The Impact On Estate Planning With Passage Of The Corporate Transparency Act

By: Randall A. Denha, J.D., LL.M.

The Corporate Transparency Act of 2020 (CTA) passed through Congress on Jan. 2, 2021 as part of the National Defense Authorization Act of 2021. The CTA was enacted to prevent companies from being able to conceal ownership of businesses where concealment could facilitate illicit activity such as money laundering, financing of terrorism, tax fraud and other foreign corruption acts which harm U.S. national security interests. Reporting requirements of the CTA will provide the information needed to build a searchable, national database of companies formed in the United States. But why should this be of any interest to estate planners?

How Does This Impact Estate Planners?

Business entities are often used to implement estate planning strategies. Those that fall within the scope of the CTA must comply with it or face hefty fines or even criminal penalties. The CTA requires that beneficial ownership information for businesses that meet the definition of a “reporting company” be reported to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). The CTA defines a reporting company as any corporation, limited liability company (LLC), or other similar entity created by filing a document with the secretary of state or a similar office under the laws of a state or Indian tribe or formed under the laws of a foreign country and registered to do business in the United States. The law mandates reporting information regarding entities that may affect many individuals who have done estate planning and asset protection planning. Additionally, owners of real estate may be affected. This type of reporting is new to the United States and is designed to catch the U.S. up with reporting standards that exist in other developed countries. The reporting requirements are not the same as information gathered in tax returns.

Who Has The Responsibility To Report Under The CTA?

There are three terms that one needs to become familiar with under the CTA. Those terms are a reporting company, a beneficial owner of a reporting company, and a company applicant. So, why is the concept of a reporting company important? Because the reporting company is the entity upon whom the reporting obligation falls.

What is a reporting company? A reporting company is a corporation, a limited liability company, or any similar entity that is formed by the filing of a document with the Secretary of State or a similar state agency or an Indian tribe.

Business Entities Created as Part of Estate Planning

The CTA reporting requirements could affect owners and principals involved in almost all business entities, including limited liability companies (LLCs), corporations, limited partnerships and other closely held entities. Many of these entities which were created as part of an estate plan may be subject to the CTA rules.

Attorneys who use business entities to accomplish their clients’ estate planning goals should keep the requirements of the CTA in mind. Closely held companies and special purpose vehicles (separate legal entities—partnerships, limited partnerships, or joint ventures—formed for a specific purpose such as isolating financial risk) are frequently used for wealth structuring or to hold assets. Some of these business structures could possibly fall within the scope of the CTA.

For example, investment planning might include forming a holding company to aggregate various investments and securities. Small businesses and rental real estate properties are often held in separate entities to afford protection as part of potential lawsuits or creditors. Estate plans often include the creation of one or more LLCs to hold other assets or even entities to fund trusts and handle trust administration. Family limited liability companies or partnerships are often created to hold investment assets for management or estate tax valuation purposes. These entities are all designed to insulate underlying assets from creditor claims.

What Has To Be Reported?

Business entities that meet the definition of a reporting company must provide information such as the full legal name, date of birth, current address, and a unique identifying number such as a driver’s license or passport number for all beneficial owners, i.e., individuals who own or control 25 percent or more of the ownership interests of the company or who exercise “substantial control” over the company. The definition excludes, for example, minors whose parent or guardian has properly reported information, individuals whose only interest in the business is through a right of inheritance, and individuals whose control is derived solely through their employment status.

Existing business entities that fall within the scope of the CTA must provide this information within two years of the effective date of the CTA, but entities formed after the effective date must provide the required information at the time of formation or registration. All changes in beneficial ownership must be reported to FinCEN within one year of the change.

What Is The Impact On LLCs?

Starting on January 1, 2024, the CTA will require certain entities to report their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. The act defines a “beneficial owner” as an individual who exercises control over the entity, either through ownership of a substantial portion of the company’s voting shares or through other means. Companies covered by the CTA must provide specific information about their beneficial owners, including their names, addresses, and dates of birth, to FinCEN. Importantly, the CTA covers LLCs, including those simply used to hold assets for estate planning. Moreover, any LLCs held in trust will likely have to report the required information for the grantor and beneficiaries of the trust, not just the information of the trustee.

The CTA is likely to have a chilling effect on the use of LLCs in estate planning. Individuals who value privacy are likely to forgo using LLCs in favor of structures that still allow anonymity, such as irrevocable trusts. Individuals who continue to use LLCs despite the loss of privacy will likely face the added compliance costs of reporting to FinCEN, maintaining accurate records, and updating reports whenever membership shares trade hands. Law firms and accounting firms may have to put in place additional protocols to ensure that client holding LLCs are meeting their obligations under the CTA.

Work With Your Estate Planner

The penalties for noncompliance are steep. Businesses that fail to report the required information or provide false or fraudulent information will be subject to a civil penalty of $500 per day during the period of noncompliance. In addition, there are criminal fines of up to $10,000 and the possibility of imprisonment for up to two years.

Businesses that could be subject to its requirements, including those used for estate planning purposes, should take action now to establish processes to gather, update, and report accurate information about their beneficial owners. Experts believe more than 30 million entities will be required to file under the CTA. Individuals should work with their estate planners to determine how the CTA may impact their estate planning and comply with the recording requirements as necessary.