When Business Meets Estate Planning – A Review of the Corporate Transparency Act

The Corporate Transparency Act (CTA) went into effect January 1, 2024, and requires certain business entities to report Beneficial Ownership Information to the Financial Crimes Enforcement Network (FinCEN). Enacted as part of the Anti-Money Laundering Act of 2020, this law aims to combat financial crimes, terrorism financing, and other illicit activities by closing loopholes and increasing transparency in corporate structures.

Prior to the implementation of the CTA, there was no formal mechanism in place to account for who owned or benefitted from small businesses at the federal level. While different states had their own mechanisms to track some of this information for registration or fee purposes, this lack of uniform oversight made it easier for bad actors to hide businesses in shell companies and launder money through them with little accountability. The CTA aims to make these illicit behaviors more difficult by requiring corporations, limited liability companies (LLCs), and similar entities (“Reporting Companies”) to disclose information about those who exercise substantial control over the entity or own 25% or more of its interests (“Beneficial Owners”).

Compliance Provisions.  To comply with the CTA, entities must report the name, date of birth, address, and a unique identifying number (such as a passport or driver’s license number) for each beneficial owner. Any changes to this information must be promptly updated with the CTA. For companies in existence before January 1, 2024, they must file their Beneficial Ownership Information Report before January 1, 2025, while new entities formed after January 1, 2024, must report within 90 days of their formation. Looking forward, companies formed in 2025 and later must report this information within 30 days. It is important to understand and comply with these deadlines because penalties range from civil or criminal fines or imprisonment for up to two years, based on the nature and severity of non-compliance.

Implications for Estate Planning.  While the CTA places an obvious new burden on small businesses, it also has far-reaching implications for estate planning, particularly for those utilizing business entities as part of their strategy. Some key factors to consider are:

Increased Transparency.  Estate planning often involves the use of LLCs or trusts to manage and transfer assets. The CTA mandates transparency in ownership, which could affect privacy and confidentiality traditionally associated with these structures. The canny reader may have noticed that trusts are not specifically mentioned as being a Reporting Company. However, if an LLC is placed in a trust and is managed by the Trustees, they would be considered Beneficial Owners as they are viewed as exercising substantial control over the business. Therefore, trusts that qualify as Beneficial Owners under the CTA must disclose relevant information about trustees and beneficiaries.

Review and Update Structures.  It is crucial to review existing estate planning structures to ensure compliance with the CTA. Entities need to be examined to determine if they meet the criteria for reporting and, if so, prepare for timely disclosures.

Impact on Asset Protection.  The requirement to disclose Beneficial Owners may also affect asset protection strategies for complex estate plans. Increased transparency could potentially expose beneficial owners to risks, including creditors and litigants.

Administrative Burden.  Complying with the CTA will add an administrative layer to estate planning. Clients and advisors must maintain accurate records and ensure timely reporting to avoid penalties. This can be streamlined by using a reporting method that shifts some of the information upkeep burden to individual Beneficial Owners, but even this method will still require a new report when there is a change in membership in the business.  

In conclusion, the Corporate Transparency Act marks a significant shift towards greater transparency in business ownership which can directly impact estate planning strategies. While it introduces new challenges, proactive planning and adaptation can help maintain compliance and achieve estate planning objectives. By understanding the implications of the CTA and taking necessary action, estate planners can navigate these changes effectively, ensuring that your plans remain robust and compliant. If you have any questions or guidance on navigating the Corporate Transparency Act, please reach out to your legal counsel or contact Hook Law to schedule an appointment.