The Corporate Transparency Act – An Example of Unintended (But Good) Consequences?

During World War II everybody traveled by rail.  And there’s the story of a young soldier shipped home to attend his mother’s funeral, only to find that his particular train was to be delayed several hours to make way for military transports.

He was resigned to missing his Mother’s laying to rest when suddenly his car lurched and begin moving forward.  As the train picked up speed and sped down the track word was quickly passed that the preferential treatment was because the Secretary of State was in one of the private cars and needed to be on time for a meeting down the line.  No one on board suspected or appreciated that the Secretary was the means by which a buck private would get to his Mother’s final rites in time!

The law of unintended consequences often comes into play when things put in motion for one purpose often end up helping those not even in the sights of an original acct. 

And so it is with the Corporate Transparency Act (CTA) and the sales opportunities it offers to alert insurance advisors.

Consider: 

Prior to January 1, 2024, the easiest way for foreign interests to hide their influence and business in the United States was to act vicariously through some U.S. entity where true beneficial ownership could be easily masked.  But beginning this year the CTA requires that those entities report the name, date-of-birth, address, and official identification of all beneficial owners (i.e., those with more than a 25% interest) or those in control, including entity officers.  And any changes must also be reported within 30 days.  Stiff civil and criminal penalties apply for noncompliance, even if unintentional.

The primary purposes of the law are to better identify money-laundering and potential funding of terrorist activities.  In fact, the CTA is a part of the Anti-Money Laundering Act of 2020.

The CTA doesn’t change the estate tax law, but it provides a, perhaps unintended, opportunity for insurance planners.  Previously untraceable U.S. assets in the estates of deceased non-resident aliens (NRAs) are now exposed to the glare of the CTA’s searchlight, as ownership can be easily traced in instances where the death tax previously went often unreported and unpaid.

NRAs are taxed only on U.S.-based assets but are only entitled to a minimalist $60,000 lifetime exemption (unlike the $13,610,000 exemption currently available to citizens and resident aliens). 

So, for example, if an NRA-parent leaves the U.S.-based family company worth $560,000 to his two children who are citizens and manage the business, a tax is due on the value in excess of his $60,000 exemption, i.e., approximately $155,000.  Previously the Feds would have had little notice of the change in beneficial ownership.  Now they will have a filing within 30 days of the change and can cross reference with the residence state’s record to determine the nature of the transaction.

We don’t often run into NRAs that are potential clients.  But in 2021 (prior to CTA reporting requirements) only the estates of 21 NRAs paid a death tax.  Now that number should now increase substantially.  Between 2010 and 2022 foreign buyers purchased over $1.1 trillion in real estate and by 2022 owned over $24.9 trillion in U.S. securities.  Those clients will need life insurance to fund unavoidable death tax liabilities as much as citizens and resident aliens. 

Call with questions and for information concerning this issue for either your non-resident clients or clients who might anticipate receipt of property from non-resident aliens.  Contact Tom Virkler, JD – CPS Director of Advanced Markets, at 706-614-3796 or tom@cpsadvancedmarkets.com.