Unravelling the web of trust ownership:  How the US Corporate Transparency Act exposes complex business structures

A new federal law in the United States called the Corporate Transparency Act (CTA) came into effect on 01 January 2024. The CTA requires most business entities to report the personal information of its “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN). A beneficial owner is a person who: (i) owns at least 25% of the ownership interests of the reporting company, or (ii) is deemed to exercise substantial control over the reporting company. The CTA’s reporting rules become more burdensome when a reporting company is owned by one or more trusts, and particularly when the trustee is also an owner of the reporting entity individually. 

A trustee may be deemed to own and control an ownership interest in a reporting company when the trust itself holds such ownership interest, and the trustee has authority to dispose of trust assets. Likewise, a beneficiary may be deemed to own or control an ownership interest in a reporting company held by the trust if the beneficiary: (i) is the sole permissible recipient of income and principal from the trust; (ii) can demand a distribution of, or may withdraw substantially, all of the assets from the trust; or (iii) acts as a grantor or settlor with the right to revoke the trust or withdraw its assets. 

For instance, assume individual A owns 75% of company X, and trust Y owns 25% of company X. If individual B is a trustee of trust Y with the authority to dispose of trust assets, and individual C is the sole beneficiary of income and principal from trust Y, then all three individuals (A, B, and C) report as beneficial owners of company X.

An individual may hold ownership interests in a reporting company in different capacities. In such cases, the individual’s ownership interests are aggregated to determine if the 25% threshold is met. For example, if individual A owns 5% of company X, trust Y owns 10%, trust Z owns 10%, and individual B owns 75%, and individual A is a trustee with the authority to dispose of assets for both trust Y and trust Z, then both individual A and individual B would be deemed beneficial owners of company X. Here, individual A’s ownership interests in company X are aggregated, resulting in individual A owning or controlling at least 25% of company X.

Lastly, while not discussed in this article, but noted above, individuals may be considered beneficial owners if they exercise “substantial control” over an entity, irrespective of ownership percentage. Therefore, when determining who to report under the CTA, practitioners should carefully consider several factors, especially when entities are owned partially by trusts. 

First, practitioners must weigh the 25% ownership rule and aggregation principles outlined above. Additionally, practitioners must consider whether an individual exercises substantial control or influence over an entity. Even those with minimal direct ownership exercise substantial control if they hold powerful decision-making roles, or have indirect influence over the reporting company.

Thomas Campbell is associate attorney at McDonald Sanders. P.C. in Fort Worth, Texas. Thomas focuses on estate planning, probate, corporate law, and state and federal taxation.