As estate planning attorneys, we are tasked with helping people consider what options they have for passing their legacy on to their loved ones. We all know that every client is different and has specific needs and goals. For example, some clients may come to you with interesting family dynamics, such as a child with special needs, a child with a drug addiction problem or a family that cannot get along. Maybe the client has a significant amount of money in an individual retirement account, and you must advise them on the income tax consequences their loved ones may face when they inherit that account.

One particular issue that we may face as estate planning attorneys is planning for clients who own a business. These clients may need assistance passing their business on to the next generation as they are ready to retire, or they may need assistance planning to help their family avoid probate and be able to continue to run or sell their business easily if they pass away. Furthermore, you may be creating different types of business entities, such as a limited liability company or family partnership, as a part of an estate planning strategy for a client. However, a new federal law, the Corporate Transparency Act, will affect the services we provide when dealing with these clients and their entities.

The Corporate Transparency Act (CTA) was effective as law in January 2021.[1] However, the law did not become fully implemented until Jan. 1, 2024.[2] The overall purpose of the law is to require businesses to report to the Financial Crimes Enforcement Network of the United States Department of the Treasury (FinCEN) about who has an ownership interest in a business. Many business owners are going to be required to file a report with FinCEN. This is of particular importance to estate planning attorneys who may be creating business entities for clients or assigning business interests to trusts they are creating because this will trigger a need to file a report with FinCEN.

HISTORY

The CTA was included within the National Defense Authorization Act, so many of us may not have realized that this law was coming down the pipeline.[3] U.S. Representative Mike Rogers, the lead Republican of the House Armed Services Committee, stated the National Defense Authorization Act is a “bipartisan and bicameral agreement that makes the investments our military needs to maintain overmatch with China – from boosting deterrence to securing our supply chain this legislation demonstrates strength in the face of China’s threats.”[4] According to FinCEN’s fact sheet about the CTA:

Illicit actors frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the United States. Not only do such acts undermine U.S. national security, they also threaten U.S. economic prosperity: shell and front companies can shield beneficial owners’ identities and allow criminals to illegally access and transact in the U.S. economy, while disadvantaging small U.S. businesses who are playing by the rules.[5]

The editorial notes on the CTA also reference money launderers layering business structures “much like Russian nesting ‘Matryoshka’ dolls.”[6] From these comments surrounding the passage of the CTA, one can see that the intent behind the legislation is to provide FinCEN with beneficial ownership information so that it can investigate if a company is merely a shell company engaging in illegal activity. Therefore, access to information submitted to FinCEN is limited to federal and law enforcement agencies for civil or criminal investigations.[7] Entities may also authorize the release of the information to financial institutions to assist with customer due diligence requirements.[8]

Although the CTA went into effect in January 2021, there were still many questions that needed to be answered about whether reporting beneficial ownership information to FinCEN would actually work and what would be required to be reported. After a comment period, FinCEN released the final rules for the CTA on Sept. 30, 2022, which answered a lot of questions.[9] These are a great reference if you want to dig deeper into the CTA. However, this is just one of “three reporting rulemakings planned to implement the CTA.”[10]

As part of the CTA, FinCEN was also required to design a reporting form and a Beneficial Ownership Secure System (BOSS) to securely store the beneficial ownership information.[11] The reporting form must be submitted online. You can either fill out the PDF form available online to later submit online or use the online filing system FinCEN has created.[12]

REPORTING REQUIREMENTS: WHOSE INFORMATION GETS REPORTED?

The main point of the CTA is to provide FinCEN with information on beneficial owners of companies and company applicants. Although this seems like a simple requirement, one must carefully analyze who is required to report, who is considered a beneficial owner of the reporting company and company applicant for the reporting company, what information you must report on the beneficial owner and company applicant, and what triggers the need for additional reporting.

Reporting Companies

If you are advising estate planning clients who own a business entity or advising clients to create certain types of entities, it is important to determine whether their entity is considered a “reporting company” under the CTA and required to make a report to FinCEN. The CTA includes many different types of entities in the definition of a reporting company. Specifically, the CTA defines a reporting company as:

A corporation, a limited liability company, or other similar entity that is:

(i) created by filing if a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or

(ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.[13]

Based on this definition, there will be numerous entities nationwide that will be required to report to FinCEN. There are many different types of business entities that are formed with the secretary of state: corporations, limited liability companies, nonprofit corporations, limited liability partnerships and limited partnerships.[14]

However, there are 23 listed entity types that are not required to file a report with FinCEN.[15] The exceptions are primarily types of entities in areas of business that are already reporting to and monitored by other government agencies, such as insurance producers that are “subject to supervision by the insurance commissioner or a similar official agency of a State; and has an operating presence at a physical office within the United States,”[16] entities registered with the Securities Exchange Act of 1934,[17] credit unions,[18] etc.

In its final rule, FinCEN declined to delve deeper into defining reporting companies. For example, one commenter raised concern that a sole proprietor filing a document with the secretary of state to obtain a “doing business as” or other trade name could be subject to the rule’s reporting requirements.[19] In response to concerns, FinCEN reiterated that the “only relevant issue for the purposes of the CTA and the final rule is whether the filing ‘creates’ the entity.”[20] FinCEN went on to state that it may consider issuing further guidance in the future if necessary.[21] If you are assisting clients with forming entities as part of your estate planning practice or strategies, it will now be important for you to consider whether you 1) need to create an entity under the secretary of state and 2) if you do create an entity with the secretary of state, whether you have triggered the need to file a report with FinCEN. Furthermore, if you are assisting probate or trust administration clients where an asset of the estate or trust is a business entity, you will need to consider if there is a change in beneficial ownership that triggers the need to make a new report. The rest of this article will take a deeper dive into these issues.

Beneficial Ownership

After determining whether an entity is considered a reporting company under the CTA, one must next determine who is a beneficial owner of the reporting company so that you can gather the necessary information on each beneficial owner for the FinCEN report. The CTA defines a beneficial owner as someone who directly or indirectly “exercises substantial control over the entity” or owns at least 25% of the entity.[22] The final rules put out by FinCEN give four factors for determining if someone exercises substantial control over a reporting company: 1) the person “[s]erves as a senior officer of the reporting company;” 2) the person “[h]as authority over the appointment of any senior officer or a majority of the board of directors (or similar body);” 3) the person “[d]irects, determines, or has substantial influence over important decisions made by the reporting company;” and 4) the person“[h]as any other form of substantial control over the reporting company.”[23]

When a trust owns an interest in an entity, a deeper analysis is required to determine who is the beneficial owner. Thankfully, the final rules give guidelines on determining this. The final rules specifically state that a trustee of a trust or other individual with the authority to remove assets is a beneficial owner.[24] Furthermore, a beneficiary of a trust will be considered a beneficial owner if the beneficiary:

(i) Is the sole permissible recipient of income and principal from the trust; or

(ii) Has the right to demand a distribution of or withdraw substantially all of the assets from the trust[.][25]

According to the final rules, a grantor or settlor of a trust will also be considered a beneficial owner if they “ha[ve] the right to revoke the trust or otherwise withdraw assets of the trust[.]”[26]

When assigning business interests in entities to a trust, it will be important to consider which individuals in the trust will now be considered beneficial owners of the entity who will need to be reported to FinCEN. Although this analysis might be simpler for a revocable trust, it could become a complicated analysis when an irrevocable trust owns an interest in a business entity. It will be crucial to review the trust document and the FinCEN final rules to determine who may meet the requirements of being a beneficial owner.

Questions about beneficial ownership may also arise when a major life event occurs that shifts who is managing an interest in an entity or creates a change in ownership. Does the beneficial owner change if a person becomes incapacitated and their guardian or agent named in a power of attorney manages the ownership interest? Does the death of someone which triggers an inheritance of the entity by a different individual or trust change who the beneficial owner is? What if the beneficiary inheriting the entity is a minor child or a trust established for a minor child?  The final rules answered some of these questions by laying out five exceptions to exclude certain individuals from the definition of a beneficial owner:

(i) A minor child ... provided the reporting company reports the required information of a parent or legal guardian of the minor child;

(ii) An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;

(iii) An employee of a reporting company, acting solely as an employee;

(iv) An individual whose only interest in a reporting company is a future interest through a right of inheritance;

(v) A creditor of a reporting company.[27]

Despite these exceptions clearing up some of these questions, it will be important to advise clients that some of these exceptions are not indefinite. Although a minor child does not need to be reported as a beneficial owner, the final rules expressly state that the child reaching the age of majority is an event that will trigger the need for a new FinCEN report to be made.[28] Furthermore, when an estate is settled, a new report must be filed because there are new beneficial owners at that point.[29] Because these sorts of events trigger new reporting requirements, it will be important for attorneys representing clients with entities or representing probate or trust administration clients to clearly state in engagement letters if the law firm will assist with FinCEN reporting or if the client will be responsible for keeping up with events that trigger the need for a new report.

Company Applicant

For entities formed after Jan. 1, 2024, the FinCEN report must include who the company applicant was.[30] The company applicant is defined as the individual that “directly files the document that creates ... the reporting company” and the individual who is “primarily responsible for directing or controlling such filing if more than one individual is involved in the filing.”[31]

The final rule explanations specifically provide an example of who to report if a law firm is filing an entity with the secretary of state. If a paralegal or legal assistant files an entity with the secretary of state, the paralegal or legal assistant and the attorney directing the filing will need to provide their information as the company applicant on the FinCEN form.[32] Due to this requirement, law firms may wish to include filing the FinCEN report in their engagement letters to simplify entity creation for the law firm and its clients.

REPORTING REQUIREMENTS: WHAT INFORMATION GETS REPORTED?

Reporting Company

In the initial report to FinCEN, a reporting company must report the “name of the reporting company,” “any trade name or ‘doing business as’ name of the reporting company,” the address of the reporting company or the primary location where business is conducted if the reporting company does not have a principal place of business, the state of formation of the reporting company and the taxpayer identification number issued by the IRS.[33]

Beneficial Owners and Company Applicants (for Entities Formed After Jan. 1, 2024)

When filing a report, reporting companies must provide the following information about every beneficial owner in the company and about company applicants for entities formed after Jan. 1, 2024: “[t]he full legal name of the individual,” “date of birth,” residential address and “a unique identifying number.”[34]

However, if the company applicant forms entities in the course of its regular business, you may submit the company applicant’s company address instead of the applicant’s residential address.[35] This is a particularly important exception for law firms or other companies that may provide FinCEN filings as part of their services so they may protect their employees’ confidential information. A unique identifying number may be a passport, driver’s license or some other identification document issued by the state, local government or Indian trust.[36] A photo of the document containing the unique identifying number must also be submitted.[37]

Individuals who may be the subject of several reports can also apply to FinCEN to receive a FinCEN identifier to provide in lieu of submitting all their information in each reporting form.[38] If a law firm will likely be filing multiple reports, it could be beneficial to have its employees apply for FinCEN identifiers to save time.

DEADLINES: WHEN ARE REPORTS DUE?

Initial Reports – One Year or 30 Days

If an entity was formed prior to Jan. 1, 2024, a FinCEN report must be filed within one year (so no later than Jan. 1, 2025).[39] Keep in mind that there is no grandfather exception for entities. Even if entities were created 30 years ago, they will be subject to this same one-year deadline as an entity that was formed one year ago.

For entities created after Jan. 1, 2024, the report must be filed within 30 days.[40] A careful reading of the CTA and FinCEN’s final rules will be necessary when dealing with any business entity moving forward to ensure you meet these filing deadlines.

Updated Reports – 30 Days From the Time of Change

If there is any change in who is a beneficial owner in a reporting company or any change in the information reported for a beneficial owner, the reporting company is required to file an updated report within 30 days.[41] Keeping up with these changes could be very tedious for beneficial owners. If a beneficial owner moves into a new home, this will trigger the need for an updated report.[42] As attorneys, it will be important to develop best practices within your firm to alert clients about these triggers for filing updated reports and clearly lay out in engagement letters who is responsible for making these supplementary reports.

Corrected Reports – 30 Days

If there are errors in any report submitted to FinCEN, a corrected report must be submitted to FinCEN within 30 days of learning about the error.[43]

PENALTIES

The CTA states that it is unlawful to “willfully fail to report complete or updated beneficial owner information to FinCEN.”[44] It is also unlawful to “willfully provide, or attempt to provide, false or fraudulent beneficial ownership information.”[45] And the fines for failing to make these reports or provide fraudulent information in a report are steep. Individuals may be fined up to $500 per day, not to exceed $10,000, and/or imprisonment for up to two years.[46] Because these penalties are potentially so high, it will be important to properly advise clients if a report is required, analyze whether a triggering event has occurred requiring an updated report to be filed, and be clear in your engagement letters who will be responsible for reporting to FinCEN.

CONCLUSION

The CTA is now fully in effect and will change the way we advise clients handling business entities moving forward. When forming entities with the secretary of state, attorneys and other advisers must now analyze whether a report to FinCEN will also be required and analyze whose information to gather as the beneficial owner of the entity. Furthermore, it will be crucial to advise clients on when supplemental reports must be filed with FinCEN if beneficial ownership changes for some reason.

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ABOUT THE AUTHOR

Chantelle Hickman is originally from northwest Oklahoma and moved to Oklahoma City to pursue a business degree at the University of Central Oklahoma then a law degree at the OCU School of Law. Ms. Hickman is now a partner at Alleman Law Firm in Oklahoma City, where she focuses her practice on estate planning, elder law, probate and guardianships.

 

 

 

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ENDNOTES

[1] 31 U.S. Code §5336.

[2] Id.

[3] H.R. 6395 – 116th Congress (2021): National Defense Authorization Act of 2021, H.R.6395, 117th Cong. (2021), https://www.congress.gov/116/bills/hr6395/BILLS-116hr6395enr.pdf.

[4] House Armed Service Committee. https://armedservices.house.gov/ndaa.

[5] Beneficial Ownership Information Reporting Rule Fact Sheet (Sep. 29, 2022), https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet.

[6] Pub. L. 116–283, div. F, title LXIV, §6402, Jan. 1, 2021, 134 Stat. 4604.

[7] 31 U.S.C. 5336(c)(2)(A).

[8] 31 U.S.C. 5336(c)(2).

[9] 87 FR 59498.

[10] Beneficial Ownership Information Reporting Rule Fact Sheet (Sep. 29, 2022), https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet.

[11] Id.

[12] Financial Crimes Enforcement Network. https://boiefiling.fincen.gov/fileboir.

[13] 31 USC 5336(a)(11)(A).

[14] Oklahoma secretary of state. www.sos.ok.gov/corp/filing.aspx.

[15] 31 USC 5336(a)(11)(B).

[16] 31 USC 5336(a)(11)(B)(xiii)(I)&(ii).

[17] 31 USC 5336(a)(11)(B)(i), (vii), (viii) & (Ix).

[18] 31 USC 5336(a)(11)(B)(iv).

[19] 87 FR 59498.

[20] Id.

[21] Id.

[22] 31 USC 5336(a)(3).

[23] 31 CFR 1010.380(d)(1).

[24] 31 CFR 1010.380(d)(2)(ii)(C)(1).

[25] 31 CFR 1010.380(d)(2)(ii)(C)(2).

[26] 31 CFR 1010.380(d)(2)(ii)(C)(3).

[27] 31 CFR 1010.380(e).

[28] 31 CFR 1010.380(a)(2)(iv).

[29] 31 CFR 1010.380(a)(2)(iii).

[30] 31 CFR 1010.380(b)(2)(iv).

[31] 31 CFR 1010.380(e)(3).

[32] 87 FR 59498.

[33] 31 CFR 1010.380(b)(1).

[34] 31 USC 5336(b)(2)(A).

[35] 31 CFR 1010.380(b)(1)(ii)(C)(1).

[36] 31 CFR 1010.380(b)(1)(ii)(D).

[37] 31 CFR 1010.380(b)(1)(ii)(E).

[38] 31 CFR 1010.380(b)(4).

[39] 31 CFR 1010.380(a)(1)(iii).

[40] 31 CFR 1010.380(a)(1)(i)&(ii).

[41] 31 CFR 1010.380(a)(2)(i).

[42] 31 CFR 1010.380(a)(2)(i).

[43] 31 CFR 1010.380(a)(3).

[44] 31 USC 5336(h)(1)(B).

[45] 31 USC 5336(h)(1)(A).

[46] 31 USC 5336(h)(3)(A).