Avid readers of this newsletter are well advised of the impending Corporate Transparency Act (the “CTA”). The CTA is a set of rules and regulations intended to reduce financial crimes through increased reporting requirements for corporations and other entities and becomes effective on January 1, 2024.

The Financial Crimes Enforcement Network (“FinCEN”), a division of the Department of the Treasury that has been tasked with implementing and overseeing the CTA, predicts that once effective, the CTA will affect more than 30 million legal entities (limited liability companies, corporations, partnerships, etc.) currently operating within the United States.

In addition to the millions of small to medium-sized businesses that will be subjected to additional reporting requirements, the CTA will also apply to countless entities formed in conjunction with the preparation of estate plans.

Legal entities are vehicles commonly utilized by estate planning attorneys for a variety of purposes, some of which include, tax planning, increasing liability protection, simplifying the distribution process, and more. Despite the varied use of these entities and their deviation from the typical “hands-on involvement” and management of operating small businesses, they are nevertheless legal entities subject to the ownership reporting requirements of the CTA.

The CTA will require legal entities to provide information to FinCEN related to the identities of their “beneficial owners,” an individual or entity that exercises substantial control over the entity or who owns or controls at least 25 percent of the ownership in the entity.

The CTA broadly defines “ownership interest” and “control of ownership interest,” thus increasing the complexity of the analysis required when determining what information should be reported to FinCEN.

Entities created during the estate planning process must report to FinCEN upon formation and whenever there is a change in beneficial ownership information to ensure compliance with the requirements of the CTA. The CTA excludes from the definition of “beneficial owner” certain classes of individuals, some of which may be common in entities created in the estate planning process. For example, the CTA excludes minor children from the definition of “beneficial owner,” and, therefore, requires the information of another individual to be reported in lieu of the minor child’s information.

To ensure compliance with the CTA, owners of legal entities created as a part of the estate planning process should carefully review their estate planning and entity documents. To learn more about the potential reporting requirements of entities formed as part of your estate plan, contact Alex Montoya at [email protected].