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FinCEN Reporting Requirements for Trusts That Own Businesses

James E. Hickmon PLLC
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Beneficial Ownership Identification and Compliance

The Financial Crimes Enforcement Network (FinCEN), tasked with combating money laundering and ensuring transparency in financial transactions, has broadened its regulations in recent years to include new requirements for identifying beneficial ownership in various legal structures, including trusts that own businesses. Trusts present unique complexities when it comes to identifying beneficial owners, due to their layered structure and the varied roles within the trust itself. This scholarly article delves into FinCEN’s reporting requirements for trusts that hold ownership stakes in businesses, with particular focus on the identification of the Beneficial Owner Information (BOI). It explores the legal framework, discusses who qualifies as a beneficial owner, and provides practical examples of how these regulations apply. Additionally, best practices for trusts and businesses to maintain compliance with FinCEN regulations are outlined.

Introduction

Trusts have long been used as estate planning tools, offering flexibility, asset protection, and potential tax benefits. However, when a trust holds an ownership stake in a business, FinCEN’s reporting requirements regarding beneficial ownership come into play. The Corporate Transparency Act (CTA) of 2021, part of a broader push toward transparency in financial dealings, mandates the disclosure of beneficial ownership information (BOI) for many legal entities, including businesses owned by trusts. This regulatory shift aims to close loopholes that previously allowed anonymous business ownership, which could facilitate money laundering or other illicit financial activities.

This article provides a detailed examination of FinCEN’s reporting requirements for trusts that own businesses, focusing on how beneficial owners are identified in this context. By discussing the reporting process and providing real-world examples, the article seeks to clarify obligations for trustees, business owners, and legal professionals working with trusts.

FinCEN Reporting and the Corporate Transparency Act

The Corporate Transparency Act (CTA), administered by FinCEN, requires most U.S. businesses and entities to file reports identifying their beneficial owners. A beneficial owner is defined as an individual who directly or indirectly exercises substantial control over a company or owns at least 25% of its equity interests. However, when the entity in question is owned by a trust, determining who qualifies as a beneficial owner under the CTA becomes more nuanced.

Who is Subject to the BOI Requirement in Trusts?

When a trust owns a business, the roles within the trust—such as grantor, trustee, and beneficiary—can complicate the process of identifying who qualifies as a beneficial owner. Under FinCEN’s rules, individuals may be considered beneficial owners if they meet any of the following criteria:

  1. Trustees: In many cases, the trustee, who holds legal title to the trust’s assets and has control over the business held by the trust, is considered a beneficial owner. If the trustee has significant control or authority over the business decisions, they are subject to BOI reporting requirements.

  2. Beneficiaries: Beneficiaries of a trust may also be classified as beneficial owners if they are entitled to at least 25% of the trust’s assets or profits generated by the business. For instance, in a trust where multiple beneficiaries exist, any individual whose financial interest in the business exceeds the 25% threshold must be reported as a beneficial owner.

  3. Grantors: If the grantor of the trust retains control over the assets or has the ability to revoke the trust, they may be deemed a beneficial owner under FinCEN rules. This typically applies to revocable living trusts, where the grantor retains authority over the trust and its business holdings.

  4. Other Individuals with Significant Control: Any person who exercises significant control over the trust’s business affairs, even if they are not formally a trustee or beneficiary, may be considered a beneficial owner. This could include advisors or protectors in a trust arrangement, depending on their role in decision-making processes.

Example Scenario: Trust-Owned Business and BOI Reporting

Consider a small manufacturing business, ABC Manufacturing LLC, that is wholly owned by a trust. The trust was established by John Smith (grantor), with Mary Johnson acting as trustee. The trust has three beneficiaries: John’s two children, each entitled to 40% of the trust’s assets, and a charity that is entitled to the remaining 20%.

In this case, the BOI reporting would likely include:

  • Mary Johnson (Trustee): As the trustee, Mary has significant control over the business and would be considered a beneficial owner under FinCEN regulations.

  • John Smith (Grantor): If the trust is revocable, and John retains control over the trust’s assets, he would also be reported as a beneficial owner.

  • John’s Children (Beneficiaries): Each child, holding a 40% financial interest in the trust, exceeds the 25% ownership threshold and would therefore be reported as beneficial owners.

  • The Charity (Beneficiary): Although the charity holds a financial interest, it does not meet the 25% threshold, so it would not be considered a beneficial owner in this context.

This scenario illustrates how multiple individuals and entities within a trust structure can be subject to BOI reporting requirements, depending on their level of control and ownership.

FinCEN Reporting Requirements for Trusts

Under the CTA, trusts that own businesses must submit BOI reports to FinCEN, detailing all individuals who meet the beneficial ownership criteria. The following information must be included for each beneficial owner:

  1. Full legal name

  2. Date of birth

  3. Current residential address

  4. Unique identifying number from a government-issued document (e.g., passport, driver’s license)

These reports must be submitted electronically through FinCEN’s BSA E-Filing System, and businesses are required to update their BOI filings within 30 days of any change to their beneficial ownership structure (such as a change in trustee or beneficiary status).

Compliance Challenges for Trust-Owned Businesses

For businesses owned by trusts, compliance with FinCEN’s BOI reporting requirements can be challenging for several reasons:

  1. Complexity of Trust Structures: Trusts often involve multiple parties with varying levels of control and ownership, making it difficult to determine who qualifies as a beneficial owner. Trustees, grantors, beneficiaries, and other parties may all need to be considered under the rules.

  2. Evolving Roles and Ownership: Trusts, by their nature, are often subject to changes over time. Beneficiaries may change, trustees may be replaced, or the trust may be revoked altogether, leading to frequent updates to FinCEN filings.

  3. Confidentiality Concerns: Trusts are often used as private estate planning tools, and trustees or beneficiaries may be reluctant to disclose personal information required under the CTA’s BOI reporting rules. This can lead to compliance tensions, particularly for trustees managing complex or high-value estates.

Best Practices for Compliance

To ensure compliance with FinCEN’s BOI reporting requirements, trusts that own businesses should adopt the following best practices:

  1. Conduct a Beneficial Ownership Analysis: Trustees should carefully review the trust structure and identify all individuals who may qualify as beneficial owners under FinCEN rules. This includes analyzing the roles of trustees, grantors, beneficiaries, and any other individuals with significant control over the business.

  2. Implement Regular Reviews: Since trust structures can change over time, it’s important to regularly review the beneficial ownership status of individuals involved in the trust. Businesses should establish procedures for updating FinCEN filings whenever there are changes in trust administration or ownership.

  3. Seek Legal and Compliance Expertise: Given the complexity of FinCEN regulations and trust law, trustees and business owners should consult with legal and compliance professionals who are familiar with both estate planning and regulatory requirements. This will help ensure accurate and timely filings.

  4. Utilize Technology Solutions: FinCEN’s BSA E-Filing System can be streamlined using compliance software that assists in tracking ownership changes and generating BOI reports. Small businesses and trusts may benefit from investing in these tools to simplify their compliance processes.

Conclusion

FinCEN’s BOI reporting requirements under the Corporate Transparency Act have significant implications for trusts that own businesses. Identifying the individuals who qualify as beneficial owners can be complex, given the layered roles within a trust structure. Trustees, grantors, and beneficiaries all have the potential to meet the definition of a beneficial owner, depending on their level of control or ownership in the business. Trusts and businesses must navigate these requirements carefully to ensure compliance and avoid penalties. By conducting thorough ownership analyses, implementing regular reviews, and seeking expert advice, trusts can meet their reporting obligations under FinCEN’s evolving regulatory framework.