money laundering and your estate plan

How  A New Act Intended To Combat Money Laundering Could Affect Your Estate Plan.

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Starting on January 1, 2024, under a new law called the Corporate Transparency Act (CTA), owners of certain business entities must file a report with the federal government, including details regarding 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, limited liability company, family limited partnership, etc.) as part of your existing estate plan. In that case, this is essential information you will need to know to ensure that you comply with the new law.

 What is the Corporate Transparency Act?  The CTA is a law that requires business entities it identifies as reporting companies to disclose certain information about the company and its owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Under the CTA, a reporting company is defined as a corporation, limited liability company (LLC), or other similar entity (i) created by filing a document with the secretary of state or a similar office under the laws of a state or Indian tribe or (ii) formed under the laws of a foreign country and registered to do business in the United States.[1] The following information about the reporting company must be included in the report[2]:

  • company’s legal name and any trade names or doing business as (d/b/a) name
  • street address of the principal place of business
  • the jurisdiction where the business was formed
  • tax identification number

Additionally, the reporting company must provide the following information to FinCEN about its beneficial owners, defined as persons who hold significant equity (25 percent or more ownership interest) in the reporting company or who exercise substantial control over the reporting company[3]:

  • full legal name
  • date of birth
  • current address
  • unique identification number from an acceptable identification document

For reporting companies created on or after January 1, 2024, the same information must be provided about the company’s applicant, who is the person who files the creation documents for the reporting entity.

 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, such as an LLC, certain information about your trust may also have to be disclosed under the CTA because it may be deemed to be a beneficial owner.

 Does the CTA impact you?   Many business regulations apply only to large businesses, but the CTA specifically targets smaller entities. If you own a small business, you may be subject to this act unless your business falls under one of the stated exemptions, which primarily apply to industries that are already heavily regulated and have their 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 in the United States.[4]

Complying with the requirements of the CTA is of the utmost importance if you own a business entity or have one as part of your estate plan. We routinely create entities that might qualify as reporting companies as part of our clients’ estate plans. These include LLCs and family limited partnerships.

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.

Asset Protection. Because an LLC is a separate legal entity from its members, the LLC’s creditors can typically recover only business debts from the LLC’s money and property, not the member’s personal accounts or property. Also, if the proper formalities are in place, the member’s personal creditors may not be able to reach the LLC’s accounts and property to satisfy the member’s personal debts.

Note: In some states, a single-member LLC does not enjoy the same protection from the member’s personal creditors. The rationale of these laws is that your creditors should be able to recover your personal debts through your LLC interests to satisfy their claims because no other members will be negatively impacted by the LLC’s seizure of money and property.

Probate Avoidance. Anything owned by the LLC—retitled into the name of the LLC during your lifetime, bought by the LLC, or transferred by operation of law at your 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. By using an LLC to own accounts and property, the LLC—not you—owns them. However, if you own the membership interest in your name, transferring the membership interest at your death may still need to go through the probate process.

Family Limited Partnerships.  A family limited partnership (FLP) is owned by two or more family members, created to hold the accounts, properties, or businesses contributed by one or more family members. An FLP has at least one general partner responsible for the partnership’s management, 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 who are permitted to vote on the partnership agreement but are not authorized to manage the partnership. The limited partners receive the income and profits of the partnership but have no personal liability for the partnership’s debts or obligations.

Asset Protection. This estate planning strategy is helpful because an FLP can help protect accounts, properties, and businesses held by the entity from your and your family’s creditors. After all, those items are not owned by you and your family as individuals but instead are owned by the entity. If a creditor obtains a judgment against you or your family for a claim unrelated to the FLP, it is more difficult for the creditor to access anything that the FLP owns to satisfy that claim.  Also, because of its lack of control and restrictions on selling a partnership interest, the value a limited partnership interest you give to a family member may be discounted, allowing you to maximize your annual gift tax exclusion and lifetime estate and gift tax exemptions.

 What do you have to do to comply with the CTA? 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. For entities created on or after January 1, 2024, and before January 1, 2025, submit the initial reports within 90 days of the entity’s creation. Entities created on or after January 1, 2025, will have 30 days to submit the reports.  Depending on your unique situation, having a business entity as part of your estate plan can be an excellent tool. If you currently have one of these entities or are considering forming one, don’t hesitate to contact us to discuss the next steps to ensure that you fully comply with the requirements of the CTA. Give us a call to schedule an appointment.

[1] 31 U.S.C. § 5336(a)(11).

[2] 31 C.F.R. § 1010.380(b)(1)(i).

[3] 31 U.S.C. § 5336(b)(2)(A).

[4] Id. § 5336(a)(11)(B)(xxi).

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