substantial assets of the trust.

Once the relevant individuals are identified, the next step is to determine whether the 25% threshold is met. Each individual’s ownership interest as a percentage of the total shares or interests in the Reporting Company is calculated. Thus, if a person is identified as an owner via multiple trust relationships, it is anticipated (although not entirely certain based on current guidance) that their interests would be aggregated for purposes of computing the 25% ownership threshold.

There are exceptions for minor children, agents, employees, and creditors. For minors, the parent or legal guardian is reported, until the child attains majority, determined under the law of the state of the organization of the Reporting Company.

What information is required to be reported?

The next question is what information is required to be provided with respect to a trustee or parties to a trust who are Beneficial Owners? The list is short, but the information is personally identifying:

• full legal name;
• date of birth;
• complete current residential street address (not a P.O. box or business address); and
• unique identifying number and issuing jurisdiction from and image of non-expired U.S. passport, state driver’s license, or state, local or tribe-issued identification documents (or if none of these are available, a foreign passport).

Changes in Beneficial Owners and in the identifying information for Beneficial Owners are required to be promptly reported to a Reporting Company, which, in turn, is required to update its filing for the company with FinCEN.

Why is this information necessary and how will it be used?

First, the why. Sadly, money laundering, terrorist financing, human trafficking, and other illicit activities are real, and bad actors use entities and financial systems for nefarious purposes. The Act is the U.S. response to global efforts related to the international Financial Actions Task Force (FATF) to counter these activities. The U.S. has never had a centralized registry of entities and beneficial owners to assist law enforcement and the Act is a first step to close that gap. It is an unfortunate burden, but it is our present reality.

Finally, who will have access to the reported information? The information will be collected via the Beneficial Ownership Secure System (BOSS). BOSS is intended to be secure and with access limited to law enforcement, government agencies, and similar authorized users. The registry is not public.

Compliance with the CTA is an added responsibility for trustees, and it is expected that there will be resistance from beneficiaries and others in providing the required information. Resistance is understandable. Education and communication will reduce the friction and ease the process. This article is an overview of highlights for trustees to be aware of as they chart the compliance process.

[1] The Act covers domestic corporations, limited liability companies, and other entities organized by filing a document with a secretary of state or similar office and foreign companies registered to do business in the U.S., subject to 23 specific exemptions, including, for example, companies otherwise subject to government reporting and oversight, such as financial institutions, investment and insurance companies, large operating companies, and tax-exempt entities.

[2] Ownership interests are defined very broadly and include equity, stock, voting rights, capital or profits interests; convertible interests into equity, stock, voting rights, or capital or profits interests; puts, calls, straddles or other option privileges of buying or selling equity, stock, voting rights or capital or profit interests; or any other similar arrangement to establish ownership.

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