Will The New Corporate Transparency Act Violate A Fiduciary Duty Of Loyalty?

will-the-new-corporate-transparency-act-violate-a-fiduciary-duty-of-loyalty?

Woman’s Hand Placing Last Alphabet Of Word Trust Over Wooden Block

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On February 7, 2022, the comment period on the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), new reporting obligations on new and existing domestic and foreign entities registered to do business in the United States. As the rules are now written, these entities may also be required to report the settlors, trustees and beneficiaries of certain types of trusts and various individuals related to trusts. This will be a sea change in the way that the fiduciary duty of confidentiality to the beneficiaries of the Trust.

The Corporate Transparency Act

               The Corporate Transparency Act applies to corporation, limited liability companies, limited liability partnerships and any other entity which is required to file with a secretary of state (for domestic entities) or is required to register to do business in the US (for foreign entities). Once the Act comes into effect, these entities will need to report the identity of the entity and the name, birthdate, address and “a unique ID number from an official document” (together with a copy of that document) for every Beneficial Owner of the entity.

A Beneficial Owner

A Beneficial Owner of the entity is anyone who either exercises substantial control over the reporting entity or who owns or controls 25% or more of the ownership interest in the entity. The time requirements for filing are 14 days (for initial reports on new entities) 14 days to report errors and 30 days to report changes to the Beneficial Ownership of the entities. Entities in existence as of the date of the Act will have one year after the Act is effective to report.

               Trusts

               Since business trusts (such as a Massachusetts Business Trust) are included in the reporting requirements, since they must register with a secretary of state, but the reporting requirements may also apply to trusts which are more commonly used for estate planning than for doing business. This is because any person who owns or controls 25% or more of the ownership interest in an entity must be reported. This means that if a trust holds 25% or more of the ownership interest in an entity, then the Trustees who can dispose of trust assets, beneficiaries of the trust who can demand distributions of trust assets or beneficiaries who are the sole person to receive all of the income and principal of the trust will need to be reported by the entity. 

               Fiduciary Duty of Loyalty

               This reporting requirement conflicts with the fiduciary duty of loyalty, and specifically the duty of confidentiality. The fiduciary duty of loyalty exists whenever someone has a legal obligation to act in the best interests of another. Although commonly thought of in terms of a formal trustee to beneficiary relationship, the fiduciary relationship has been held to exist between an attorney and a client, an accountant and a client, a principal an agent, an executor the heirs, a guardian to a ward, a corporate officer to a shareholder and an employer to an employee. This duty of loyalty includes a duty of confidentiality. The duty of confidentiality requires a fiduciary to keep confidential any information which the disclosure of may be harmful or embarrassing to a beneficiary, even if that information has been disclosed by the beneficiary elsewhere. This could include even the mere fact that the trust owns or controls the reporting entity.

               The way the rules are written, fiduciaries of trusts that have effective control over an entity or 25% or more of the ownership interest will be put into the position of either violating their duty of loyalty, and so opening them up to civil liability to the beneficiaries of the trust, or refusing to disclose that information, so opening themselves and the entity to civil and criminal penalties with fines of up to $10,000 and prison of up to two years.   

               Hopefully, during the comment period, FinCEN will receive the feedback needed to except estate planning trust from this disclosure, otherwise we may be looking at chaos as these two requirements clash.

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