As part of Congress’ ongoing fight against fraud, corruption, terrorist financing and money laundering, lawmakers passed the Business Transparency Act (CTA) on January 1, 2021, as part of of the 2021 law on the authorization of national defense. The CTA contains significant new federal reporting obligations and imposes heavy civil fines and criminal penalties for non-compliance. This can have a particularly onerous impact on estate planning clients who achieve their planning goals through the use of one or more business entities.
Effective January 1, 2022, beneficial ownership information must be reported to the Treasury Department’s Financial Crimes Network (FinCEN) for a business entity that is considered a âreporting companyâ. Except as expressly provided in the CTA, a “reporting company” includes a joint stock company, a limited liability company, a limited partnership, a limited liability partnership, a limited liability partnership, a family limited partnership. or any other similar entity which is:
- created by filing a document with the Secretary of State of a State or similar office under the laws of a State or Indian tribe; or
- formed under the law of a foreign country and registered to do business in the United States by filing a document with the Secretary of State or similar office under the laws of a state or d ‘an Indian tribe.
Currently, sole proprietorships, trusts, certain partnerships and other entities that do not conceal a person’s identity are not included as a reporting corporation. However, based on ongoing reviews of beneficial owners and reports provided to Congress, these types of entities could be included in future legislation.
Beneficial ownership information includes full legal name, date of birth, current residence or business address, and a unique identification number such as a driver’s license number or passport number for a person who, directly or indirectly, through a contract or other arrangement, exercises âsubstantial controlâ or owns or controls at least 25% of the âinterestsâ of a reporting company. A âbeneficial ownerâ, however, does not include a minor, when a parent of the minor makes a declaration; persons who act as agents, intermediaries, depositaries or agents; a person whose control arises solely from the employment of a reporting company; an individual whose only interest is a right of inheritance; or a creditor of the reporting company, unless the creditor is a beneficial owner. At a minimum, a reporting company must identify a person to be declared as the beneficial owner if no person controls more than 25% of the ownership interest.
On the effective date, the beneficial owner of a reporting company that has been previously incorporated or registered will have up to two years to report to FinCEN as prescribed by the LTC. For a reporting company formed or registered after the effective date, a beneficial owner will be required to make a declaration at the time of formation or registration. All updates to beneficial owner information should be reported within one year of a change. Civil penalties for non-compliance include fines of up to $ 500 for each day the violation continues and criminal fines of up to $ 10,000 per day and / or jail terms of up to ‘at two years.
In conclusion, for those who use business entities as part of their estate planning strategy, meeting CTA obligations will be important, given the potential civil and criminal penalties that can be imposed for non-compliance.