FinCen Reporting of Information Concerning Beneficial Ownership Held By Trusts

Now that the Beneficial Ownership Information Reporting Requirements final rule (“BOI Reporting Rule”) adopted on September 30, 2022 by the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury has finally taken effect,[1] questions continue to arise about the implementation of the BOI Reporting Rule and how it will apply (or not apply) to various entities and individuals. In this article, we discuss the reporting of beneficial ownership information (“BOI”) involving trust arrangements.

In general, the BOI Reporting Rule will require many millions of small business entities formed in the United States, including closely held corporations and limited liability companies, to report to FinCEN specified information (the BOI) about the beneficial owners who own or control such entities, as well as the company applicants who form or register the companies. Companies that are required to report their BOI under the BOI Reporting Rule are referred to as “reporting companies.” The term “beneficial owner” is broadly defined to include any individual who, directly or indirectly, either (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25 percent of the company’s ownership interests.[2] An individual may be considered a beneficial owner of a reporting company through a trust or similar arrangement under either of these tests.

First, “substantial control” is broadly defined to include: service as a senior officer of the entity; authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); and direction or substantial influence over “important decisions” made by the company, such as the nature, scope, and attributes of its business and any major expenditures or investments.[3] An individual may “directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a reporting company” in various ways, including through: board representation; ownership or control of a majority of voting power or voting rights; rights associated with any financing arrangement or interest in the company; or any other contract, arrangement, understanding, relationship, or otherwise.[4]

Second, the term “ownership interests” includes, among other things, “[a]ny equity, stock, or similar instrument” evidencing an ownership interest in the reporting company.[5] An individual may directly or indirectly own or control such an ownership interest “through any contract, arrangement, understanding, relationship, or otherwise,” including through a “trust or similar arrangement.”[6] In particular, the BOI Reporting Rule identifies three individuals who will be deemed to own or control trust assets (such as stock) for the purpose of determining who must report: (1) “a trustee of the trust or other individual (if any) with the authority to dispose of trust assets”; (2) a beneficiary who (a) “[i]s the sole permissible recipient of income and principal from the trust” or (b) “[h]as the right to demand a distribution of or withdraw substantially all of the assets from the trust”; and (3) “a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust.”[7] FinCEN has confirmed that, “depending on the specifics of the trust arrangement, the ownership interests held in trust could be considered simultaneously as owned or controlled by multiple parties in a trust arrangement,”[8] for example, by a trustee and a beneficiary. In that event, the reporting company must report the information for each party to FinCEN if the 25 percent ownership threshold is met.

One additional item to be aware of arises because trust arrangements often involve minors. The BOI Reporting Rule generally excepts minor children, as defined under the law of the state in which a domestic reporting company is formed or a foreign reporting company is first registered, from the definition of the term “beneficial owner.”[9] However, the exception applies only if the reporting company instead reports the required information for a parent or legal guardian of the minor child.[10] FinCEN has emphasized that the reporting company must submit an updated report when a minor child reaches the age of majority (again, as defined under state law).[11]

[1] For a general description of the BOI Reporting Rule, see eMinutes, “FinCEN Reporting — Yes It Is Really Happening” (Feb. 23, 2023). The BOI Reporting Rule is codified at 31 C.F.R. § 1010.380.

[2] 31 C.F.R. § 1010.380(d).

[3] Id. § 1010.380(d)(1).

[4] Id. § 1010.380(d)(1)(D)(ii).

[5] Id. § 1010.380(d)(2)(i)(A). Other types of “ownership interests” include a capital or profit interest, convertible instruments, and options or other non-binding privileges to sell stock, a capital or profit interest, or convertible instruments. Id. § 1010.380(d)(2)(i)(B)-(D).

[6] Id. § 1010.380(d)(2)(ii).

[7] Id. § 1010.380(d)(2)(ii)(C); see also FinCEN, Small Entity Compliance Guide v. 1.1, at 21 (Dec. 2023).

[8] FinCEN, Beneficial Ownership Information Reporting Requirements, 87 FR 59,498, 59,532 (Sept. 30, 2022). Note that such an outcome is not unique to trust arrangements. Id. at 59,532 n. 170. As we discussed in a previous article, joint ownership of an undivided interest in a reporting company’s stock or membership interests, such as between husband and wife, can result in the same assets being attributed to all of the joint owners, such that the reporting company must report both of the joint owners’ information to FinCEN, if the 25% threshold is met. Id.; see eMinutes, “Questions Continue About FinCEN Beneficial Ownership Information Reporting” (Dec. 8, 2023).

[9] 31 C.F.R. § 1010.380(d)(3)(i).

[10] See id. § 1010.380(b)(2)(ii), (d)(3)(i).

[11] See id. § 1010.380(a)(2)(iv); FinCEN, Beneficial Ownership Information Reporting Requirements, supra note 8, 87 FR at 59,533.