November 13, 2023

Discretion vs. Disclosure: The Burden of Family Legacy Confronts the Corporate Transparency Act

By Sandra Prisco, Director, Tax & Business Services & Jo Anna M. Fellon, CPA, National Leader – Private Client Services

Discretion vs. Disclosure: The Burden of Family Legacy Confronts the Corporate Transparency Act Private Client Services

The growing community of ultra-high-net-worth families is increasingly adopting the family office model. These family offices are built with several priorities in mind, one of which is the need to protect family privacy. A family office allows a family to have all personal and financial information in one secure place, accessible by only a limited number of people. The family office can, therefore, serve as the guardian and gatekeeper for the family. With recent legislative changes, family offices are being forced to walk the tightrope of complying with required corporate transparency while ensuring the much-desired privacy of various financial strategies.

The Corporate Transparency Act (“CTA”) enacted in 2021 is effective on January 1, 2024, and will be administered by the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”), with a stated purpose to help combat money laundering, terrorist financing, corruption, and tax fraud. FinCEN has already begun releasing reporting guidelines. For existing entities, the first reports are due by January 1, 2025. New entities formed after the effective date must report within 30 days of their formation. Additionally, any changes to beneficial ownership, name, or address must also be reported within 30 days.

In today’s inflationary environment, families are looking to diversify their portfolios with a mix of real assets, including equities, gold, and real estate. Real estate holdings, commonly held through private family limited partnerships and family-owned S corporations, will be subjected to the new reporting requirements, thereby piercing the veil of privacy. The CTA exempts several types of entities — generally, companies that are already subject to rigorous state or federal reporting or oversight.

Under the CTA, the identity and personal information of individuals, those who directly or indirectly exercise substantial control over the company or directly or indirectly own or control 25% or more of the company, are referred to as “beneficial owners.” While many high-net-worth families look to steward wealth for future generations by way of trust vehicles that are commonly funded with an equity interest in the family business, the appointment of a mutual trustee across multiple family trusts with similar holdings may now be subjected to this stringent reporting by way of “controlling” 25% or more interest in the company. This is similar to the constructive ownership rules within partnership entity tax filings as it relates to the identification and disclosure of family relationships among those deemed to be an owner of 50% or more of the entity. The CTA could also force the disclosure of personal details about any individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual or as a grantor, settlor, or beneficiary of a trust or similar arrangement that holds an ownership interest. This would result in both a “price to pay” by the family entities as it relates to the cost of compliance, as well as disclosure of the ties that bind the family’s network of trusted advisors.

The reporting company must provide the following personal, identifying information about each of its beneficial owners in its Beneficial Ownership Information (BOI) report: legal name, date of birth, address of residence, and copies of documentation provided to verify identity. Reported information will be disclosed only to federal and state law enforcement agencies in specified circumstances and with the reporting company’s consent and to financial institutions in connection with their know-your-customer (“KYC”) obligations. Failure to comply will result in significant civil and criminal penalties, up to and including two years in prison.