Take-Away: FinCen just published its final rules with regard to beneficial ownership information reporting. The good news is that estate planning trusts are exempt from such reporting. The bad news is that if a trust owns a ‘reporting company’ some aspects of the trust and its beneficiaries will have to be disclosed to the Department of Treasury.

Background: On September 29, 2022, the Financial Crimes Enforcement Network (FinCen) issued its final rule to implement the 2021 Corporate Transparency Act (CTA) which is intended to fight money laundering and address the finance of terrorism by forcing the transparency of ‘shell companies.’ The goal  of this reporting is to establish, through the Department of Treasury, a national registry with regard to entities that are used, or could be used, to hide drug and human traffickers, and who use such entities to launder money or finance terrorism.

Scope: The rule will require most corporations, LLCs, and other entities that are created in or registered to do business in the United States, e.g. LLPs and LLLPs,  to report information about their beneficial owners. Specifically, the rule describes who must file beneficial owner information (BOI) what information must be reported, and when a report is due. The rule requires a reporting company to file reports with FinCen that identify two categories of individuals: (i) the beneficial owners of the entity; and (ii) the company applicants of the entity (think lawyers filing on behalf of their clients.)

Beneficial Owner: The rule defines a beneficial owner as any individual who directly or indirectly either (i) exercises substantial control over a reporting company, or (ii) who owns or controls at least 25% of the ownership interests of a reporting company. 

Exemptions: The rule exempts 5 types of individuals from the definition of beneficial owner. In addition, 23 types of entities are specifically excluded from the definition of reporting company. Examples include: businesses with other 20 full-time employees and which file federal tax returns reporting more than $5 million in gross receipts; tax exempt organizations; banks; insurance companies; some public accounting firms.

Substantial Control: The Rule defines the contours who has substantial control of a reporting company. That is anyone who is able to make important decisions on behalf of the entity.

25% Ownership:  The rule also provides examples of what constitutes the 25% ownership threshold, including how a reporting company should handle a situation in which ownership interests are held in trust.

BOI Information: The reporting company is required to identify itself and 4 pieces of information with regard to each of its beneficial owners: (i) name; (ii) birthdate; (iii) address; and (iv) unique identifying number and issuing jurisdiction, e.g. passport; driver’s license.

Company Applicant: The rule defines a company applicant to be only two persons: (i) the individual who directly files the document that creates the entity, e.g. the attorney who prepares and files the LLC Articles of Organization; or (ii) the individual who is primarily responsible for directing or controlling the filing of the relevant document by another.

Effective Date: The effective date for the rule is January 1, 2024. A reporting company that is created or registered before that date will have one year, until January 1, 2025, in which to file its initial report. A reporting company will have to file an updated report within 30 days when it becomes aware or has reason to know of the inaccuracy of information in earlier filed reports.

Penalties: There are both civil and criminal penalties for willfully providing false or fraudulent BOI’s or willfully failing to report complete or updated information. A violation can result in a civil penalty of $500 a day for each day the violation continues.  The criminal fine is not more than $10,000, or imprisonment for not more than 2 years, or both.

Trusts: A private trust, e.g. a conventional estate planning trust,  is not specifically included in the definition of a reporting company. That is because an estate planning trust is not formed through filing a document with the state.

See-Through Reporting Company: That said, a private trust that owns an interest in a reporting company is nonetheless included under the definition of beneficial owner in the Proposed Disclosure Regulations. The Proposed Disclosure Regulations identify control and ownership factors as they pertain to estate planning trusts, albeit not providing helpful guidance. An individual may directly or indirectly own or control an ownership interest in a reporting company by virtue of “through control of such ownership interest owned by another individual.” So, conceivably, a trust beneficiary might be viewed as having control over a trust that in turn owns a reporting company.

If a trust holds an ownership interest in a reporting company, the following are treated as beneficial owners of the reporting company: (i) a Trustee  of the trust or other individual (if any) with the authority to dispose of assets; (ii) a beneficiary who is the sole permissible recipient or income and principal from the trust or who has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or (iii) a grantor or settlor who has the right to revoke the trust or otherwise withdraw assets from the trust. [31 CFR Part 1010.380(d)(3)(ii)(C).]

Conclusion: Most small closely held corporations and LLCs will be required to file under the CTA. If a trust owns such a closely held corporation or a 25% or more interest in the corporation, some disclosures of the trust will be required by the CTA, and depending upon the rights of a trust beneficiary, it is possible that information with regard to trust beneficiaries will also be filed with FinCEN, which will be a big change to the long standing benefit of keeping the beneficiaries of a trust confidential and away from the public.