Trusts as Beneficial Owners

Trusts, along with other types of entities such as individuals and companies, can own a company, such as a Corporation or Limited Liability Company (LLC).

If a company is required to report Beneficial Ownership Information (or BOI) to FinCEN, it is referred to as a “reporting company”.  A reporting company must report BOI, but BOI represents individuals (not companies, trust or other entities) who either have 25% or more Ownership Interest in the reporting company or are considered to have Substantial Control over the reporting company.

Does this mean trusts do not have to report BOI, because a trust is not an individual?  Not so fast.  FinCEN has provided some guidance on this.  Specifically, FinCEN has identified at least two areas where a trust can produce BOI’s for a reporting company:

• First, a trustee of a trust or similar arrangement may exercise substantial control over a reporting company (See Page 19, Small Entity Compliance Guide, v.1.1 Dec-2023).
• Second, the following individuals may hold ownership interests in a reporting company through a trust or similar arrangement (See Page 21, Small Entity Compliance Guide, v.1.1 Dec-2023):
  • A trustee or other individual with the authority to dispose of trust assets.
  • A beneficiary who is the sole permissible recipient of trust income and principal or who has the right to demand a distribution of or withdraw substantially all of the trust assets.
  • A grantor or settlor who has the right to revoke or otherwise withdraw trust assets.

The second form regarding holding ownership interests (called Indirect Ownership) can be quite confusing from the perspective of attempting to identify actual ownership interest or Voting Power over the reporting company.  So, let’s provide a simple example of how this can work.

Let’s suppose the reporting company has two owners, John Doe with a 50% direct ownership interest, and the Doe Family Trust with another 50% direct ownership interest.  Lets further suppose Jane Doe is the trustee with the power and authority to dispose of trust assets, and lets also suppose Sue Smith is a beneficiary with the right to demand a distribution from the trust.

FinCEN tells us that Jane Doe can be someone with substantial control over the reporting company, due to her authority over the trust.  Furthermore, she is presumed to hold an ownership interest (indirect ownership interest) over the reporting company, due to her position within the trust.  Therefore, while the trust maintains a 50% direct ownership interest in the reporting company, Jane Doe is presumed to maintain the same 50% ownership interest in the reporting company, but this time it’s an indirect ownership interest.

Sue Smith, in our example, doesn’t appear to have substantial control over the reporting company, but she is also presumed to hold an ownership interest (indirect ownership interest) over the reporting company, due to her position within the trust.  Same analysis as Jane Done:  Sue Smith is presumed to maintain a 50% indirect ownership over the reporting company, due to the 50% the trust directly owns.

Therefore, in my example above, the following individuals must report their BOI due to their relationship to the reporting company:

• John Doe, due to having a 50% direct ownership interest,
• Jane Due, due to having a 50% indirect ownership interest, due to her position with a trust maintaining a 50% direct ownership interest, and
• Sue Smith, due to having a 50% indirect ownership interest, due to her position with a trust maintaining a 50% direct ownership interest.

This example illustrates how direct ownership in a company should always equal 100% (in this example, John Doe has 50%, and the Doe Family Trust has 50%), but indirect ownership has no such limitations and can be much greater than 100%.

Let’s make the example a bit more complicated.  Let’s suppose John Doe only owns 10% of the reporting company and the Doe Family Trust owns 90%.  Does this mean John Doe no longer has to report BOI to FinCEN?

The answer may surprise you.  First, does John Doe have substantial control over the reporting company?  We didn’t disclose any substantial control previously, but this should be looked at.  The next question is, does John Doe have any control over the Doe Family Trust?  Is it possible John Doe has some control over the trust, such as a grantor or settlor who has the right to revoke or otherwise withdraw trust assets?  Or, is John Doe a “other individual with authority to dispose of trust assets?”

If the answer is “yes” to any of those questions, then John Doe would be considered to have an indirect ownership interest equal to the direct ownership amount of the trust, which is in this example, 90%.  Therefore, John Doe would be considered to have a 100% ownership interest, consisting of 10% direct and 90% indirect.

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