On January 1, 2024, a new piece of federal legislation came into effect that creates new (and potentially complex) reporting requirements for many types of business entities created in the Commonwealth of Kentucky.
The Corporate Transparency Act (CTA) imposes new information reporting obligations on business entities such as corporations (including S-Corporations), LLCs, limited partnerships, and LLPs among others. Beginning on January 1, 2024, such “reporting companies” will have to disclose personal information about 1) the company itself; 2) the “beneficial owners” of such company (referred to as “Beneficial Ownership Information” or “BOI”); and 3) the “company applicants” who filed the initial applications with the Secretary of State to formally establish or register the company. For reporting companies formed prior to January 1, 2024, they will have one year (until January 1, 2025) to file the initial BOI report. For all reporting companies formed on or after January 1, 2024, the company has 90 days after the date it receives notice from the Secretary of State that its creation has become effective to file its initial BOI report. And prospectively, for any reporting company formed on or after January 1, 2025, the company will only have 30 days after receiving notice from the Secretary of State to file its BOI report.
Failure to abide by these new reporting requirements can result in significant civil penalties, including a failure to comply penalty of $500-per-day for each day beyond the required filing deadline, as well as potential criminal penalties. The purpose for such a reporting regime and harsh penalties is to help the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) crack down on the use of shell companies for conducting fraudulent transactions and engaging in illicit or criminal enterprises.
Why does this matter to estate planning? Envision this commonplace scenario: Husband and Wife, both in their mid-50s set up an appointment to discuss putting an estate plan into place. Husband and Wife have 2 college-age children; both Husband and Wife work full-time jobs and each have multiple tax-deferred retirement accounts; Husband and Wife own their personal residence jointly with right of survivorship; and to supplement their income, Husband and Wife purchase 3 single-family rental properties through an LLC that they set up in 2018, with Husband and Wife both listed as members of the LLC. Lastly, Husband and Wife have expressed worry about their children having to deal with the cost and duration of probate in Kentucky. On first impression, a revocable living trust appears to be a good fit to satisfy their goals. Seems like a pretty straightforward example, doesn’t it?
It is, but now with an asterisk. The LLC that Husband and Wife set up back in 2018 – it is a “reporting company” under the terms of the CTA. As members of the LLC, Husband and Wife are responsible for ensuring that the LLC satisfies the CTA reporting requirements by filing the LLC’s BOI report by January 1, 2025. But, in order to appropriately fund their new revocable living trust to meet their goal of avoiding probate, Husband and Wife will need to name the revocable living trust as the owner of the LLC’s membership interests – the trust becomes the beneficial owner of the LLC. As soon as that happens, the CTA reporting requirement is now entangled with Husband and Wife’s estate plan. The trustee(s) – and potentially the beneficiaries – of the revocable living trust are now subject to having their personal information disclosed as part of the LLC’s BOI report. This may not change the outcome of their estate planning goals, but it does add another wrinkle that estate planners will need to consider within their decision-making matrix. This is especially important because it is not hard to imagine how more complex estate planning scenarios than the one outlined above, where a series of trusts and multiple small businesses that meet the definition of a “reporting company” can simultaneously expand and obscure exactly who is the beneficial owner of the reporting company, whose BOI must be disclosed, and who should ultimately be responsible for ensuring the appropriate information is reported.
Because these new reporting requirements under the Corporate Transparency Act can quickly become complex where trusts are involved, and because the penalties can be very harsh, it is critically important for estate planners to be aware of and discuss the CTA when meeting with clients who are considering the use of trusts as part of their estate plan. Estate planners must be able to identify when estate planning techniques will create or change the beneficial ownership of a reporting company, thus affecting BOI reporting under the CTA, and be able to effectively communicate with the client as to the necessary steps they should take to comply with the law. As always, it is good practice to communicate to estate planning clients that they should contact their tax advisors and any legal counsel that were engaged for the purpose of establishing a business entity to determine whether such entity meets the definitions of a “reporting company” under the CTA, as well as to confirm that such reporting requirements and deadlines are being satisfied.