Mark A. Limardo, Partner

The U.S. Department of the Treasury (FinCEN) continues to issue important guidance on the Corporate Transparency Act (CTA) through updates to its Frequently-Asked Questions.  You can find links to the FAQs, the CTA regulations, and other CTA guidance in our Corporate Transparency Act Resource Center. 

• “Reporting Company” means an entity required to file a “beneficial ownership interest” report (“BOI Report”) under the CTA, absent an applicable exemption.

Trustee Ownership under the CTA.  Under the CTA, a trustee is considered to own or control trust assets if the trustee has the power to sell or otherwise dispose of trust assets (which is almost always the case under a standard trust document).  Therefore, if 25 percent or more of a Reporting Company is held in a trust, the trustee must be reported as a “Beneficial Owner” (as defined under the CTA) on the Reporting Company’s BOI Report, even though the trustee has no economic interest in the trust assets.

In general, a Reporting Company cannot list an entity as Beneficial Owner.  So, if a Reporting Company is held in a trust with an entity (corporate) trustee, the Reporting Company must be able to look through the entity trustee to find any individual who must be listed as a Beneficial Owner on the Reporting Company’s BOI Report.

Limited Exception for Corporate Trustee.  In a recent update to the FAQs, FinCEN issued guidance on a limited exception to this “look-through” rule for entity (corporate) trustee arrangements.   If an entity trustee arrangement meets three conditions (as discussed below), the Reporting Company can report the entity trustee as a Beneficial Owner in lieu of an individual who otherwise would been reported as Beneficial Owner solely as a result of such individual’s status as an equity owner (e.g., a shareholder) of the corporate trustee.  To take advantage of this “no look-through” rule with respect to a particular individual, the entity trustee arrangement for a Reporting Company must meet the following three conditions:

1. the entity (corporate) trustee is itself exempt from the CTA (e.g., “large operating company,” public company or bank);
2. absent this exemption, the individual is treated as a beneficial owner of the Reporting Company solely because the individual is an equity owner (e.g., shareholder or partner) of the entity trustee; and
3. the individual does not otherwise control the ownership interest in the Reporting Company or exercise “substantial control” over the Reporting Company

Example 1.  As the trustee of Family Trust, Trust Company, which itself is exempt from the CTA as a “large operating company,” owns 100 percent of the stock of Reporting Company.  Individual X owns 100 percent of Trust Company but has no direct involvement with the administration of Family Trust or the Reporting Company.  Individual Y, as an employee and representative of Trust Company, provides trustee services to Family Trust.

• Reporting Company may report Trust Company as a Beneficial Owner in lieu of Individual X, because Trust Company is CTA-exempt and Individual X’s status as a Beneficial Owner of Reporting Company arises solely as a result of Individual X’s status as a shareholder of Trust Company.
• Reporting Company must report Individual Y as a Beneficial Owner, because Individual Y’s status as Beneficial Owner arises as a result of Individual Y’s ability to dispose of the Reporting Company stock and/or ability to exercise “substantial control” over the Reporting Company.

Example 2.  Same as Example 1, except that Trust Company is not itself exempt from the CTA.

• Reporting Company must report both Individual X and Individual Y as Beneficial Owners.

So Now What?  Any Reporting Company that is either 25-percent or more owned by or subject to the “substantial control” of a trust needs to start planning for CTA compliance.  If the trustee is an entity, the Reporting Company at a minimum must report as a Beneficial Owner any trustee employee directly providing trustee services.  If the Reporting Company wants to use the “no look-through” rule outlined above, the Reporting Company will also need to confirm that the trustee entity is itself CTA-exempt.  Because a Reporting Company probably cannot access sufficient information about an entity trustee and its employees, the Reporting Company may find itself forced to rely upon representations from an entity trustee, both as to the identity of any trustee-associated Beneficial Owner and the applicability of the “no look-through” rule.  In this case, the Reporting Company may want to seek indemnification protection from an entity trustee if any representation proves to be incorrect or out-of-date.

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For more information on this and other CTA matters, please contact:

Mark A. Limardo at + 1 212 592-1494 or [email protected]
Daniel A. Etna at + 1 212 592-1557 or [email protected]
Leah Kelman at + 1 973 274-2004 or [email protected]
Ellen L. Shapiro at + 1 212 592-1533 or [email protected]
Fred R. Green at + 1 212 592-5910 or [email protected]
Louis Tuchman at + 1 212 592-1490 or [email protected]
Theresa J. Balducci at + 1 212 592-1481 or [email protected]

© 2024 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.