The Corporate Transparency Act (CTA) introduces new reporting requirements that may indirectly affect trusts. While trusts themselves are not generally considered reporting companies, they may still need to report Beneficial Ownership Information (BOI) under certain circumstances. Specifically, a trust may be required to report BOI if it owns 25% or more of a reporting company’s interest or has substantial control over the reporting company. Additionally, certain individuals connected with the trust, such as trustees, beneficiaries, or the settlor, might be deemed beneficial owners of a reporting company and thus personally subject to CTA reporting requirements.
Given the complexity and the potential implications of the CTA, it is crucial for lawyers and CPAs to understand the nuances of these requirements to adequately advise their clients. Below are detailed considerations for evaluating whether a trust and its associated individuals need to comply with CTA reporting requirements.
Trustees may need to report BOI if they meet one of the following criteria:
If a trust owns 25% or more of the interest in a reporting company, an individual with the authority to dispose of trust assets must report BOI.
If the trustee has significant powers over a reporting company, they must report BOI. These powers include:
Control over a majority of the voting power or voting rights.
The right to remove and replace any senior officer of the reporting company.
The right to remove and replace a majority of the company’s board of directors or governing body.
The ability to direct, determine, or influence major decisions of the company, such as business scope, officer compensation, key contracts, and amendments to governing documents.
Beneficiaries of a trust that owns at least 25% interest in a reporting company are required to report BOI if:
Beneficiaries with future interests through inheritance are exempt from reporting.
Contingent beneficiaries are not required to report BOI until they become current beneficiaries with specific rights.
Beneficiaries with Crummey withdrawal rights over trust property may need to report BOI in certain situations.
Individuals with the power of appointment over trust property must report BOI if they can demand a distribution to themselves or others.
Settlors of a trust must report BOI if the trust owns at least 25% of a reporting company and the settlor has the right to:
Revoke the trust.
Withdraw any of the trust’s assets.
Revocable Trusts: Settlors of revocable trusts that own at least 25% interest in a reporting company are required to report BOI.
Irrevocable Trusts: Generally, settlors of irrevocable trusts do not need to report BOI, except under specific circumstances, such as with irrevocable grantor trusts where the settlor has substitution power.
When conducting a CTA analysis for trusts, it is crucial to consider an individual’s ownership interests in a reporting company. If an individual directly owns a portion of a reporting company that is below the 25% threshold, but a trust for that individual’s sole benefit owns an additional interest that, combined, exceeds the 25% threshold, the individual must report BOI.
Lawyers and CPAs must carefully examine trust instruments and understand the specifics of the reporting company and its governing documents to determine BOI reporting obligations. Awareness and proper interpretation of the CTA’s requirements are essential for compliance and to provide accurate guidance to clients managing trusts and associated reporting companies.
By staying informed about these regulations, professionals can ensure that trusts and their associated parties adhere to the necessary reporting standards, thereby avoiding potential legal complications and penalties. FileForms is an industry-leading service provider providing guidance and filing solutions to Lawyers and CPAs in need of a trusted partner that can assist in serving trusts and their business clients.
