Trusts and the Corporate Transparency Act
The Corporate Transparency Act requires that non-exempt businesses (reporting companies) file a beneficial ownership information (BOI) report with FinCEN disclosing individuals with 25% or more of a beneficial ownership interest or who exercise substantial control. While this analysis can be straightforward in most situations, one area where it can be more difficult is with a reporting company where a trust has a direct or derivative ownership interest. While the trust may be the “owner” of the company, it is not the “beneficial owner.” Instead, we must look through the trust to the individuals to determine the beneficial owner.
A beneficiary of a trust will be treated as a beneficial owner if that beneficiary is the sole income and principal beneficiary of the trust. A beneficiary will also be a beneficial owner if the beneficiary has the right to demand or withdraw all, or substantially all, of the trust assets. If the person who created the trust (the grantor) can revoke the trust, the grantor will be considered a beneficial owner. Finally, a trustee or other individual who can dispose of trust assets will be treated as a beneficial owner.
Unfortunately, the regulations governing the Corporate Transparency Act do not provide much guidance on what it means to dispose of trust assets. The ability to sell the interest in the business or distribute it to another would clearly constitute disposing of trust assets. The Trustee in most trusts would likely have this power. It gets a bit murkier if someone holds a lifetime power of appointment or other power to distribute trust assets. Absent further guidance to the contrary, disclosing the holder of a lifetime power of appointment as a beneficial owner is advisable.
Some trusts have individuals such as investment trustees that control the investing of trust assets. If this power includes the ability to dispose of the interest in the business this person should also be listed as a beneficial owner. If your trust has a trust protector with the ability to remove the trustee, it is an open question whether this person would also be treated as a beneficial owner.
As with any other change that must be updated in the BOI Report, changes in trustees or beneficiaries will necessitate timely updating your company’s BOI Report. As you can see there are numerous issues that need to be looked at whenever a trust has a direct or indirect ownership interest in a reporting company. As always obtaining competent legal advice is recommended.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.