HOW THE CORPORATE TRANSPARENCY ACT MAY AFFECT YOUR ESTATE PLAN
A new law called the Corporate Transparency Act (CTA) goes into effect on January 1, 2024. Under this law, owners of certain business entities must file a specific report with the federal government. In it, they must include details about the ownership of their entity.
The CTA was enacted to help combat money laundering, financing of terrorism, tax fraud, and other illegal acts. If you have an entity (corporation, LLC, family limited partnership, etc.) as part of your existing estate plan, read on for important information about how to comply with this new law.
What is the Corporate Transparency Act (CTA)?
The CTA is a law that requires certain business entities (reporting companies) to disclose information to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Under the law, a reporting company is defined as a corporation, limited liability company (LLC), or other similar entity created by filing a document with the secretary of state or a similar office. The following information about the reporting company must be included in the report:
company’s legal name and any trade names or doing business as (d/b/a) name
street address of the principal place of business
jurisdiction where the business was formed
tax identification number
Additionally, the reporting company must provide the following information to FinCEN about its beneficial owners:
full legal name
date of birth
unique identification number from an acceptable identification document
Beneficial owners are people who hold significant equity (25% or more ownership interest) in the reporting company, or who exercise substantial control over the reporting company.
For reporting companies created on or after January 1, 2024, the same information must be provided.
Note: Although a trust is not considered to be a reporting company under the CTA, if your trust owns an interest in a reporting company, certain information about your trust may also have to be disclosed because it may be deemed to be a beneficial owner.
Does The Corporate Transparency Act Impact Me?
The CTA specifically targets small businesses. If you own one, you're likely subject to this act unless your business falls under one of the stated exemptions. These exemptions primarily apply to industries that are already heavily regulated and have their own reporting requirements. Your business may also be exempt from the reporting requirements if it:
employs more than 20 full-time employees,
filed a return showing more than $5 million in gross receipts or sales, and
has a physical office located within the United States.
Complying with the requirements of the CTA is of the utmost importance if your estate plan contains a business entity. For example, an LLC or family limited partnership.
Limited Liability Companies
An LLC is a business structure that can own many types of accounts and property. These entities can be used to provide asset protection and probate avoidance.
Because an LLC is a separate legal entity from its members, the LLC’s creditors can't typically go after the member's personal property. Also, if the proper formalities are in place, the member’s personal creditors may not be able to reach the LLC’s assets.
Note: In some states, a single-member LLC does not enjoy the same protection from the member’s personal creditors.
Anything that is owned by the LLC (either by being retitled, bought by, or transferred into the LLC) throughout your lifetime or at death, will not go through the public, costly, and time-consuming probate process. The probate process only transfers accounts and property that you owned at your death. However, if you own the membership interest in your own name, the transfer of the membership interest at your death may still need to go through the probate process.
Family Limited Partnerships
A family limited partnership (FLP) is an entity owned by two or more family members. It is created to hold the accounts, properties, or businesses of family members. An FLP has at least one general partner who is responsible for the management of the partnership. This person has unlimited liability and is compensated by the partnership for their work according to the partnership agreement. An FLP also has one or more limited partners. These people are permitted to vote on the partnership agreement but are not authorized to manage it. The limited partners receive the income and profits of the partnership but have no personal liability for its debts or obligations. FLPs can be great asset protection and tax planning strategies.
An FLP can help protect accounts, properties, and businesses from your and your family’s creditors. This is because items in the FLP aren't owned by you and your family as individuals but instead by the entity. If a creditor obtains a judgment against you or your family for a claim not related to the FLP, it is more difficult for them to access anything that the FLP owns.
Because of its lack of control and restrictions on selling a partnership interest, the value of a limited partnership interest that you give to a family member can be discounted, allowing you to maximize your annual gift tax exclusion and lifetime estate and gift tax exemptions.
What Do I Have to Do to Comply with the Corporate Transparency Act?
To comply with the act, you should gather the required information for all reporting companies you own and all other beneficial owners. For entities created before January 1, 2024, submit the initial reports for each reporting company by January 1, 2025. The current requirement for reporting companies that are created after January 1, 2024, is that the initial report is due within 30 days of the entity’s creation. Please note, however, that a new rule has recently been proposed that would temporarily extend this deadline from 30 to 90 days for business entities formed during 2024. If implemented, this rule would allow additional time to understand and comply with the new requirements.
Having a business entity as part of your estate plan can be an excellent tool depending on your unique situation. If you currently have one of these entities or are considering forming one, please reach out to us to discuss the next steps to ensure that you fully comply with the requirements of the CTA. Give us a call at 614-389-9711 to schedule an appointment.
About the Author - Gregory S. DuPont, JD, CFP
Greg has been serving clients as an estate and tax planning attorney in Ohio since graduating from Capital University Law School in 1992. He obtained an accounting and finance degree from The Ohio State University. As a Certified Financial Planner, a designation that requires advanced coursework in a complete range of financial subjects, he is a rare financial professional who can provide cross-disciplinary solutions from the legal, tax and investment perspectives.
Greg is the co-author of the book: Protecting Your Future with Tax-Free Long-Term Care, and is a contributing author in Jack Canfield's best selling book The Recipe for Success.
He has been named one of Ohio's Top 100 lawyers, an invitation-only designation given by The National Advocates.