May 22, 2022

Volume XII, Number 142

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May 20, 2022

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FinCEN Seeks Guidance on Applying Corporate Transparency Act Reporting Obligations to Trusts and Estates

The Corporate Transparency Act (CTA), which requires corporations, limited liability companies and other similar entities to disclose beneficial ownership information to the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), is expected to impose reporting obligations on certain types of trusts and various individuals related to trusts. However, the CTA does not explicitly address many types of trusts commonly used in US estate planning. In response, FinCEN recently released proposed regulations governing the CTA and has requested comments on how to apply the proposed regulations to certain kinds of trusts. This article provides a glimpse into how the CTA may apply to trusts and details timing and penalties for reporting to FinCEN.

THE CTA AND A NOTICE OF PROPOSED RULEMAKING

On December 7, 2021, FinCEN issued a Notice of Proposed Rulemaking (NPRM) to administer the beneficial ownership information reporting provisions of the CTA. The CTA is designed to combat illicit activities such as tax fraud, money laundering and terrorist financing.

Under the CTA, “reporting companies” must report certain identifying information of “beneficial owners” and “applicants” to FinCEN. The following information must be reported for each beneficial owner and applicant:

  1. Full legal name

  2. Date of birth

  3. Current residential address for a beneficial owner and current residential or business address for an applicant

  4. A unique identifying number from an acceptable identification document (e.g., a passport) or a FinCEN identifier

  5. A copy of the relevant identifying document.

An applicant is an individual who files the document that forms the entity or first registers the entity to do business in the United States. A beneficial owner is an individual who (1) owns or controls at least 25% of a reporting company’s ownership interests or (2) exercises substantial control over the entity. The recently issued NPRM lays out how these reporting requirements may affect certain kinds of trusts, trust beneficiaries, trust settlors and trust officeholders. Review of subsequent developments, such as final regulations, is necessary to determine how the CTA will affect trusts overall.

HOW THE CTA IMPACTS TRUSTS

There are two ways that the CTA may apply to trusts: (1) individuals with power to dispose of assets of a trust that holds ownership interests of a reporting company may be considered as controlling the ownership interests held in trust, and, thus, be beneficial owners if such ownership interests amount to 25% or more of the entity’s ownership interests, and (2) business trusts, which include statutory trusts and Massachusetts trusts, may be considered reporting companies. FinCEN acknowledges that the framework of the CTA is not always clear with respect to trusts and has requested comments on the CTA’s applicability to trusts.

As described above, individuals may hold ownership interests in reporting companies through trusts. A trust beneficiary will be considered as owning such ownership interests if they have the right to withdraw, or demand distribution of, substantially all of the assets from the trust or if they are the only allowable recipient of both income and principal from the trust. Settlors with the power to revoke the trust or to otherwise withdraw assets of the trust will also be considered as owning such interests. Trustees will be considered to control such interests if they can dispose of trust assets. Moreover, any individual related to a trust with the power to dispose of trust assets may be considered as holding ownership interests in reporting companies held by the trust. The reporting company would be required to report identifying information of any such beneficiary, settlor, trustee or other individual who is considered as owning 25% or more of its ownership interests through a trust.

Domestic reporting companies include entities that are created by a filing with a secretary of state or similar office, and foreign reporting companies are entities formed under the laws of foreign countries and are registered to do business in the United States by the filing of a document with a secretary of state or similar office. Business trusts are created by filing a formation document with a secretary of state and are, therefore, likely to be considered reporting companies as indicated by the NPRM.

TIMING AND PENALTIES

Reporting companies that were formed before the effective date of the reporting regulations must submit the beneficial owner information to FinCEN no later than two years from the effective date of the final regulations. Any reporting company formed after the effective date of the regulations must submit the relevant information to FinCEN within 14 days of formation. FinCEN invites comments on the timing of the effective date of the final regulations.

Failure to provide beneficial ownership information to FinCEN under the CTA may result in both civil and criminal penalties. An individual or entity that fails to provide the required information will be liable for a civil penalty of up to $500 for each day a violation continues and may be fined up to $10,000 and imprisoned up to two years for a criminal violation.

A REQUEST FOR COMMENTS

FinCEN has requested comments on the following topics related to trusts:

  • Whether other types of trusts exist, besides business trusts (statutory trusts or Massachusetts trusts), that are created by the filing of a document with a secretary of state or similar office

  • The existence of data sources to determine the total number of trusts and what portion of the total are created or registered with a secretary of state or similar office.

FinCEN will be accepting comments until February 7, 2022.

Continued monitoring is required to determine how CTA reporting requirements will ultimately apply to trusts in the near future.

© 2022 McDermott Will & EmeryNational Law Review, Volume XII, Number 10
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About this Author

Associate

Gabriella Batista focuses her practice on private client and wealth management, with a particular focus on cross-border taxation issues.

While in law school, Gabriella served as Academic Events Editor of Journal of Law and Business and Development Chair of Law Women.

305-507-2321
Michael Silva International Tax Attorney McDermott Will & Emery Miami, FL
Partner

Michael Silva focuses his practice on international tax law, with an emphasis on US investment structures, cross-border transactions, tax treaty planning and US activities of foreign banks. He has significant experience forming investment funds and advising family offices.

 

Michael also advises Brazilian and Asian investors on investments in US real estate projects, and assists multinational corporations on establishing a business presence in the US.

Maintaining an active private client practice, Michael regularly advises families on trusts and private trusts...

305-329-4494
Counsel

Ryan J. Coyle focuses his practice on international tax matters, with an emphasis on providing tax-efficient restructuring solutions for high-net-worth international families and their closely held businesses. In addition to advising US-based families on income, gift, and estate tax matters, he assists non-US families with tax matters relating to pre-immigration planning and inbound investment.

Ryan has extensive experience advising on US anti-deferral legislation (i.e., Subpart F and GILTI) applicable to non-US entities that become controlled foreign corporations as a result of...

305 329 4479
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