January Private Client Update – Corporate/Commercial Law

No Major Estate and Gift Tax Changes Likely in 2022

In our October Alert, we wrote about the House budget
reconciliation bill, H.R. 5376, called the Build Back Better bill
(the “Bill”). The September version of the Bill included
several provisions with far-reaching estate planning
implications.

However, the Bill was modified before being passed by the House
in mid-November, and most of the estate planning-related provisions
we wrote about were eliminated. In particular, the modified Bill
does not reduce the applicable exclusion amount; it does not
eliminate the benefits of grantor trusts; and it does not change
the rules that apply to estate and gift tax discounts on interests
in entities holding nonbusiness assets.

The revised Bill has retained provisions that would impact high
net worth taxpayers. A key component of the revised Bill is a
surtax on modified adjusted gross income more than $10 million for
individuals (or $200,000 for non-grantor trusts). At $10 million
the surtax would be 5{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a}, and at $25 million (or $500,000 for trusts)
an additional 3{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a}. The Bill does not otherwise increase current
individual income tax rates. Other provisions we mentioned in the
October Alert, including a reduction of tax exemption on the sale
of Qualified Small Business Stock and various changes to tax rules
affecting retirement accounts, remain in the Bill. At the time of
this writing the Bill is under consideration in the Senate, and it
is unclear whether it will be modified further and whether or when
it might be enacted.

Estate Planning Inflation Adjustments for 2022

The basic exclusion amount, which is the amount exempt from the
federal estate and gift tax as well as the amount of exemption
available from the generation-skipping transfer tax, has increased
to $12,060,000 in 2022. This is a $360,000 increase from last
year.

The gift tax annual exclusion amount is $16,000 in 2022, up
$1,000 from last year. The inflation adjustment for the annual
exclusion applies only in increments of $1,000; the last increase
was in 2018 (from $14,000 to $15,000).

The annual exclusion for gifts to non-U.S. citizen spouses has
increased to $164,000, up $5,000 from last year. Other
international-related inflation adjustments include the increase to
$17,339 of the value of foreign gifts that must be reported by U.S.
persons who receive them; and the increase to $178,000 of the
5-year average annual income tax that triggers “covered
expatriate” status for purposes of determining whether an exit
tax applies upon expatriation from the United States.

Upcoming Reporting Requirements under the Corporate
Transparency Act

The Corporate Transparency Act (the “CTA”) became law
in January 2021, as part of the National Defense Authorization Act.
The CTA will require certain companies (“Reporting
Companies”) to report their beneficial owners and other
information to the Financial Crimes Enforcement Network
(“FinCEN”), a bureau of the Treasury Department. The CTA
was enacted primarily to combat money laundering, tax fraud and
other illicit activities, and to bring the United States in
compliance with international standards that share the same
goals.

The reporting obligations under the CTA are expected to affect
millions of entities and their owners. These obligations will
affect virtually any estate planning structure that includes
corporations, LLCs, limited partnerships or similar entities. Any
individual or trust who owns these types of entities will be
affected.

On December 8, 2021, FinCEN issued proposed regulations under
the CTA. Final regulations, which will indicate the effective date
of the new reporting requirements (the “Effective Date”),
are expected to be issued later in 2022. In anticipation of the
Effective Date, individuals and trustees should become familiar
with the CTA, consider how it will affect them and how to arrange
for compliance once it comes into effect.

Below is a summary of the CTA’s reporting requirements under
the proposed regulations:

• What is a Reporting Company under the CTA? The
  CTA defines a Reporting Company as any corporation, limited
  liability or other similar entity that is either (i) created by the
  filing of a document with a U.S. State or Indian Tribe, or (ii)
  formed in a foreign country but registered to do business in the
  United States by filing of a document with a U.S. State or Indian
  Tribe. The proposed regulations expand this definition to include
  any entity that meets either criteria, regardless
  of whether it is a “similar” entity.
  
   
  
  There are twenty-three exceptions from the definition of Reporting
  Company, which capture banks, publicly traded companies,
  broker-dealers, and several other entities that are deemed to be
  already subject to sufficient regulatory oversight. Notably, there
  is no dedicated exception for the type of unregulated holding
  company that is commonly used for estate planning purposes. The
  definition of Reporting Company is therefore designed to encompass
  most family investment vehicles.




• What must be reported by a Reporting Company?
  Under the CTA, a Reporting Company will have to report information
  about itself, its “Beneficial Owners” and its
  “Applicants.” Under the proposed regulations, the
  reportable information would generally include:
  

  • For the Reporting Company: Full name, address,
    jurisdiction of formation and Taxpayer Identification Number
    (“TIN”) or its DUNS Number or LEI if the company has no
    TIN.

  
  

  • For each Beneficial Owner: Full name, date of
    birth, residential address and a unique identifying number (e.g.,
    passport number, driver’s license number) and the image of a
    document containing both the identifying number and a
    photograph.

  
  

  • For each Applicant: The same information as
    for Beneficial Owners, except that certain Applicants may use a
    business address instead of a residential address.

  
  

  The proposed regulations would allow Reporting Companies,
  Beneficial Owners and Applicants to obtain a FinCEN identifier
  number that Reporting Companies may report in lieu of the
  information listed above.




• Who is a Beneficial Owner?
  
   
  
  A Beneficial Owner of a Reporting Company is an individual who
  directly or indirectly either (i) exercises substantial control
  over the Reporting Company, or (ii) owns or controls at least 25{e421c4d081ed1e1efd2d9b9e397159b409f6f1af1639f2363bfecd2822ec732a}
  of the Reporting Company.
  
   
  
  The proposed regulations clarify the definition of substantial
  control to include serving as a senior officer, authority over
  appointment or removal of any senior officer and direction or
  substantial influence over important matters affecting the
  Reporting Company.
  
   
  
  If an interest in a Reporting Company is owned by a trust, any
  trustee with the power to dispose of trust assets is deemed to own
  the trust’s interest in the Reporting Company. A trust
  beneficiary would also be attributed ownership if he or she is the
  sole beneficiary or has the power to withdraw substantially all
  trust assets. Finally, a trust’s settlor is treated as an owner
  of the trust’s interest in a Reporting Company if he or she may
  revoke or withdraw the trust assets, whether under the terms of the
  instrument, some other agreement or through ownership in one or
  more entities.




• Who is an Applicant? Generally, an Applicant
  is anyone who files (or directs the filing of) the document that
  creates a Reporting Company or, in the case of foreign companies,
  anyone who files (or directs the filing of) the document that first
  registers the foreign company in a State or Indian Tribe.




• What are the penalties for violating the CTA?
  Penalties for willful reporting violations include civil monetary
  penalties of up to $500 for each day the violation continues,
  criminal fines of up to $10,000 and up to 2-year imprisonment.




• When will the reporting obligations under the CTA come
  into effect? The final regulations that are yet to be
  issued will specify the Effective Date. Under the proposed
  regulations:
  

  • Any Reporting Company formed on or after the Effective
    Date would have to submit the reportable information to
    FinCEN within 14 days from the date it was formed
    (or registered in the case of foreign entities).

  
  

  • Any Reporting Company formed before the Effective
    Date would have one year from the
    Effective Date to submit the report to FinCEN.

  
  

  In addition, after the Effective Date:

  
  

  • Reporting Companies that are no longer exempt
    from the CTA’s requirements would have to file a report within
    30 days from the loss of exempt status.

  
  

  • Entities with respect to which there are
    changes to the reportable would have to file an
    updated report within 30 days from the date of the
    change.

  
  

  • Entities that filed an incorrect report would
    have to file a corrected report within 14 days of
    becoming aware or having reason to know the original report was
    incorrect.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.