The Corporate Transparency Act (CTA) defines a “beneficial owner” of a “reporting company” as any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company. How does the CTA affect estate planning and administration?

Although a trust is not a “reporting company” under the CTA, a trust may directly or indirectly own or control an interest in a reporting company. (There is an exception for trusts created by registering with government authorities – these do not apply to estate planning.) Clients set up trust agreements during their lifetimes and transfer interests in a reporting company to trusts for various purposes, such as gifting to irrevocable trusts to potentially reduce the size of their taxable estates or transferring assets to a revocable trust to avoid probate at death.   

In addition, an individual or a trust may inherit an interest in a reporting company at the death of another individual (e.g., by Will, trust or beneficiary designation). A change in beneficial owner due to death is deemed to occur not upon death but on the date the estate is settled and the interest is transferred, at which time the report must be updated.

This article will discuss the three categories of individuals involved with a trust who may be considered a beneficial owner of the reporting company held in the trust and thus have reporting requirements:

  1. A trustee or other individual who has authority to dispose of trust assets (if there are multiple trustees or individuals who have such authority, then each is a beneficial owner).  Note that the statute and regulations do not define “dispose of trust assets.” 
  2. A beneficiary of a trust but only if he or she is the sole permissible recipient of income and principal from the trust, or if he or she has the right to demand a distribution of or withdraw substantially all of the trust assets. 
  3. A settlor (creator) of a trust but only if he or she has the right to revoke the trust or otherwise withdraw the assets of the trust.

We will first look in more detail at who has authority to dispose of trust assets. The most basic case would be a trust which has one individual who serves as sole trustee and has authority to make distributions and control investments. No one else has authority over the trust assets.  No one may remove and replace the trustee. In this case, the trustee would be the only individual who has power to dispose of trust assets.

However, most trusts are not that simple. There are a number of individuals who, arguably, have the power to dispose of trust assets, either in fiduciary positions, such as trust investment directors (i.e., direct the trustee as to investments) and trust distribution directors (i.e., direct the trustee as to distributions to beneficiaries), or in non-fiduciary positions, such as trust protectors or persons holding veto powers over certain actions of the trustee (or director), or power to remove and replace a trustee (or director), or power to appoint trust assets (i.e., power to direct to whom trust assets will pass). Note that an individual’s agent under a power of attorney may have certain of these powers depending on the terms of the power of attorney and the trust agreement.  If a trustee only has administrative duties because the trustee is directed as to investments and distributions, then, arguably, the trustee does not have the power to dispose of trust assets. FinCEN has not directly addressed these issues.

If a trustee is an entity, such as a bank or trust company, then the question is who is required to report on behalf of the trustee. FinCEN has not provided guidance as to whether the corporate trustee, as well as the trust officer(s) who work on the trust for the corporate trustee, must report.

As for trust beneficiaries, a trust beneficiary will be considered a beneficial owner of the reporting company only if he or she is the sole permissible income and principal beneficiary (e.g., a trust for spouse which qualifies for the marital deduction) or if he or she has the right to withdraw substantially all of the trust assets. This would not apply to any trust which has multiple beneficiaries, such as a trust which allows the trustee in its discretion to distribute to one or more of the settlor’s descendants, or a trust where the trustee may distribute income to one individual but principal to a different individual.  Note that a contingent beneficiary (e.g., someone who holds an interest upon the death of a current beneficiary) would not be considered.

For a revocable trust (i.e., a trust revocable by the settlor), during the settlor’s lifetime, the settlor would be considered a beneficial owner of the reporting company held in the trust. However, even during the settlor’s lifetime, there may be others who are considered beneficial owners (e.g., if the trust is created for the sole benefit of another individual, or if someone other than the settlor, or in addition to the settlor, is a trustee). Note that, if an individual who owns an interest in a reporting company instead names a revocable trust as beneficiary on death (which is possible since Connecticut adopted the Uniform Transfer on Death Securities Registration Act), this would avoid the need to report any information about the trust until the death of the individual owner. We discussed using transfer on death designations for securities earlier this year in our 2023 Client Newsletter.

If there is any change in the information reported for any of the individuals above, then the reporting company has 30 days from when the change occurred to report the change.  This would apply in the following examples: change of fiduciary serving; change of address or name; change of information on identification document; death of current beneficiary or settlor; occurrence of event which gives the beneficiary the right to withdraw substantially all assets; change in percentage ownership interest that the trust holds in the reporting company to greater or less than 25 percent; creation of a power of appointment; and termination of a trust.

For individuals who are trustees of multiple trusts, it might be preferable to obtain a FinCEN identifier from FinCEN and report only the FinCEN identifier to the reporting company.  Any updates can then be made directly with FinCEN.

It is important to understand how the CTA and its reporting requirements will affect your current estate planning documents and those named in the documents as well as future estate planning and estate settlement. For more information, please contact Lisa F. Metz or another BW attorney.

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