August 23, 2023

Understanding the Corporate Transparency Act and Its Impact on Directed Trusts

Written By: Daniel Gleich

Key Points 

  • The Corporate Transparency Act (CTA) introduces new reporting requirements for business entities, effective January 1, 2024.
  • Directed Trusts must adhere to the CTA's reporting requirements, including filing a Beneficial Ownership Information (BOI) Report.
  • Privacy and compliance can coexist within Directed Trusts by leveraging the privacy safeguards of trust-friendly jurisdictions like South Dakota.
Businessman looking at the Corporate Transparency Act law with a pen and magnifying glass.

The Corporate Transparency Act (CTA) is bringing significant changes to the reporting requirements for legal entities, including Directed Trusts and LLCs (effective January 1, 2024). The law’s primary purpose is to combat money laundering and strengthen national security by requiring more detailed reporting for all entities. The law also aims to weed out tax fraud simultaneously in the process. The CTA essentially brings America’s corporate reporting requirements in alignment with the laws around the rest of the world.

Individuals who benefit from the protection and privacy of a Directed Trust, LLC or any operating company need to be aware of the CTA. If you are a CPA, attorney, or financial advisor, here’s what you need to know so you can proactively guide your clients to compliance with the changes taking effect in 2024.

The Other Acronym to Know: BOI

The CTA introduces a fundamental shift in transparency and accountability by establishing a central registry for beneficial ownership in legal entities. 

Directed Trust investor on a laptop and holding a piece of paperwork with plants in the background.

A beneficial owner is defined as any of the following:

  • Someone who has significant influence over the company.
  • An individual who holds an executive position at the company, such as the president, CEO, or CFO.
  • A person who owns at least 25% of the shares in the company.
  • Specific trust arrangements and individuals or entities that act on behalf of others in those arrangements.

By collecting information on beneficial ownership, law enforcement agencies gain a vital tool to investigate and prevent financial crimes.

Directed Trusts, which play a key role in estate planning and wealth management, are not exempt from the reporting responsibilities brought forth by the CTA. Trustees, grantors, and beneficiaries of Directed Trusts must adhere to the new reporting requirements to ensure compliance. The new framework centers on filing a Beneficial Ownership Information (BOI) Report with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The BOI Report isn’t overly revealing or complex, but does remove a layer of privacy for those who have beneficial interest in a domestic reporting company.

Privacy vs. Secrecy (and the Balance of Transparency)

Enactment of the CTA has sparked discussions surrounding the delicate balance between privacy and secrecy. Directed Trusts, particularly those established in South Dakota, have long been sought after for their robust privacy protections. Privacy provisions in South Dakota's Directed Trust statutes offer a shield of confidentiality for trust participants. These provisions are why South Dakota is widely regarded as the best state to form a Directed Trust. While the CTA adds to the reporting requirements, it does not compromise the essential privacy safeguards provided by trust-friendly jurisdictions like South Dakota.

Full secrecy, on the other hand, is no longer permissible. With the CTA, it will not be possible to hide where wealth is coming from or whom it’s going to. The BOI database enables the government to see beneficial ownership interest in any entity and validate its legality. However, financial professionals can help clients understand that privacy and transparency can coexist in compliance with the CTA. By leveraging the advantages of Directed Trusts in privacy-oriented jurisdictions, clients can be compliant while safeguarding sensitive information regarding their wealth.

Illustration of transferring funds privately in compliance with the Corporate Transparency Act (CTA).

Educate Clients and Prospects

By staying informed and communicating the nuances of the CTA, financial professionals can help their clients with existing trusts navigate the new law. Annual reviews present an ideal time to bring the CTA into the conversation.

The law is both forward and backward looking. Some clients may benefit from considering changes in their trust structures. These changes could involve evaluating the suitability of the current trustee or custodian, exploring the possibility of changing the trust's jurisdiction, or even contemplating a trust decanting process.

The CTA can also provide a timely talking point when engaging with new prospects who are seeking effective wealth management strategies. By showcasing expertise in managing trust structures and addressing compliance requirements, financial professionals can foster trust and with current and new clients alike.

Two happy successful excited investors giving a high five celebrating successful investment.

When it comes to establishing and maintaining South Dakota Directed Trusts, Madison Trust is committed to providing education and support to advisors, intermediaries, and their clients as they navigate the regulatory landscape and its ever-evolving laws such as the CTA. Staying informed, communicating effectively, and offering strategic guidance can help you lead your clients to compliance with the CTA. Contact us with any questions you may have.

Disclaimer: All of the information contained on our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax or investment advice. Nothing of the foregoing, or of any other written, electronic, or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relayed as, legal, tax, investment advice, statements, opinions, or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.

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