US trusts must prepare for launch of beneficial ownership register

Although exemptions from the reporting obligation exist for most non-profit bodies and trusts, some will be caught by the regulations. The exemption does not apply to entities whose applications for tax exemption are pending with the Internal Revenue Service (IRS). Entities formed after 1 January 2024 have 90 days from the date of their creation to comply with the Act. It is highly unlikely that a newly formed non-profit will receive its tax-exempt status from the IRS before the filing deadline, because the IRS is currently takingbetween six and ten months to review exemption applications, says law firm Fox Rothschild. This processing delay means that new non-profits will probably have to file an initial report and will continue to be subject to the Act’s reporting requirements unless and until they receive tax-exempt status from the IRS.

Non-profit entities created before 1 January 2024 are in a less precarious position, as they are being granted a year to comply with the Act. However, they may have difficulties if their existing tax exemption is temporarily revoked because of unusual events, for example if they form a subsidiary or enter into a joint venture with a for-profit entity. In such cases, they must file an annual report within 180 days of the date the IRS revoked their tax exemption. This deadline will generally come before the non-profit is able to reinstate its tax-exempt status.

In either case, failure to report in time can potentially result in fines and jail time.

The exemption for trusts is limited to non-statutory trusts: those that are not created by filing a legal document with an official agency of the federal or state government. However, even non-statutory trusts could be affected by the Act if they have direct or indirect interests in companies that are caught by the legislation. In such a case, the company itself has the ultimate responsibility for filing beneficial ownership reports; however, a trustee of a trust that owns or controls that company arguably may have some duty to help it gather and report the information.

'The trustees, the beneficiaries, the settlor, and other individuals who may play a role in the administration of the trust could be deemed beneficial owners of the entity', says law firm Saul Ewing. 'Many routine trust changes (including, for example, a change of a trustee’s address, a change in trustees, a change of beneficiaries, or the death of the settlor, trustee, or beneficiary) may require additional reports to be filed with FinCEN.'

Moreover, the Act's intentionally broad 'substantial control' test for beneficial ownership means that almost any individual who can make important decisions impacting the reporting company may be deemed within scope of the reports, says Saul Ewing. 'Any trust or series of trusts which own interests in entities must be carefully and continually reviewed in order to accurately report beneficial owners...Trustees now must be cognizant that they arguably may have this new information gathering responsibility as well.'

Questions still remain about the scope of the Act. It is unclear whether an individual who is a trustee of several separate trusts that collectively own or control a reporting company is a beneficial owner. There are similar uncertainties where there are multiple current beneficiaries of a trust that has sufficient ownership or control over a reporting company, or when an individual is a beneficiary of multiple trusts that collectively have sufficient ownership or control over a reporting company.

Sources

• Fox Rothschild (non-profits)
• Saul Ewing (trusts)
• FinCEN (FAQs)
• STEP International News 5 October 2023: New US companies may be given extra time to file beneficial ownership reports