Starting January 1, 2024, the Corporate Transparency Act mandates that personal information must be submitted to the Treasury Department regarding certain private "reporting companies." (A "reporting company" under the CTA generally refers to a corporation, limited liability company, or other similar entity created by filing a document with a secretary of state or similar office under the law of a state or Indian tribe or formed under the law of a foreign country and registered to do business in the United States. However, the CTA also provides a list of exemptions for certain types of entities that are not required to report.) This reported information includes individuals serving as officers or directors of reporting companies, as well as beneficial owners who have direct or indirect control of 25% or more of the company.
Determining direct ownership or control is simpler compared to indirect control, especially when stocks or equivalents are held in one or multiple trusts. Reporting is required for trustees if they possess at least 25% ownership interest in a reporting company and have the authority to dispose of trust assets.
Trustees must report themselves and any beneficiaries if the trust holds at least 25% ownership and control of a reporting company, the beneficiary is the sole recipient of the trust's income and principal, or the trust's Grantor retains the right to revoke the trust or withdraw assets. Reporting is also necessary if the trust holds any amount of ownership and control in the reporting company, and the trustee (or an advisor, protector, designated representative, or other individual) either owns a majority of voting rights, can direct important company decisions, or has the authority to replace a majority of Directors or senior officers.
Certain trustees and beneficiaries are exempt from reporting, including corporate trustees not controlled by beneficiaries, minors (although their parents or guardians are required to report), employees, nominees, custodians, or agents for the trustee, individuals anticipating future trust benefits, creditors of the trust, and non-profit entities.
In addition to the initial reporting, trustees must update the information whenever there are changes such as trustee resignations, beneficiaries coming of age, changes in trustee or beneficiary addresses, and expirations or renewals of passports or driver's licenses included in the information. When assessing the level of control, trustees must also consider the amount of ownership or control in the reporting company that the beneficiary has outside of the trust.
Navigating the intricate landscape of legal and financial compliance with the Corporate Transparency Act will be a formidable challenge. Lawyers, accountants, Trust Officers, Wealth Managers and other professionals who are fiduciaries, or advise fiduciaries, are responsible for managing trusts face the daunting task of keeping track of trustees, grantors, and beneficiaries while ensuring compliance with the CTA.
We are looking into whether there is a AI-powered solution to reduce the time and costs of compliance, and I would expect others will as well, but until then clients will be looking at bearing the costs of having each and every trust reviewed and analyzed to determine if the trust has ownership or control over a reporting company, the terms of trust will trigger the beneficial owner reporting requirements.
Matthew Erskine is managing partner at Erskine & Erskine.