The Corporate Transparency Act and Estate Planning

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The beneficial ownership information (BOI) reporting requirements mandated by the Corporate Transparency Act (CTA), which go into effect on January 1, 2024, have clear implications for business entities that were not previously compelled to provide information on their ownership or management. However, they can also affect trusts, depending on the business assets a trust holds. Unfortunately, while the Final Rule issued in September 2022 clarified some aspects of implementation, it also leaves many unanswered questions about how to determine who is considered a beneficial owner in these cases.

Understanding How BOI Reporting Intersects with Trusts

Though the definition of a reporting company in the CTA is broad, most trusts do not qualify because they are not formed by filing a document with a secretary of state or similar office. A trust may be considered a beneficial owner, though, if it owns or controls 25 percent or more of a reporting company’s ownership interests or exercises substantial control over such a company. The wrinkle is that the trust itself can’t be reported as the beneficial owner because a beneficial owner must be an individual.

It’s worth noting here the “Mom and Pop” effect created by the CTA’s large operating company exemption because the type of closely held family business that may well make up a trust’s business holdings is likely to fall outside of the definition provided. To be considered exempt as a large operating company, the business must:

  • Employ more than 20 full-time employees in the United States, and
  • Have filed federal income tax returns in the previous year demonstrating more than $5M in gross receipts or sales (excluding gross receipts and sales from sources outside of the US), and
  • Have an operating presence at a physical office within the US.

While the ownership and control structures of business entities that do not meet these criteria may be less complex than those of larger entities, thus limiting the potential number of beneficial owners, the addition of a trust can make the picture more complicated.

Because both “ownership interest” and “substantial control” are defined very broadly under the CTA, the possible individuals who could be considered a beneficial owner in a trust depends on the terms of the trust arrangement. Here’s what we know—and what we don’t.

Potential Beneficial Owners in a Trust

The most obvious place to start in determining beneficial ownership in a trust is with the trustee. They are considered to exercise substantial control of a reporting company through the trust’s interest in that entity if they have the authority to dispose of trust assets. However, beneficiaries and grantors can also be considered to own or control ownership interests held in trust under certain circumstances:

  • Beneficiary: If they are the sole permissible recipient of income and principal for the trust, or if they have the right to demand a distribution of trust assets or may withdraw substantially all such assets.
  • Grantor or settlor: If they have the right to revoke the trust or withdraw its assets.

While these cases are relatively clear, the regulatory language provided does not cover a number of other common scenarios or clarify the role of other individuals who might be involved in the administration of a trust. For example, what happens in cases where there are multiple beneficiaries? How does the regulation apply when decisions concerning distributions are made by committee? Are trust advisors or protectors considered to exercise substantial control? If beneficiaries don’t provide the necessary information for BOI filing, is the trustee liable for failure to report?

The good news is that existing companies have up to one year from the implementation of the Final Rule (until January 1, 2025) to make their initial BOI filing with US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). However, given the potential complexity and the number of unanswered questions left by the guidance provided so far, those affected are advised not to wait to start figuring it out. The consequences of failing to file or filing inaccurately can include stiff fines or even jail time.

The Trusts & Estates team at Bridge Law LLP can help you determine if your trust arrangements require BOI reporting and keep you in compliance with the law. To schedule your consultation, contact us here.

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