Data Privacy Concerns With the CTA? Consider the Value of DAPTs

People are understandably nervous about sharing personal data no matter the circumstances. That can be especially true regarding estate planning, given the existence of the recently enacted Corporate Transparency Act (“CTA”). There may be some ways, however, to mitigate the breach of privacy despite the wide-reaching effects of this legislation.

Background on the CTA’s Requirements

In an effort to combat money laundering and other illicit business activities, Congress passed the Anti-Money Laundering Act of 2020, as part of the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”) and included the CTA, which becomes effective on January 1, 2024. Although the primary targets of the CTA are entities held by foreign nationals or entities, the CTA also encompasses domestic members, shareholders, limited partners or similar ownership positions.

The CTA requires a “Reporting Company” to disclose its “Beneficial Owners”. Reporting Companies include foreign and domestic entities as defined below:

1. Domestic reporting companies are corporations, limited liability companies, limited partnerships and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
2. Foreign reporting companies are entities (including, without limitation, corporations, limited liability companies and limited partnerships) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.[1]

A Beneficial Owner under the law is an individual who either directly or indirectly: (1) exercises substantial control over the Reporting Company; or (2) owns or controls at least 25% of a Reporting Company’s ownership interests.[2]

The required reporting is not to be taken lightly. Fines for failing to report are up to $500 for each day that the violation has not been remedied, up to a total of $10,000, and potential imprisonment for not more than 2 years, or both.[3] For more information on the Corporate Transparency Act, see our previous article on the topic.

Many clients are understandably hesitant to disclose certain information to the Financial Crimes Enforcement Network (“FinCen”) given security breaches and failed attempts to secure information related to other disclosure programs worldwide such as those done through the Common Reporting Standards (“CRS”) disclosure programs.[4]

How DAPTs Can Mitigate Information Requirements

One essential element of estate planning is privacy planning, which also falls under the category of “asset protection.” This is for the obvious reason that the less creditors know about a person’s assets, the harder it will be to obtain judgements or liens against those assets.

Domestic Asset Protection Trusts (“DAPT”) are commonly used to structure clients’ estates for those interested in maintaining a level of privacy and interposition between their assets and their potential creditors.  DAPTs are irrevocable and discretionary trusts where control of the asset is solely in the hands of a corporate trustee. DAPTs also typically contain provisions prohibiting the beneficiary from controlling or demanding distributions from the trust, particularly in the event of a lawsuit against one of the entities held by the trust or against the settlor and/or beneficiary of the trust.

Nevada is one of the most popular DAPT jurisdictions for many reasons. One of the reasons is Nevada’s Spendthrift Trust Act which provides in NRS §166.120.1:

A spendthrift trust as defined in this chapter restrains and prohibits generally the assignment, alienation, acceleration, and anticipation of any interest of the beneficiary under the trust by the voluntary or involuntary act of the beneficiary, or by operation of law or any process or at all. The trust estate, or corpus or capital thereof, shall never be assigned, aliened, diminished, or impaired by any alienation, transfer or seizure so as to cut off or diminish the payments, or the rents, profits, earnings or income of the trust estate that would otherwise be currently available for the benefit of the beneficiary.

Not only is NRS §166.120 a firewall or roadblock that prevents creditors from seizing one’s assets or distributions, but it similarly enables the beneficiaries of said trusts to mitigate the effects of the CTA.

Under the CTA, only those individuals that maintain substantial control or own more than 25% of the entity are required to disclose their information. In the case of a DAPT, it is only the trustee, not the beneficial owner that maintains control and so therefore the individuals would not be required to disclose their information.

When deciding on the name of a DAPT, it’s recommended that no identifying names be used. For example, if the client, whose name is Joe Smith, would like to create a trust for his family, they should not title the trust the “Smith Family Irrevocable Trust” which may be traced back to Joe. Instead, the name of the trust should be something generic, such as the “Blue Mountain Wealth Preservation Trust” to avoid any association with the Smith family.

In summary, DAPTs are not only a great tool for estate planning and asset protection but can also be used as a method to mitigate the privacy implications of the CTA.

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This DarrowEverett Insight should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This Insight is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. We are working diligently to remain well informed and up to date on information and advisements as they become available. As such, please reach out to us if you need help addressing any of the issues discussed in this Insight, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.

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[1] 31 U.S. Code § 5336(a)(11)

[2] 31 U.S. Code § 5336(3)(A)

[3] 31 U.S.C. § 5336(h)(3)

[4] See OECD’s report https://www.oecd.org/tax/transparency/documents/statement-on-the-data-breach-in-the-national-revenue-agency-of-bulgaria.htm