Trusts And The CTA

By Stanley Foodman

On April 18, 2024, FinCEN updated FAQs that address Trusts and the CTA (Corporate Transparency Act). Trusts are vehicles that can assist in the preservation of wealth and property for future generations, protect assets, or carry out a charitable purpose. A trust is an entity created and governed under the state law in which it was formed. A trust involves the creation of a fiduciary relationship between a grantor, a trustee, and a beneficiary for a stated purpose. Trusts continue to grow in popularity despite significant set up cost, and the complexity of the filing and reporting. Understanding Trusts and the CTA is important because if a trust is a Reporting Company it will be required to file a Beneficial Ownership Report. In addition, if a Trust owns or has control of a Reporting Company, then the individual beneficial owners personal information must be reported to FinCEN. In sum, it is of significant importance that Trusts and the CTA are understood given the ingrained complexity in trusts and how trusts can present compliance challenges. Under the CTA, a person who willfully violates the BOI reporting requirements may be subject to civil penalties of up to $591 for each day that the violation continues. Moreover, a person who willfully violates the BOI reporting requirements may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000.

Trust Definitions as per the FinCEN Beneficial Ownership Guide

• A domestic entity such as a statutory trust, business trust, or foundation is a reporting company only if it was created by the filing of a document with a secretary of state or similar office. Likewise, a foreign entity is a reporting company only if it filed a document with a secretary of state or a similar office to register to do business in the United States.
• State laws vary on whether certain entity types, such as trusts, require the filing of a document with the secretary of state or similar office to be created or registered.
• If a trust is created in a U.S. jurisdiction that requires such filing, then it is a reporting company, unless an exemption applies. This implies that every trust with ownership or significant control over a reporting company must undergo a thorough review to ascertain if the level of ownership or control necessitates the reporting of individual trustees and beneficiaries.

The FinCEN Beneficial Ownership Guide also states that:

A trustee of a trust or similar arrangement may exercise substantial control over a reporting company. Examples of direct ways to exercise substantial control over a reporting company are:

• Board representation.
• Ownership or control of a majority of voting power or voting rights.
• Rights associated with financing or interest.

Examples of indirect ways to exercise substantial control over a reporting company are:

• Controlling one or more intermediary entities that separately or collectively exercise substantial control over a reporting company.
• Through arrangements or financial or business relationships with other individuals or entities acting as nominees.

The following individuals may hold ownership interests in a reporting company through a trust or similar arrangement:

• A trustee or other individual with the authority to dispose of trust assets.
• A beneficiary who is the sole permissible recipient of trust income and principal or who has the right to demand a distribution of or withdraw substantially all of the trust assets.
• A grantor or settlor who has the right to revoke or otherwise withdraw trust assets.

Excerpts from the? FAQs regarding Trusts and the CTA

1. 14. Can beneficial owners own or control reporting companies through trusts?

Yes, beneficial owners can own or control a reporting company through trusts. They can do so by either exercising substantial control over a reporting company through a trust arrangement or by owning or controlling the ownership interests of a reporting company that are held in a trust.

1. 15. Who are a reporting company’s beneficial owners when individuals own or control the company through a trust?

A beneficial owner is any individual who either: (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of a reporting company’s ownership interests. Exercising substantial control or owning or controlling ownership interests may be direct or indirect, including through any contract, arrangement, understanding, relationship, or otherwise.

Trust arrangements vary. Particular facts and circumstances determine whether specific trustees, beneficiaries, grantors, settlors, and other individuals with roles in a particular trust are beneficial owners of a reporting company whose ownership interests are held through that trust.

For instance, the trustee of a trust may be a beneficial owner of a reporting company either by exercising substantial control over the reporting company, or by owning or controlling at least 25 percent of the ownership interests in that company through a trust or similar arrangement. Certain beneficiaries and grantors or settlors may also own or control ownership interests in a reporting company through a trust. The following conditions indicate that an individual owns or controls ownership interests in a reporting company through a trust:

• a trustee (or any other individual) has the authority to dispose of trust assets;
• a beneficiary is the sole permissible recipient of income and principal from the trust, or has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or
• a grantor or settlor has the right to revoke the trust or otherwise withdraw the assets of the trust.

This may not be an exhaustive list of the conditions under which an individual owns or controls ownership interests in a reporting company through a trust. Because facts and circumstances vary, there may be other arrangements under which individuals associated with a trust may be beneficial owners of any reporting company in which that trust holds interests.

1. 16. How does a reporting company report a corporate trustee as a beneficial owner?

For purposes of this question, “corporate trustee” means a legal entity rather than an individual exercising the powers of a trustee in a trust arrangement.

If a reporting company’s ownership interests are owned or controlled through a trust arrangement with a corporate trustee, the reporting company should determine whether any of the corporate trustee’s individual beneficial owners indirectly own or control at least 25 percent of the ownership interests of the reporting company through their ownership interests in the corporate trustee.

For example, if an individual owns 60 percent of the corporate trustee of a trust, and that trust holds 50 percent of a reporting company’s ownership interests, then the individual owns or controls 30 percent (60 percent × 50 percent = 30 percent) of the reporting company’s ownership interests and is therefore a beneficial owner of the reporting company.

By contrast, if the same trust only holds 30 percent of the reporting company’s ownership interests, the same individual corporate trustee owner only owns or controls 18 percent (60 percent × 30 percent = 18 percent) of the reporting company, and thus is not a beneficial owner of the reporting company by virtue of ownership or control of ownership interests.

The reporting company may, but is not required to, report the name of the corporate trustee in lieu of information about an individual beneficial owner only if all of the following three conditions are met:

• the corporate trustee is an entity that is exempt from the reporting requirements;
• the individual beneficial owner owns or controls at least 25 percent of ownership interests in the reporting company only by virtue of ownership interests in the corporate trustee; and
• the individual beneficial owner does not exercise substantial control over the reporting company.

In addition to considering whether the beneficial owners of a corporate trustee own or control the ownership interests of a reporting company whose ownership interests are held in trust, it may be necessary to consider whether any owners of, or individuals employed or engaged by, the corporate trustee exercise substantial control over a reporting company. The factors for determining substantial control by an individual connected with a corporate trustee are the same as for any beneficial owner.

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