Navigating the CTA Report with Trusts
By Samantha Perryman & Kyle Irvin
As you are likely aware, the Corporate Transparency Act (“CTA”)1 became effective at the beginning of this year. The CTA requires entities formed or authorized to do business in the United States to complete a Beneficial Ownership Information Report (“BOIR”) to disclose certain information regarding the business and individuals deemed to be “beneficial owners” of the business.
If a bank acts as trustee of a trust that owns 25% or more of a business entity that is required to report under the CTA, the bank (as the trustee) is a “beneficial owner” and must be disclosed on the business’s BOIR. Typically, the CTA requires that filers “look through” entities and report the individual owners and shareholders of entities that would otherwise be reported as beneficial owners.
This may leave you wondering whether the owners and shareholders of your bank will need to report their personal information if the owner or shareholder’s only connection to a reporting company is by being deemed to be a beneficial owner through their ownership of the bank that serves as Trustee of a trust where the trust owns more than 25% of the reporting company. A recent FinCEN FAQ released on April 18, 2024, provided additional guidance regarding the particular issue of owners and shareholders of a bank where the bank acts as corporate trustee of a trust(s) owning more than 25% of a reporting company. FAQ D.16 describes the scenario:
D. 16. How does a reporting company report a corporate trustee as a beneficial owner?
For purposes of this question, “corporate trustee” means a legal entity rather than an individual exercising the powers of a trustee in a trust arrangement.
If a reporting company’s ownership interests are owned or controlled through a trust arrangement with a corporate trustee, the reporting company should determine whether any of the corporate trustee’s individual beneficial owners indirectly own or control at least 25 percent of the ownership interests of the reporting company through their ownership interests in the corporate trustee.
1 31 U.S.C. § 5336.
For example, if an individual owns 60 percent of the corporate trustee of a trust, and that trust holds 50 percent of a reporting company’s ownership interests, then the individual owns or controls 30 percent (60 percent × 50 percent = 30 percent) of the reporting company’s ownership interests and is therefore a beneficial owner of the reporting company.
By contrast, if the same trust only holds 30 percent of the reporting company’s ownership interests, the same individual corporate trustee owner only owns or controls 18 percent (60 percent × 30 percent = 18 percent) of the reporting company, and thus is not a beneficial owner of the reporting company by virtue of ownership or control of ownership interests.
The reporting company may, but is not required to, report the name of the corporate trustee in lieu of information about an individual beneficial owner only if all of the following three conditions are met:
• the corporate trustee is an entity that is exempt from the reporting requirements;
• the individual beneficial owner owns or controls at least 25 percent of ownership interests in the reporting company only by virtue of ownership interests in the corporate trustee; and
• the individual beneficial owner does not exercise substantial control over the reporting company. (emphasis added)
In addition to considering whether the beneficial
In addition to considering whether the beneficial owners of a corporate trustee own or control the ownership interests of a reporting company whose ownership interests are held in trust, it may be necessary to consider whether any owners of, or individuals employed or engaged by, the corporate trustee exercise substantial control over a reporting company. The factors for determining substantial control by an individual connected with a corporate trustee are the same as for any beneficial owner.2
The above bolded part of the citation from the FAQ is incredibly important because in many cases it should allow the owners and shareholders of banks serving as corporate trustees of trusts to avoid reporting the personal information of the bank’s larger shareholders by simply reporting the name of the corporate trustee bank.
As an example, if main bank shareholder John Doe owns 80% of ABC Bank, and ABC Bank is corporate trustee of multiple and various trusts owning more than 25% of over 100 different
2 https://www.fincen.gov/boi-faqs.
entities that John Doe has no connection to because it is the trust department of ABC Bank that actually knows anything about the trusts and the 100 entities, John Doe’s personal information does not have to be listed on the BOIRs of the 100 different entities owned by the trusts due to his ownership of ABC Bank. As the citation states above, as long as the three criteria are met, ABC Bank can be listed as the beneficial owner of the 100 entities and be reported as described below, rather than listing John Doe’s personal information or personal FinCEN identifier on over 100 different entities he has no connection to other than his ownership of ABC Bank. To ensure you properly meet your reporting requirements in that case, you should contact an attorney who can analyze the ownership structure and determine your full reporting obligation.
In the event the bank’s owners and shareholders do not need to be reported under the above analysis, follow these steps to disclose the bank’s information on the reporting entity’s BOIR. The BOIR form can be accessed at this link: https://boiefiling.fincen.gov/. The first three pages of the form ask for information about the business entity and its company applicants (people who helped form the company with the Secretary of State).
On page four of the BOIR form, you will select the box in Item 37 to identify that the bank is an exempt entity3, and then fill in the legal name of your bank in Item 38, as depicted below. This completes your bank’s reporting requirements if the bank only needs to be disclosed as a trustee, and the owners and shareholders of the bank do not need to be reported, as further discussed above.
Certain beneficiaries of the trust may also need to be disclosed in addition to disclosing the bank as corporate trustee. The beneficiaries who need to be reported include: (1) any beneficiary with the power to revoke a revocable trust; (2) any beneficiary who is the sole recipient of income and principal of an irrevocable trust; and (3) any beneficiaries who may exercise a power of appointment during their lifetime, have a swap power, act as director in a directed trust, or have power to require a mandatory distribution or withdraw all trust assets.
3 Banks are exempt under 31 C.F.R. § 1010.380(c)(2)(iii).
To report these beneficiaries, you will need to click the blue “+” button near the top of page four, as shown above. You will then need to input the beneficiary’s information into Items 38-50 and attach a copy of the beneficiary’s unexpired US Driver’s License or US Passport in Item 51 by selecting “Add Attachment”, as shown below. You will need to complete one page per beneficiary who meets any of the reporting requirements listed above.
As a brief aside, the bank may also act as an owner of an entity organized to implement certain exchanges under IRS Code § 1031, often referred to as an Exchange Accommodation Titleholder (“EAT”). As long as your bank owns 100% of the EAT, the EAT has no reporting requirement under the CTA because it is a wholly owned subsidiary of an exempt entity under Exemption #22.4 Accordingly, the bank has no CTA requirements related to the EAT. If the EAT is transferred to the taxpayer upon completion of the exchange, the taxpayer will have thirty (30) days to complete the CTA report for the EAT because it will no longer be an exempt entity.
4 31 U.S.C. § 5336(3)(B)(xxii).
Let’s take a look at a hypothetical to help flesh out some of the more intricate aspects of CTA analysis as applied to trust powers and beneficiaries. Consider the following:
- ABC, LLC is a local for-profit seed company. ABC is managed by Mike Mouse, Manager. ABC is owned:
- 10% by the Minnè Mouse Spousal Lifetime Access Trust, with GHI Bank as Trustee, with a spousal lifetime limited power of appointment for Minnè to kids and grandkids.
- 40% by the Mike Mouse Spousal Lifetime Access Trust, with Tim Little as Trustee with a spousal lifetime limited power of appointment for Mike to kids and grandkids. Broad Trust Protector power to family accountant, Donald D. Whitewing, to change beneficiaries and order distributions from a Trust Distribution committee.
- 50% by DEF, Co., an entity that is owned 50/50 by Tim Little’s wife, Carol, and The Little Foundation, a 501(c)(3) private foundation. Tim Little serves as President of DEF, Co. and The Little Foundation is run by Tim and Carol’s daughter, Barb.
First off, Mike Mouse is deemed to exercise substantial control over ABC, LLC due to his role as Manager, so Mike Mouse’s personal information needs to be reported on ABC, LLC’s BOIR as a beneficial owner. Second, the Minnè Mouse SLAT does not own more than 25% of ABC, LLC so we do not have to worry about disclosing anyone related to the Minnè Mouse SLAT on ABC, LLC’s BOIR. Third, the Mike Mouse SLAT owns more than 25% of ABC, LLC, so we do have to analyze the Mike Mouse SLAT to determine who needs to be reported on the BOIR. Because Tim Little is Trustee of the Mike Mouse SLAT, Tim Little will have to report his personal information for ABC, LLC’s BOIR.5 Because Mike also has a lifetime limited power of appointment under the SLAT, Mike’s personal information would have to be disclosed on ABC, LLC’s BOIR due to his ability to appoint all of the assets outside of the trust; however, because Mike’s information is already disclosed due to his role as Manager, he does not need to be reported again. There is no requirement that Mike’s personal information be included a second time for this power of appointment role, nor do you have identify the role Mike has within or related to ABC, LLC or the reasons why you are listing Mike’s personal information on ABC, LLC’s BOIR. Donald D. Whitewing, as Trust Protector, seemingly has broad powers over the Trust and therefore, because of his potential substantial control over ABC, LLC via the Trust as Trust Protector, Donald D. Whitewing’s personal information would need to be listed on ABC, LLC’s BOIR. In addition, not enough facts have been given about the powers of the Trust Distribution committee, but presumably any distribution directors
5 Note: if the trustee of the Mike Mouse SLAT had been GHI Bank, the Bank, as Trustee would have to report as noted in page 3 of this article (assuming none of the other individuals included here were owners or shareholders of GHI Bank).
on the Trust Distribution Committee would also need to be reported if they have broad powers to distribute all the assets of the trust.
Finally, the other 50% ownership of ABC, LLC by DEF, Co. must be analyzed. Because Tim Little is President of DEF, Co. his personal information would have to be listed on ABC, LLC’s BOIR; however, just like Mike before, Tim has already been reported due to his role as Trustee of the Mike Mouse SLAT. Again, Tim’s information need not be included a second time on ABC, LLC’s BOIR due to Tim’s role as President of DEF, Co. nor do you have to identify the role or reason(s) you are listing Tim Little on ABC, LLC’s BOIR – you merely have to make sure each individual with a reporting requirement is reported for ABC, LLC in this hypothetical. In addition to identifying Tim as President, we must “look through” DEF, Co. to its owners. Carol is deemed to own 25% of ABC, LLC by way of her ownership of 50% of DEF, Co. (50% of ABC, LLC is owned by DEF, Co. and Carol owns 50% of DEF, Co.). Therefore, Carol’s personal information would need to be reported on ABC, LLC’s BOIR. Finally, The Little Foundation also owns 25% of ABC, LLC by way of its 50% ownership of DEF, Co. (50% of ABC, LLC is owned by DEF, Co. and the Foundation owns 50% of DEF, Co.). However, because 501(c)(3) private foundations are exempt,6 we would simply report The Little Foundation as an exempt owner on ABC, LLC’s BOIR in the same way that we reported the bank as exempt on page 3 of this article.
The applications of the CTA to trusts are varied and vast, but hopefully this article helps break it down into some understandable parts as trust departments begin to practically deal with its application. At the time of writing this article, we are presuming that the federal cases pending in Alabama and Michigan will not do away with the CTA, and that business entities and their professional advisors will be focused on complying with the CTA’s requirements until the deadline at the end of the year.7 Never fear though, by working through the statutes and reports, there is a way through the gauntlet.
6 31 C.F.R. § 1010.380(c)(2)(xix)
7 Although these legal challenges have been brought against CTA enforcement, it appears unlikely that any final resolution will be reached by the CTA’s filing deadline for business entities in existence prior to January 1, 2024, which is set for December 31, 2024.