What is the Corporate Transparency Act?

On January 1, 2024, the Corporate Transparency Act (“CTA”) went into effect, requiring the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to collect beneficial ownership information (“BOI”) from corporations and limited liability companies (“LLCs”) registered in the U.S. 

A beneficial owner is an individual who, directly or indirectly, exercises substantial control over a “reporting company” or who owns or controls at least 25% of the ownership interests of the company. The mandatory disclosures include the individual’s full legal name, date of birth, address, and a unique identifying number such as an EIN or Social Security number, or an identification number issued by FinCEN. BOI information is reported through the Beneficial Ownership Secure System (“BOSS”), which is a “a non-public, secure registry” managed by FinCEN.

The cost of non-compliance can be highly punitive: Failure to disclose the required information to FinCEN may be subject to severe civil and criminal penalties, including a fine of up to $250,000 or imprisonment up to five years.

What is Considered a Reporting Company?

The CTA regulations apply to “reporting companies,” which are further delineated as Domestic and Foreign Reporting Companies. Virtually any company established by filing organizational documents with a Secretary of State of any U.S. state is a “reporting company” and is subject to the reporting requirements. Even single member or trust-owned LLCs created anywhere in the U.S. are subject to the disclosure rules.

Almost all U.S. domestic LLCs are Domestic Reporting Companies, even if they were only established for personal wealth structuring purposes.

A Foreign Reporting Company is an entity established outside the U.S. that is registered to do business with a Secretary of State (or equivalent office). Foreign companies that are not required to register to “do business” are NOT foreign reporting companies under the CTA regulations. Each state’s statutes and the rules enacted by the various secretaries of state determine what level of activity constitutes “doing business” in the state. If a particular locality does not require a foreign company to register to do business, it is not considered a Foreign Reporting Company under the CTA regulations.

How Are Trusts Affected by the CTA?

Importantly, trusts are not “reporting companies” and are not subject to the CTA disclosure rules. Of course, there are scores of different types of trusts and many attractive trust jurisdictions that may provide appropriate planning solutions. The tax characteristics, privacy, and protection offered by a trust depends entirely on the type of trust, where it’s established, and how it’s managed.

Planning for non-disclosure of beneficial owner information to the FinCEN database requires careful analysis to determine if the foreign entity is exempt from the disclosure rules or if a certain type of trust framework achieves broader wealth planning objectives. Clients who place a high premium on privacy and who wish to keep their personal information out of a national “Financial Crimes” database should seek legal counsel to determine how to structure their entities with the CTA in mind. Bespoke Group actively works with its clients to navigate these reporting requirements while optimizing for privacy. 

Why FinCEN’s Regulations Endanger the Right to Privacy 

For decades, LLCs have been used both to enhance asset protection and to provide privacy for personal use holdings like vacation homes, non-mortgaged primary homes, or personal & family investment portfolios. It has been standard wealth planning practice to use trust-owned LLCs in robust privacy jurisdictions like Wyoming or South Dakota to allow affluent clients to hold real estate or other family assets in private structures, often within tax-advantaged irrevocable trusts. Financially and commercially successful individuals understandably seek to preserve their privacy and protect themselves and their family from curiosity seekers or from those with nefarious intent to harm the client or the client’s family.

The requirement for LLCs created and registered in the U.S. to report personal information to a federal database managed by the Financial Crimes Enforcement Network raises valid concerns for individuals focused on protecting their privacy.

These regulations and reporting processes may significantly affect the right to privacy for many individuals and families in the U.S. Personal information stored within a financial crimes database is not guaranteed to be protected from a data breach, and digital records are effectively permanent historical and traceable records. Furthermore, with these regulations in place, efforts to protect one’s privacy through an LLC structure puts individuals in the uncomfortable position of being tracked within a financial crimes database. Many people prefer the ability to protect their privacy without coming under the scrutiny of financial crimes enforcement agencies or any type of criminal enforcement agency.

A Precedent Has Been Set

Another important factor to consider is the potential expansion of this act over time, resulting in additional beneficial ownership information being collected at the federal and state level. Now that a precedent has been set, expanding the scope of information that could be collected in the future is potentially a lower hurdle.

Since the initial rollout of the CTA, various states have been working on their own reporting requirements, often focusing on narrower categories of “reporting companies”. In addition to placing greater administrative burdens on individuals and corporations, state-level BOI collection will likely raise concerns regarding privacy and could potentially increase the risk of data breaches as this information is stored in a separate database. Moreover, states may implement more frequent data collection timelines, and companies that do not adhere to these requirements could face additional fines and penalties.

Our Focus on Privacy

Privacy is generally understood to be a fundamental human right and preserving and protecting the privacy of our clients is central to our services. Our team is dedicated to providing industry-leading wealth management solutions, and privacy is a key factor in every decision we help our clients make. The Corporate Transparency Act presents new challenges for our industry, and in an ever-changing regulatory environment, Bespoke will always look for opportunities to optimize for privacy while maintaining compliance with existing regulations.

Additional Resources: FinCEN Beneficial Ownership Reporting

FinCEN Beneficial Ownership Information Reporting Rule Fact Sheet
https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet

FinCEN Beneficial Ownership Information FAQ
https://www.fincen.gov/boi-faqs

Beneficial Ownership Reporting Outreach and Education Toolkit
https://www.fincen.gov/boi/toolkit

If you’re interested in learning more about Bespoke’s approach to private wealth management and how we can help you build a secure financial future, we invite you to reach out to us directly. We’d be happy to set up a confidential consultation at your convenience.

Thank you for considering Bespoke as your partner in wealth management. We look forward to the opportunity to work with you.

This information is intended for general educational purposes only and should not be construed as legal or investment advice.

Matt McClintock and Abbie M.B. Everist Highlight the Urgency of Digital Asset Planning in New Bloomberg Article: Don’t Let Volatile Digital Assets Blow Up a Client’s Estate Plan.

Esteemed estate planners Matt McClintock and Abbie M.B. Everist have penned an insightful piece for Bloomberg, underscoring the critical need for addressing digital asset issues in the realm of estate planning. As the digital asset landscape remains in its early stages, McClintock and Everist emphasize the complexity and uncertainty that comes with the novel nature of these assets, the industries that govern them, and the technology utilized to administer them.

In their article, McClintock and Everist caution that the lack of standardization and understanding surrounding digital assets poses a significant challenge for estate fiduciaries, who may be ill-equipped to navigate the complexities of these assets in the event of an individual’s passing. The authors argue that a proactive approach to digital asset planning is essential to ensure the seamless transfer of these assets and to protect the interests of beneficiaries.

“Given the rapidly evolving nature of digital assets and the potential legal and technological hurdles that may arise, it’s imperative that estate planners and their clients take a proactive approach to addressing these issues,” said Matt McClintock. “Our article aims to shed light on the importance of this often-overlooked aspect of estate planning and equip professionals with the knowledge they need to effectively navigate this complex landscape.”

Read the paper here.

About the Authors

Matt McClintock, JD, Founder and Executive Managing Director at The Bespoke Group a wealth strategies advisory firm that is significantly invested in the digital world.

Abbie M.B. Everist, JD, LLM, MBA, MA, Managing Director, National Tax Office, Private Client Services in Sioux Falls, S.D., and Vice Chair of the ABA Generation-Skipping Transfer Tax Committee.

During the 2008 recession, many families took advantage of the down markets and leveraged
gifting options to reduce taxes. 2022 once again provided such an opportunity. How long this
environment will last is difficult to predict, but with high exemptions combined with depressed asset values caused by rising interest rates and fears of inflation and/or a recession, this moment in time may be the best strategic gifting opportunity for years to come.

Advantages of the Current Estate and Generation-Skipping Transfer (GST) Tax Exemptions
Since 2000, the federal estate tax and generation-skipping transfer tax exemptions have steadily increased:

$675,000 in 2000
$1,000,000 in 2005
$3,500,000 in 2009

$10,000,000 in 2017 (indexed for inflation)

In 2022, the inflation adjustment increased the exemption to $12,060,00 per person; in other words, this is the maximum amount a U.S. citizen or resident can give away or die owning in 2022 without paying gift or estate tax.  Alternatively, if an estate were to exceed this limit, a 40% federal estate tax rate would apply to the excess amount.  (The GST tax is in essence a second layer of estate tax for transfers that skip a generation or more.)

In addition to federal taxes, some states do levy inheritance or estate taxes, but many places, such as California, Colorado, and Wyoming, do not.

How Much Wealth Can Be Gifted Without Tax Liability?
The amount you can gift free of tax depends on the current lifetime exemption at the time of the gift or upon your death. If you make lifetime gifts exceeding $16,000 per recipient per calendar year, you must file a gift tax return and allocate a specific amount of your estate and GST exemptions toward that gift. Significantly, the Internal Revenue Service (IRS) has made it clear that making lifetime gifts when an exemption limit is high will not result in any tax if the exemption is lower when you die. The gift keeps its exemption limit that was current at the time of your gift. Under the current law, unless Congress intervenes, this exemption is scheduled to fall back or “sunset” to $5 million indexed for inflation (roughly $6 million in 2022) on January 1, 2026. Given the current historically high exemptions and the possibility that these exemptions will be much lower in the future, lifetime gifts that use some or all your exemption are best. Any asset transferred, plus its appreciation from the date of transfer, will not be treated as a countable estate asset since it now belongs to the recipient.

Leveraging Gifts in a Down Market

There are two specific types of gifts typically used to transfer wealth during the current down
market: Making Individual Annual Gifts for the maximum Gift Tax Exemption Amount
2022 had an annual $16,000 per person limit. This gift tax annual exclusion applies to all gifts made to the recipient during the tax year – including birthday gifts, holiday gifts, and any other gifts during the year. Annual exclusion gifts may be made in the form of cash or any other property, and they may be made outright or in trust(s).

Make Lifetime Gifts Using All or Part of Your Lifetime Maximum Exemption

One of the best methods for creating generational wealth is by not gifting cash but making large lifetime gifts of assets that are likely to increase in value significantly over time. When asset values are depressed, it can be particularly advantageous to make carefully structured, leveraged gifts, usually into protective long-term trusts. As depressed or discounted assets are gifted into protective trusts, the future increase in the value of those assets will be out of the donor’s estate for federal transfer tax purposes.  Further, those protective trusts may allow the family’s wealth to avoid estate and GST tax for many generations.

Capital Gain Tax Considerations

Careful gift planning should take into consideration not only the federal transfer tax implications, but also the impact the gift may have on capital gain tax when the asset is later sold by the donee. Capital gain tax is a specific type of income tax levied on any increase in value from the date the owner acquired the property and the date the owner disposes of the property. The value of the property when the owner initially acquired the property is the owner’s “basis.” In the case of gifts made by the owner to a donee during the owner’s lifetime, the donee receives the donor’s basis in the property. (This is called “carryover basis.”)

In the case of gifts made after the owner’s death (for property included in the owner’s estate), under current law the recipient’s basis in the property is reset at the asset’s value on the owner’s date of death.  This is often called a “step-up” in basis.

When contemplating whether to make gifts during life or at death, it is important to compare the implications of capital gain tax with the implications of the estate tax.

Learn More About Gifting Your Assets Intelligently

Estate planning requires careful consideration of tax in all its forms, but also requires consideration of a process and structure to prepare heirs to responsibly grow into the gifts and inheritance they will someday receive. Bespoke Services helps affluent individuals and families strategically protect and enjoy the wealth they’ve worked hard to build.

The following information is intended for general educational purposes only and should not be construed as legal or investment advice.