Have a Trust that Owns Part of A Corporation, LLC, Limited Partnership? Can You Afford a $182,000 Fine?

Dear Mr. Miller:

I own a 30% interest in a family corporation that holds real estate in California.  Someone mentioned that I have to file some type of form with the Federal Government.  I thought Living Trusts didn’t need government approval and certainly not the Federal Government.  What’s going on? Can I just ignore this government encroachment on my rights?

Investment Retiree

When Trusts Meet Reporting Companies
Reporting Requirements for Trusts
Benefits of Transparency for Trusts
The Price of Non-Compliance–Now here is where it gets really interesting
What You Should Do

Dear Retiree:

While real estate can be a very lucrative investment and Living Trusts can be very helpful for estate planning, when they come together complexities can arise.  In this case, that complexity arises through the Corporate Transparency Act.  The Corporate Transparency Act (CTA), a recent law aimed at combating financial crime, adds a new layer of complexity for these situations. Let’s unravel the details and see how the CTA might impact you, including the potential consequences of non-compliance.

When Trusts Meet Reporting Companies:  The CTA primarily targets newly formed businesses and certain existing ones called “reporting companies.” These typically include Limited Liability Companies (LLCs), Limited Partnerships, and corporations. However, the act also shines a light on who truly controls these companies, even if ownership isn’t straightforward. This is where trusts come in.

If a trust owns a significant share (usually 25% or more) of a reporting company, the CTA kicks in. But the trust itself isn’t considered the beneficial owner. The CTA focuses on the individuals who ultimately benefit from the trust’s holdings, such as:

Settlor: The person who created the trust.
Beneficiary: The person who receives the trust’s income or assets.
Trustee: The person who manages the trust’s assets.

In some cases, all three might be considered beneficial owners depending on the specific terms of the trust and their level of control.

Reporting Requirements for Trusts:  When a trust holds an interest in a reporting company, the company itself, not the trust, is responsible for filing a “Beneficial Ownership Information (BOI) Report” with the Financial Crimes Enforcement Network (FinCEN). This report should detail information about each beneficial owner associated with the trust, including their:

Full Name
Date of Birth
Address
Driver’s license or passport number (or a few others)

The key takeaway here is that even though the trust isn’t directly reporting, the information about the individuals behind the trust becomes part of the BOI report.

Benefits of Transparency for Trusts:  The CTA might seem like an administrative burden, but it serves a vital purpose.  Here are some of the benefits that are cited by its proponents:

Reduced Financial Crime: By identifying the people who truly benefit from a trust’s holdings in a company, authorities can better track suspicious activity and prevent financial crimes like money laundering.
Increased Trustworthiness: Knowing who ultimately controls a company, even if ownership is held through a trust, can help foster trust and confidence in business transactions.
Improved Compliance: For trustees, understanding the reporting requirements under the CTA can help ensure they are acting in accordance with the law.

The Price of Non-Compliance–Now here is where it gets really interesting:  While the CTA promotes transparency, failing to comply can come with hefty penalties. Here’s what you might face for non-reporting:

Financial Penalties: Companies that intentionally provide false or misleading information or fail to report altogether can be fined up to $10,000 per day.  In addition, a civil penalty of up to $500 per day can be imposed for failing to file a complete or updated BOI report.  $500 may not seem like a lot but that is per day.  That’s over $182,000 per year!
Criminal Charges: Willful non-compliance can lead to criminal charges, resulting in fines of up to $10,000 and imprisonment for up to two years for individuals involved.

Remember, the CTA is a relatively new law, and legal challenges are ongoing. However, taking steps towards compliance now minimizes potential risks.

What You Should Do:  If you’re a trustee managing a trust that holds an interest in a reporting company, it’s crucial to understand your obligations under the CTA. Here are some steps you can take:

Consult with a Legal Professional: An attorney can help you navigate the complexities of the CTA and ensure you comply with the reporting requirements.  Note that our expertise is in estates, trusts, and elder law, not business law.  However, we customarily refer our clients to experts in fields in which we do not practice.
Communicate with Beneficiaries: Open communication with beneficiaries regarding the CTA and how it might affect the trust is essential.
Stay Informed: The CTA is a new law, and regulations are still evolving. Keep yourself updated on any changes that might impact trusts and reporting requirements.

While the CTA might add a new layer of administrative tasks for trusts, it ultimately promotes a more transparent and secure financial system for everyone. By understanding your role in this process, you can help ensure compliance, avoid penalties, and contribute to a healthier business environment.