Corporate Transparency Is Here: The Effects on Elder Law Practice

Corporate Transparency Is Here: The Effects on Elder Law Practice

10.1.2024

By Todd M. Hirsch and Julia L. Santo

What Is the Corporate Transparency Act?

The Corporate Transparency Act was enacted as part of the Anti-Money Laundering Act of 2020, for the purpose of curbing illicit activities such as money laundering, tax fraud, human and drug trafficking and terrorist organization financing.^[1] To combat these issues, this legislation now mandates that companies conducting business in the United States report Beneficial Ownership Information to the government.^[2] The information collected is not made available to the general public, but instead is only available to statutorily authorized government authorities.^[3]

The Corporate Transparency Act has been in full effect since Jan. 1, 2024, and elder law and estate planning practitioners must be aware of how the reporting obligations will change their practices and the responsibilities of their clients.

Which Companies Are Required To Report?

Companies that are required to report beneficial owner interests are called reporting companies. Reporting companies include corporations, limited liability companies or any other entity that was created in the United States by filing a document with a secretary of state or any similar office under the law of a state.^[4] Reporting companies must report information about their beneficial owners to the Financial Crimes Enforcement Network, a bureau of the U.S. Department of the Treasury.^[5]

Which Companies Are Exempt From Reporting?

There are 23 types of entities that are exempt from the Beneficial Ownership Information reporting requirements, including publicly traded companies, nonprofit organizations and certain large operating companies.^[6]

Most important for our practice area, personal trusts are generally not considered “reporting companies” because there is typically no government filing requirement upon creation of a trust. However, if a trust is the beneficial owner of an LLC, there may be reporting obligations, which are discussed in detail later in this article.

Who Is a Beneficial Owner?

A beneficial owner is any individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company.^[7] An individual can be a beneficial owner through both substantial control and ownership interests. In addition, it is possible for a reporting company to have multiple beneficial interests. Each reporting company must have a minimum of one beneficial owner, but there is no maximum number of beneficial owners who must report. For a trust that holds an ownership interest in a reporting company, the grantor, the trustee or even the beneficiary may be considered the beneficial owner.

There are five exceptions to the beneficial owner definition:

1. Minor child – This exception only applies if a parent or legal guardian’s information is reported in lieu of the minor child’s information. Also, when the minor child reaches the age of majority, the exception no longer applies, and an updated Beneficial Ownership Information report must be provided.
2. Nominee, intermediary, custodian or agent – If the individual is merely acting on behalf of an actual beneficial owner, then the actual beneficial owner must still report.
3. Employee – This exception assumes that the individual is not a senior officer of the reporting company.
4. Inheritor – The individual’s only interest in the reporting company is a future interest through a right of inheritance, such as through a last will and testament providing a future interest in a company. However, once the individual inherits the interest, this exception no longer applies.
5. Creditor – An individual who would meet the definition of a beneficial owner of the reporting company solely through rights or interests for the payment of a predetermined sum of money, such as a debt incurred by the reporting company.^[8]

What Information Needs To Be Reported to the Financial Crimes Enforcement Network?

Beneficial Owner

(1) Full legal name.

(2) Date of birth.

(3) Complete current address.^[9]

(4) Unique identifying number and issuing jurisdiction from one of the following non-expired documents (must include an image of the document):

1. U.S. Passport.
2. State driver’s license.
3. Identification document issued by a state, local government or tribe.
4. Foreign passport (if the beneficial owner has none of the above).^[10]

Importantly, if any of the above required information to report regarding beneficial owner changes, the Financial Crimes Enforcement Network must be updated within 30 calendar days of the change.^[11]

When Must the Report Be Filed?

If the reporting company was created or registered to do business before Jan. 1, 2024, the company has until Jan. 1, 2025 to file its initial report.^[12]

If the reporting company is created or registered on or after Jan. 1, 2024, and before Jan. 1, 2025, the company will have 90 calendar days to file its initial report after receiving actual or public notice that the company’s creation or registration is effective.^[13] Companies formed after Jan.1, 2025 will have only 30 days to file an initial beneficial owner report.^[14] 

What Are the Penalties for Failure To Comply?

The willful failure to report complete or updated beneficial ownership information to the Financial Crimes Enforcement Network, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information, may include civil penalties of up to $500 per day the violation continues or criminal penalties of up to two years in prison and/or a fine of up to $10,000.^[15] 

What Are the Reporting Requirements for Trusts?

As elder law practitioners, the institution of the Corporate Transparency Act requires us to assess our clients’ trusts and their holdings. The first question that must be asked is whether a trust is in fact a reporting company.

A personal trust is not a reporting company because a personal trust and accompanying documentation do not need to be filed with the secretary of state. However, if a trust owns an interest in a company that is mandated to report, then the trustee, grantor and even the trust beneficiaries may be required to report to the Financial Crimes Enforcement Network as a beneficial owner.

The following individuals may be considered a beneficial owner if a trust holds ownership interest in a reporting company:

1. A trustee or other individual with the authority to dispose of trust assets or vote shares of the report company.
2. 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.
3. A grantor or settlor who has the right to revoke or otherwise withdraw trust assets. This could include a settlor’s power to swap assets with the trust and reacquire assets from the trust.^[16]

If an individual other than the trustee (i.e., a distribution advisor, a trust protector, a member of the trust committee or an investment advisor) has the authority to dispose of trust assets, such individuals must also be reported to the Financial Crimes Enforcement Network.^[17] 

What Is the New York LLC Transparency Act?

The New York LLC Transparency Act was signed into law on March 1, 2024 and will go into effect starting on Jan. 1, 2026. The reporting requirements of this law will apply to all LLCs formed under New York law (domestic LLCs) and all LLCs formed in another jurisdiction but registered to do business in New York (foreign LLCs). Under this new law, all eligible LLCs must file with the New York State Department of State either a beneficial ownership disclosure form or an attestation of exemption.^[18]

The definition and reporting requirements under the LLC Transparency Act closely mirror those defined in the Corporate Transparency Act. Further, the terms “beneficial owner,” “reporting company,” “exempt company” and “applicant” have the same meanings in both the New York State and federal laws.^[19] While an LLC that meets one of the 23 exemptions to reporting under the federal law will also be exempt under the New York LLC Transparency Act, the exemption is not automatically applied in New York State. Instead, the LLC must file an attestation of exemption with the Department of State, under penalty of perjury, within 30 days of the LLC’s formation or qualification to do business in New York, which includes the specific exemption claimed and the basis for the exemption.^[20] 

Similar information is required of the beneficial owner, namely:

(1) Full legal name.

(2) Date of birth.

(3) Current home or business address.

(4) A unique identifying number from an unexpired passport, driver’s license or state identification card.^[21]

For newly formed LLCs, the beneficial ownership disclosures will have to be filed within 30 days of initial filing of the articles of organization or an application for authority.^[22] For all other previously formed or authorized LLCs, the beneficial owner disclosures must be filed within one year of the effective date (Jan. 1, 2027).^[23] 

After the initial filing, all LLCs that are considered reporting companies must file an annual statement to confirm or update the information provided in the initial beneficial ownership disclosure form. Any LLCs that filed an attestation of exemption will also have an annual reporting requirement.^[24] This is notably different from the federal law, which requires that changes in prior reports be filed within 30 days of any change.

The information reported to the Department of State will be deemed confidential and only released pursuant to either (1) a written request of the beneficial owner, (2) by court order, (3) to officers and employees of federal, state or local government agencies when necessary for the agency to perform its official duties or (4) for a valid law enforcement purpose, including an investigation by the attorney general.^[25] Failure to disclose the requested information can result in both monetary fines and possible suspension or dissolution of the LLC.

Conclusion

The use of trusts and LLCs has become commonplace in elder law. The recently enacted Corporate Transparency Act and forthcoming New York LLC Transparency Act impose strict new reporting requirements with stiff penalties for noncompliance. It is incumbent upon practitioners who represent grantors, trustees and beneficiaries of trusts to familiarize themselves with these new reporting requirements. Even if trusts are not inherently considered “reporting companies,” there may still be an obligation to report beneficial ownership information if the trust owns an interest in a company that does meet the definition of a “reporting company.” The reporting requirements on both the federal and state level will continue to be evaluated, and possibly amended, by regulators, and future changes and developments should be monitored for the protection and proper guidance of our clients.

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Todd M. Hirsch is an associate at Fulton Vittoria. His practice focuses on probate and estate administration, trust administration, estate planning, and estate tax matters. Julia L. Santo is an associate at Abrams Fensterman. Santo serves as the vice chair of the Sponsorship Committee of the Elder Law and Special Needs Section and as the vice chair of the CLE Committee of the Trusts and Estates Section. This article appears in a forthcoming issue of Elder and Special Needs Law Journal, the publication of the Elder Law and Special Needs Section.

Endnotes

[1] See Press Release, Statement by Secretary of the Treasury Janet L. Yellen on New Rule Under the Corporate Transparency Act (Sept. 29, 2022), https://home.treasury.gov/news/press-releases/jy0979; see also Treasury, National Strategy for Combating Terrorist and Other Illicit Financing (May 2022), https://home.treasury.gov/system/files/136/2022-National-Strategy-for-Combating-Terrorist-and-Other-Illicit-Financing.pdf.

[2] 31 U.S.C. § 5336.

[3] See Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59,498 (Sept. 30, 2022), https://www.federalregister.gov/d/2022-21020.

[4] See id.

[5] Id.

[6] See 31 U.S.C. § § 5336(a)(11)(B)(i)-(xxiv) (which contains the entire list of exemptions).

[7] 31 C.F.R. § 1010.380(d).

[8] 31 C.F.R. § 1010.380(b)(2).

[9] 31 C.F.R. § 1010.380(b)(1)(ii).

[10] 31 C.F.R. § 1010.380(b)(1).

[11] 31 C.F.R. § 1010.380(a)(2)(i).

[12] 31 C.F.R. § 1010.380.

[13] 31 C.F.R. § 1010.380(a)(1)(i)(A).

[14] 31 C.F.R. § 1010.380(a)(1)(ii)(B).

[15] See 31 U.S.C. § 5336(h)(3).

[16] 31 C.F.R. § 1010.380(d)(2)(ii)(C).

[17] 31 C.F.R. § 1010.380(d).

[18] N.Y. Limited Liability Law § 1107(a).

[19] See N.Y. Limited Liability Law § 1106(a).

[20] N.Y. Limited Liability Law § 1107(b).

[21] N.Y. Limited Liability Law § 1107(a).

[22] N.Y. Limited Liability Law § 1107(d).

[23] N.Y. Limited Liability Law § 1107(e).

[24] N.Y. Limited Liability Law § 1107(g).

[25] N.Y. Limited Liability Law § 1107(f).