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How Will the Corporate Transparency Act Affect Estate Planning?
By Trusts & Estates Practice Group on May 11, 2021 at 10:00 AM

In Congress’ ongoing fight against fraud, corruption, terrorism financing and money laundering, lawmakers passed the Corporate Transparency Act (CTA) on January 1, 2021, as part of the 2021 National Defense Authorization Act. The CTA contains significant new federal reporting obligations and imposes heavy civil fines and criminal penalties for noncompliance. It may have an especially onerous impact on estate planning clients who accomplish their planning goals through the use of one or more business entities.

Beginning January 1, 2022, beneficial ownership information must be reported to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) for a business entity that is deemed a “reporting company.” Unless expressly excluded under the CTA, a “reporting company” includes a corporation, limited liability company, limited partnership, limited liability partnership, limited liability limited partnership, family limited partnership, or other similar entity that is:

  1. created by filing a document with a state’s secretary of state or similar office under the laws of a state or Indian tribe; or
  2. formed under the law of a foreign country and registered to do business in the United States by the filing of a document with the secretary of state or similar office under the laws of a state or Indian tribe.

At this time, sole proprietorships, trusts, some general partnerships, and other entities that do not obscure an individual’s identity are not included as a reporting company. However, based on ongoing beneficial ownership reviews and reports provided to Congress, these types of entities may be included in future legislation.

Beneficial ownership information includes the full legal name, date of birth, current residential or business street address, and a unique identifying number such as a driver’s license number or passport number for an individual who, directly or indirectly, through any contract or other arrangement, exercises “substantial control” or owns or controls 25 percent or more of the “ownership interests” of a reporting company. A “beneficial owner,” however, does not include a minor, when a parent of the minor is reporting; individuals who serve as nominees, intermediaries, custodians or agents; an individual whose control is solely derived through employment by a reporting company; an individual whose only interest is through a right of inheritance; or a creditor of the reporting company, unless the creditor is a beneficial owner. At a minimum, a reporting company must identify one individual to report as a beneficial owner if no one individual controls more than 25 percent of the ownership interests.

Upon the effective date, a beneficial owner of a reporting company that has been previously formed or registered will have up until two years to report to FinCEN as prescribed under the CTA. For a reporting company formed or registered after the effective date, a beneficial owner will be required to report at the time of formation or registration. All updates to beneficial owner information must be reported within one year of a change. Civil penalties for noncompliance include fines of up to $500 for each day the violation continues and criminal fines of up to $10,000 per day and/or imprisonment for up to two years.

In conclusion, for those who use business entities as part of their estate planning strategy, meeting the obligations of the CTA will be important, given the potential civil and criminal penalties that may be assessed for failing to comply. Please contact an attorney in our Trusts & Estates Practice Group if you have questions about the new obligations and how to ensure compliance.

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