CareersCLIENT ALERT | TAX & WEALTH MANAGEMENT | AUGUST 2024
The Corporate Transparency Act and Estate Planning
The Corporate Transparency Act (CTA), enacted to combat financial crimes such as money laundering and terrorism financing, mandates that small businesses disclose beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). However, concerns are rising as businesses may not be adequately prepared for compliance. As of July, FinCEN has received only 2.7 million of the estimated 31 million Beneficial Ownership Information Reports that must be filed by January 1, 2025. In spite of this, Treasury Secretary Janet Yellen reiterated that the reporting deadline remains unchanged. Secretary Yellen noted, “FinCEN believes that the time frame is adequate for companies in existence before this year.”
CTA Impact on Estate Planning
The CTA’s impact extends to estate planning as well. Estate planning attorneys often help clients create privately held companies, for the purposes of owning certain assets, and ownership in these assets are transferred to trusts. Trusts are not “reporting companies” under the CTA. However, they are required to disclose information about their beneficiaries and any individuals with substantial control or ownership over the reporting companies owned in the trust. The term “substantial control” is defined broadly. It can encompass trustees, trust protectors, and beneficiaries with significant influence over the trust, as well as individuals indirectly connected to the trust who exercise substantial control through their roles within the company. When a business owner dies, the responsibility for CTA compliance falls to the person managing the decedent’s affairs, usually an executor or trustee.
Challanges to the CTA
Legal challenges to the CTA are emerging. A recent Alabama court ruling questioned the constitutionality of certain provisions of the Act, raising uncertainties about its enforcement in different jurisdictions. Similar cases have been brought in Massachusetts, Texas, Maine, Michigan, and Ohio. Despite these challenges, businesses must prepare to meet the reporting requirements and deadlines.
Conclusion
Lack of succession planning could result in crippling penalties and administrative chaos under the CTA. In extreme cases, non-compliance could jeopardize the ability of the business to conduct day-to-day activities. But with proper estate planning, it is possible to reevaluate the structure and management of the trust, safeguarding the estate and the business against the risk of unexpected legal and financial repercussions. Clear identification of beneficial owners is now crucial for accurate estate planning.
If you have any questions regarding the matters covered in this alert, please reach out to the lawyer(s) listed below or your usual Walter Haverfield contact.
Alex Kuzmik | Associate | Tax & Wealth Management | 216.619.7883 | akuzmik@walterhav.com
Sebastian C. Pascu | Partner | Tax & Wealth Management | 216.619.7870 | spascu@walterhav.com
This communication is for general information only. It is not a full analysis of the matters presented and should not be relied upon as legal advice. This may be considered attorney advertising in some jurisdictions.