How the Corporate Transparency Act Impacts Your Estate Plan

Big news in the estate planning world! A recent federal law, called the Corporate Transparency Act (“CTA”), takes effect on January 1, 2024. And when it does, every small business will be obligated to submit an annual report revealing the names of their major owners.

Now, here's what this has to do with you. If you happen to have a trust that holds partial or full ownership in a business, that business might be required to disclose private details about your trust, including details about the name of your Trustee or beneficiaries, in your annual corporate report to the government.

What Is the Purpose of the Corporate Transparency Act and What Does It Require?

Enacted in 2020, the CTA aims to tackle money laundering and terrorism financing schemes involving "shell" corporations—companies that exist merely on paper and don't engage in actual business or trade. Under this Act, small companies will now have to disclose the names of any owners who hold 25% or more ownership in the company, as well as any individuals who exercise significant control over the company's activities.

To comply with the requirements, businesses must submit an annual report to the Financial Crimes Enforcement Network (FinCEN) containing the following details about each owner or controller:

• Business name;

• Current business address;

• State in which the business was formed and its Entity Identification Number (EIN);

• Owner/controller’s name, birth date, and address; and a

•  Photocopy of a government-issued photo ID (such as a driver’s license or passport) of every direct or indirect owner or controller of the company.

Failing to file an annual report could result in serious repercussions, from paying a fine of $500 for every day the report is late up to imprisonment for two years.

Does My Trust Need to Be Disclosed?

Since a trust can own a business or a share of a business, they are also covered by the CTA, but under more limited circumstances.

The new rule applies to any company that is created by filing a formation document with the Secretary of State or a similar office, such as corporations and limited liability companies (LLCs). Non-profits, publicly traded companies, and regulated companies like banks and investment advisors are exempt from the rule. Large companies are also exempt if they have 20 or more full-time employees in the U.S. and generate $5 million in sales. So, if your trust owns a share of any of these types of companies, it does not need to be reported.

Furthermore, if you’ve created an LLC or corporation but aren’t actively using it to run a business, that company is also exempt from reporting due to its inactivity, so your trust would not be reported in that instance, either.

But if your trust owns a share of a small, for-profit company (like a small family business or local investment), the beneficial owner of the trust will need to be reported to FinCEN.

The beneficial owner is the person who benefits from the trust or has the power to make major decisions about the trust assets. Depending on how your trust is written, this is usually the trustee, but it can also be the beneficiaries of your trust. 

Does the Corporate Transparency Act Affect My Trust’s Asset Protection?

One of the best things about creating a trust is that it provides you and your family with an extra level of privacy and provides asset protection from divorce or lawsuits for your trust’s beneficiaries after you’re gone.

Thankfully, having a trust that owns a business or a share of a business doesn’t take away from the trust’s ability to provide asset protection to your heirs.

And while the CTA reduces some of the privacy benefits that come with owning assets in a trust, the names of your trust, trustees, and beneficiaries are not made public and are only used by the government for the specific purpose of investigating financial crimes. 

Because of this, trusts remain an excellent tool for providing privacy, avoiding probate, and setting up your family with a lifetime of asset protection and financial security.

Guidance for Your Family Now and For Years to Come

If you have a trust or are curious about creating an estate plan for your family, you may be wondering how changes in the law will affect your plan in the future and how you can possibly plan for them.

That’s where we come in, as your trusted personal advisor. Unlike many estate planning attorneys who serve their clients once and never see them again, we see estate planning as a life-long relationship.

Your life and the world around you are constantly changing, and your estate plan should too. That’s why we keep our clients informed about any changes in the law that may affect their estate plan and offer to review your plan for free every three years to make sure that your plan still works for you just as well as it did on the day you created it.

If you’re ready to create a custom plan for the ones you love or have questions about how the CTA might affect you, schedule a free call today.

This article is a service of Cedar Counsel. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love.