On January 1, 2024, the Corporate Transparency Act (CTA) came into effect. This significant move aims to combat financial wrongdoings including money laundering, corruption, tax evasion, and fraud by mandating certain businesses in the United States to disclose key ownership details to the federal government, unless they meet specific exemption criteria.
Interestingly, while the act exempts 23 types of entities, such as banks, credit unions, and large operating companies, it primarily targets smaller entities that might otherwise remain obscured from regulatory oversight.
The enforcement of the CTA falls under the jurisdiction of the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury, requiring non-exempt entities to report Beneficial Ownership Information (BOI). This initiative allows, under judicial approval, the disclosure of ownership and control details to law enforcement agencies, with severe penalties for non-compliance that include both civil fines and criminal charges.
For wealth advisors and Registered Investment Advisors (RIAs) working within estate planning, it's crucial to understand the implications of the CTA. Many estate plans involve corporate structures, making it imperative to assess whether these entities fall within the scope of the CTA's reporting requirements.
Existing entities prior to January 1, 2024, face a filing deadline by December 31, 2024. Entities established within the year 2024 have a 90-day reporting window, and those formed post-January 1, 2025, must report within 30 days. Importantly, any changes in reported information require an update within 30 days.
Reporting obligations under the CTA may arise in various estate planning scenarios, including ownership of limited liability companies, closely held family businesses, trusts with significant entity interests, and positions of control or authority within a trust structure.
Notably, trusts must report if they hold a 25% or greater interest in an entity obligated to file under the CTA. The regulations around trusts are nuanced, often necessitating detailed analysis to determine reporting obligations for trustees, beneficiaries with significant rights, and other individuals with authority over trust assets.
The complexity of the CTA extends to roles such as trust protectors and advisors, where the degree of control can trigger reporting requirements. This aspect underscores the importance of specialized legal and financial guidance to navigate the reporting landscape. While some law and accounting firms may advise on CTA obligations, a growing number of specialized service providers are emerging to assist with compliance efforts.
A notable development occurred on March 1, 2024, when the federal district court in the Northern District of Alabama declared the CTA unconstitutional, challenging its legitimacy under Congress’ enumerated powers. The impact of this decision, potentially limited to the case's parties, introduces an element of legal uncertainty surrounding the act's enforcement.
For RIAs and wealth advisors, staying informed about the CTA and its implications for estate planning is paramount. The act not only introduces new compliance dimensions but also underscores the ongoing evolution of financial regulation in the United States, necessitating vigilant monitoring and strategic planning to ensure client interests are safeguarded and regulatory obligations are met efficiently.
