Novel Fiduciary Liability Risks under the Corporate Transparency Act

The Corporate Transparency Act (CTA), effective January 1, 2024, imposes new reporting obligations on most corporations, limited liability companies (LLCs), limited partnerships, and similar entities operating in the United States. These entities, referred to as reporting companies, must submit beneficial ownership information (BOI) reports to the Financial Crimes Enforcement Network (FinCEN), disclosing details about their beneficial owners and company applicants. Noncompliance can result in significant fines and imprisonment for individuals involved. Although trusts are not directly classified as reporting companies, trustees and fiduciaries of trusts holding interests in these entities may still face disclosure requirements. The article delves into fiduciary liability concerns for trusts under the CTA and outlines strategies to mitigate these risks.

The CTA mandates that all reporting companies formed before 2024 must file their initial BOI reports by January 1, 2025. Companies formed after 2024 must file within 90 days of their formation. Updates to BOI reports must be submitted within 30 days of any changes. Beneficial owners include individuals with substantial control over the company, ownership of at least 25% of the entity, or significant decision-making authority. Trustees of trusts owning reporting company interests, particularly those with control powers like appointing managers, may also fall under the category of beneficial owners. The CTA enforces penalties for willful noncompliance, including daily fines and potential imprisonment, with liability extending to individuals who intentionally fail to file or submit false information.

Trustees and fiduciaries face specific risks under the CTA when trusts own reporting company interests. Fiduciaries could be held liable if they fail to provide accurate ownership information, neglect to ensure timely filings, or misuse their control over the reporting company. For instance, a trustee with authority to remove or replace company managers may have an added obligation to oversee compliance. Although senior officers of the reporting company generally bear direct responsibility for filing, trustees could be implicated if their actions—or inactions—contribute to noncompliance. Furthermore, beneficiaries might pursue legal claims against fiduciaries for breaches of duty resulting in trust property losses due to CTA penalties.

Hypothetical scenarios illustrate varying fiduciary risks. A trustee managing an LLC solely owned by the trust may bear direct responsibility for compliance, risking personal or fiduciary liability for filing failures. Trustees managing trusts with minority ownership interests face lower risks but should still coordinate with company managers to protect trust assets. Additionally, trustees with indirect oversight powers, such as appointing or removing managers, might share accountability for ensuring compliance. These scenarios emphasize the need for diligence, accurate reporting, and proactive communication to minimize exposure to penalties and potential beneficiary claims.

To mitigate risks, trustees should adopt best practices, including monitoring compliance deadlines, accurately documenting beneficial ownership, and maintaining communication with responsible parties. Engaging legal and compliance professionals is essential to navigate obligations under the CTA. Attorneys drafting trust and corporate governance documents should specify compliance responsibilities and consider including indemnification or exculpation clauses to shield non-responsible parties. Proactively furnishing required information and collaborating with service providers can help trustees fulfill their duties while reducing the risk of liability under the CTA.

For more information see Steven Howard Holinstat and Jacob E. Wonn, “Novel Fiduciary Liability Risks under the Corporate Transparency Act” ABA Probate and Property Journal, November 2024.