Since the passage of the Corporate Transparency Act (CTA), many families have become concerned that the broadly applicable rules intended to prevent money laundering could create a substantial risk of sensitive and private entity ownership information becoming public, or that the rules will create an onerous compliance burden and legal risk, especially in complex family wealth structures. On September 30, 2022, the Department of the Treasury issued final rules providing more clarity for families looking to understand their reporting requirements and potential exceptions under the CTA
A major take-away from the final rules is that a family with a regulated private trust company (PTC) as a core element of its wealth structure may be subject to substantially lower Financial Crimes Enforcement Network (FinCEN) reporting burdens under the CTA than a family that does not utilize a PTC. This stems from three key parts of the final rules:
The CTA took effect on January 1, 2021, when Congress overrode former President Trump’s veto of the National Defense Authorization Act for 2021, which included the CTA language. The statute provides that the effective dates to begin reporting requirements are to be determined by regulation. In general, the CTA requires “reporting companies” to report to the FinCEN certain information regarding each of its “beneficial owners.” In general, a “beneficial owner” is an individual who – directly or indirectly – owns or controls at least 25% of the ownership interests in the reporting company, or an individual who otherwise exercises “substantial control” of the reporting company. “Substantial control” is broadly defined, and can include (1) an individual serving as a “senior officer” of the reporting company, (2) an individual having direct or indirect authority over removal or appointment of the governing body, and (3) an individual deemed to have “de facto” control over key decisions under a set of criteria described in the regulations.
A “reporting company” generally includes any entity that is formed by filing a document with a state’s secretary of state or equivalent office, and also includes a foreign entity that qualifies to do business with such an office. This will generally include corporations, limited liability companies, limited partnerships, limited liability partnerships, statutory trusts, and similar entities. Importantly, the definition should not include common law trusts and general partnerships, even if those entities make an optional filing with state officials, because those entities generally are not formed by filing a document. The CTA also provides for 23 categories of exempt entities that will not be deemed to be “reporting companies.”
Under the final rules, reporting companies formed on or after January 1, 2024 will be required to make an initial report to FinCEN within 30 days of formation, while entities existing prior to January 1, 2024 will have until January 1, 2025 to make an initial report. In addition, reporting companies will be required to report changes to beneficial owner information within 30 days and will be required to correct any error within 30 days of discovering the error. A willful failure to comply by a reporting company, or a senior officer of the reporting company or another person who willfully causes the failure, may cause the entity or individuals to be liable for criminal penalties.
A major privacy concern associated with the CTA is that the statute provides broad authorization for FinCEN to disclose the information it collects to other state and federal agencies. FinCEN plans to make rules concerning access to the information and related safeguards, but those rules have not yet been issued.
A full discussion of the final rules is beyond the scope of this article, but below are what we feel are some key observations from the perspective of families with family offices and substantial assets in trust.
PTC as an Exempt Entity
Consistent with the statute, the final rules provide for a total of 23 categories of exempt entities that are not considered “reporting companies.” An exemption is expressly provided for banks as such term is defined in various other laws, including the Investment Company Act of 1940 (‘40 Act). In general, a PTC that is supervised and examined by a state banking authority is considered a “bank” under the ‘40 Act and, as such, would be excluded from the definition of reporting companies (See 15 U.S. Code § 80a–2(a)(5)). This means that the PTC, itself, would not be required to file any reports pursuant to the CTA. In contrast, a traditional family office entity is not excluded from the definition of reporting company for purposes of the CTA and therefore the ownership of the family office must be reported to FinCEN in compliance with the CTA, unless another exemption applies. For example, another broad exemption applies generally to any “large operating company,” meaning an entity with 20 full time US employees, a physical office in the US, and $5 million of gross receipts for the previous year.
Ownership and Control of Trust Assets
The final rules provide that an individual will be deemed to have control or ownership of trust assets if the individual is serving as trustee or otherwise has the authority to dispose of trust property. In addition, a trust beneficiary who is the sole permissible recipient of trust income and principal, or who has authority to withdrawal trust assets, will be deemed to have ownership or control of the trust property. The grantor of a trust will be deemed to have ownership or control if the grantor has authority to revoke the trust or otherwise withdraw trust assets.
Thus, for an irrevocable trust with multiple discretionary beneficiaries, a single trustee with no other person entitled to dispose of trust property, and no person entitled to withdraw trust assets or revoke the trust, only the trustee will generally be deemed to have control or ownership.
While the exclusion of PTCs from the definition of reporting companies is important, such exclusion could also provide a significantly greater benefit under the CTA’s subsidiary rule. Specifically, the rules provide that if an entity is controlled or wholly owned by a PTC, that “subsidiary” entity is also excluded from the definition of reporting companies. Thus, if an entity is wholly owned by trusts of which a PTC serves as trustee, it would appear the entity is also not a reporting company. Similarly, if the PTC, as trustee, controls the entity, the entity would also be exempt. Unfortunately, the final rules do not provide clarity on the definition of “control” in this context (specifically whether the subsidiary rule applies if an individual also has “beneficial ownership” or “substantial control” as defined in the rules, which is not mutually exclusive). Nonetheless, it should be clear that if the entity is wholly owned by trusts of which the PTC is serving as trustee, the entity is not a reporting company, and a reasonable interpretation of the subsidiary rule would lead to the conclusion that any entity in which the PTC controls the voting ownership is not a reporting company. Another key clarification in the final rules is that if an individual is deemed to be a beneficial owner of a reporting company only due to their ownership interest in an exempt entity having an ownership interest, the FinCEN report for the reporting company may include the name of the exempt entity rather than the individual’s name.
While the CTA rules will likely create a compliance burden for many wealthy families with complex structures, it is clear that having a regulated PTC as a central part of the structure should lessen that burden.
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