The Corporate Transparency Act, a new law that will require companies to report information about their owners to the federal government, will officially go into effect on Jan. 1. While the law will primarily impact small businesses, it will also apply to trusts that have ownership interests in a company. If your trust holds interest in a company, you may need to disclose information about its trustee or beneficiaries under the new law. This guide explores the relationship between the CTA and trusts, along with the compliance requirements you need to know.

Key Takeaways:

• The CTA will apply to trusts that have substantial control or own at least 25% of a reporting company.
• As it applies to trusts, a beneficial owner may be a trustee, beneficiary, grantor, or settlor of a trust.
• There are some exceptions to the beneficial owners of a trust, including minor children and future beneficiaries.
• The law goes into effect on Jan. 1, 2024, and it’s important to be aware of the information you need to submit about a trust’s beneficial owner.
• Have an advisor review your trust before the law takes effect to determine the beneficial owners you need to report.

What Is the CTA?

The CTA is a new law requiring business entities to submit information about their beneficial owners to the federal government. The law defines a beneficial owner as an individual who holds at least 25% ownership in a company or who exercises substantial control over the company. The CTA applies to any entity that has registered to do business in the United States by filing with a state’s secretary of state or a similar office. The law refers to these entities as reporting companies.

A reporting company will file information about its beneficial owners with the Financial Crimes Enforcement Network, a bureau of the U.S. Department of the Treasury. The purpose of the law is to prevent people from using shell companies or similar business structures to hide their illegal activities, such as money laundering and tax evasion.

Does the CTA Apply to Trusts?

The CTA will widely affect corporations, limited liability companies, and limited partnerships, but what about trusts? In most cases, trusts are not created by filing a document with a state office, so they won’t be considered a reporting company. However, the law will apply to any trust that owns 25% or more of a reporting company. It will also apply to trustees who have substantial control over a reporting company.

For example, if your trust owns at least 25% of the ownership interests in a for-profit company, such as a family business, the business will need to report information about the trust’s beneficial owner to FinCEN. Your trust will also be subject to the CTA if it holds at least 25% ownership in an LLC, a limited partnership, or another similar entity.

Some entities are exempt from the CTA, including nonprofits, federally regulated companies such as banks and insurance companies, and large companies with over 20 full-time employees and $5 million or more in annual sales. If your trust owns shares in those entities, it won’t have to report under the CTA.

Who Is a Beneficial Owner?

The CTA has a broad definition of a beneficial owner. According to the law, a beneficial owner is someone who:

• Exercises substantial control over a reporting company.
• Owns or controls at least 25% of the reporting company’s ownership interests.

Under the law, a person can have substantial control over a reporting company in several ways. They can be a senior officer of a company, someone with the authority to appoint or remove board members, or an individual who makes important decisions on behalf of the company.

Can a Trust Be a Beneficial Owner?

A trust itself cannot be a beneficial owner, because a beneficial owner must be a person. However, if the trust owns at least 25% of a reporting company or has substantial control over a company, it must report its beneficial owner. As it applies to trusts, a beneficial owner is someone who benefits from the trust or can make decisions related to its assets.

In many cases, the trustee will be the beneficial owner under the CTA. The law considers a trustee to be a beneficial owner if they have substantial control over a reporting company. A trustee may also hold ownership interests in a reporting company through a trust. For example, if the trustee has the authority to dispose of trust assets or control the shares held by the trust, they will likely be a beneficial owner.

Besides trustees, the beneficiary, grantor, or settlor of a trust can also be a beneficial owner in some cases. Specifically, the law says a beneficial owner can be:

• A beneficiary who is the sole permissible recipient of income and principal from the trust.
• A beneficiary who has the right to demand a distribution or withdrawal of the trust assets.
• A grantor or settlor who has the right to revoke the trust or withdraw trust assets.

It’s important to know there may be multiple beneficial owners associated with a trust under the CTA. For example, a trustee, beneficiary, and grantor could all be beneficial owners of a trust. If you believe your trust may fall within the scope of the CTA, we strongly encourage you to work with an advisor who can review your trust and determine the beneficial owner(s) to ensure you comply fully with the law.

Exceptions to Beneficial Owners

There are a few exceptions when it comes to beneficial owners under the law. A minor who is the beneficiary of a trust will not be considered a beneficial owner until they become an adult and have the power to control the trust’s assets. Additionally, the future beneficiary of a trust that holds 25% ownership in a reporting company will not be a beneficial owner until they inherit those interests.

Compliance Requirements for Trusts Under the CTA

The CTA goes into effect on Jan. 1, 2024, and existing entities have one full year to submit their initial beneficial ownership report. After that, they must resubmit information annually. Failure to comply with the CTA will have serious consequences, including civil fines and potential criminal penalties. Here’s a closer look at what you need to know about the compliance requirements for trusts.

Initial Report

In the initial report, a reporting company will have to file information about the trustee or other individuals who have control of the trust’s assets. If you’re a beneficial owner of a trust, you will need to submit the following information:

• Your full legal name.
• Your date of birth.
• Your current address.
• A unique identifying number from your U.S. passport, state driver’s license, or another government-issued identification document.
• A photocopy of the identification document.

Continued Reporting Requirements

In addition to the initial report, a reporting company must submit updated information if there is a change in beneficial ownership. For trusts, these changes may include the following scenarios:

• A beneficiary changes their address.
• A minor beneficiary becomes an adult with the power to control the trust’s assets.
• A trustee resigns, gets removed, or becomes appointed.
• A beneficiary or grantor who was the beneficial owner dies.

Does the CTA Affect a Trust’s Privacy?

We understand many people establish trusts to protect their assets and maintain their privacy. Some people will be wary of submitting their personal information under the CTA, and it’s a valid concern. However, as a beneficial owner of a trust, your information will remain private, and you won’t have to submit your Social Security number as part of the reporting requirements.

Under the law, only federal, state, local, and tribal offices will be able to have access to FinCEN’s beneficial ownership database. Those officials can only access this information for activities related to national security, intelligence, and law enforcement. For example, a law enforcement agency investigating financial crimes may request access to this information. In some cases, financial institutions will be able to get access to the data, but that will happen only with the reporting company’s consent.

The bottom line is this: If you own assets in a trust, your information will not be made public. Information about the trustee and beneficiaries will only be accessible to government agencies as part of a legal investigation.

Review Your Trust Before the CTA Takes Effect

There’s a lot to know about the CTA and how it will affect trusts that own shares in a company. If you haven’t yet, take some time to determine the beneficial owners you will need to report under the law. At Anderson Advisors, we’re familiar with the complexities of the CTA, especially as it relates to trusts. We can review your trust to provide guidance about how to comply with the CTA. Contact us today for more information.