The Corporate Transparency Act (CTA) is a federal law that took effect on January 1, 2024. It was enacted to curb money laundering, corruption, tax evasion, fraud, and other financial crimes. It requires entities organized or registered to do business in the United States to disclose information about the entity and who owns it to the U.S. federal government unless the entity qualifies for an exemption.
There are 23 reporting exemptions. Most people think their entity is so tiny that it must be exempt. However, the opposite is true. Exempt entities include, for example, banks and credit unions, registered broker-dealers, and significant operating companies. CTA is geared to provide information about smaller entities that otherwise may fly under the radar.
FinCEN (the U.S. Department of Treasury Financial Crimes Enforcement Network) implements the CTA. If your entity is required to report, you must disclose identifying and beneficial ownership information (“BOI”) about your entity and who owns it. With proper court authorization, FinCEN can then provide the information to law enforcement to divulge the beneficial owners of entities and who controls them. Note there are penalties for failure to file that are both civil and criminal. That means money and jail time.
Often, estate plans include some corporate entity. You should be aware of this new law and determine whether or not you have a filing requirement. If you are required to report and your entity existed before January 1, 2024, you have to file by December 31, 2024. For entities formed between January 1, 2024, and December 31, 2024, you have 90 days to report. For entities formed after January 1, 2025, you have 30 days to report. These obligations are ongoing, so if you move or change your address, you must update your information within 30 days.
When looking at your estate plan, here are situations where you may have a reporting requirement:
- You have a limited liability company
- You own stock in a closely held family business
- Your trust owns an interest in an entity that is required to report
- You are trustee of a trust that has a reporting requirement
- You are the beneficiary of a trust that has a reporting requirement
- You have the power to dispose of the assets of a trust that has a reporting requirement
- You inherited stock from someone who had a reporting requirement
Trusts are required to report if they own 25% of a reporting company. Note the CTA regulations have guidance around reporting requirements for trusts, but it is sparse. An individual trustee almost always has a reporting requirement if the trust owns at least 25% of a reporting company or can control certain aspects of the reporting company. Any other individual who holds a position of authority to dispose of trust assets may also have a reporting requirement. Beneficiaries may also have reporting requirements if they can receive income and principal or have a right to demand substantially all of the trust assets. The person who created the trust (the grantor or settlor) may also have a reporting requirement if they have the right to revoke or withdraw trust assets. What gets murky is whether trust protectors, distribution advisors, or investment advisors exhibit enough control to have reporting requirements. These situations are very fact-specific and will require a thorough analysis as to the extent of the reporting requirements.
While law firms and accounting firms can advise you on whether you have a filing obligation, not many are taking on the task of reporting. Specialized companies, many of which already provide corporate services, are stepping forward to provide this service.
Note that on March 1, 2024, the federal district court for the Northern District of Alabama ruled that the CTA is unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers. This ruling may or may not have broader applications beyond the parties directly involved in that case.