What You Need to Know About the Corporate Transparency Act

The Corporate Transparency Act (CTA) is a new federal law aimed at combating financial crimes such as money laundering and fraud by requiring certain businesses to disclose information about their owners. This law affects small businesses, corporations, and limited liability companies (LLCs), making it crucial for business owners to understand its requirements.

Who Needs to Report? Any corporation, LLC, or similar entity registered in the U.S. must report its "beneficial owners" unless it qualifies for an exemption. A beneficial owner is anyone who exercises substantial control over the company or owns at least 25% of its interests.

Certain entities, like large corporations with over 20 full-time employees and more than $5 million in gross revenue, or entities already subject to other federal reporting, are exempt. However, most small and family-owned businesses will need to comply.

When is the Deadline? The initial deadline to report under the CTA is January 1, 2025. Any entity created or registered before January 1, 2024, must file its report by this date. For businesses formed after this date, the report is due within 30 days of registration.

What Needs to Be Reported? Entities must disclose information about each beneficial owner, including:

• Full legal name

• Date of birth

• Residential or business address

• A unique identifying number from an acceptable ID (such as a passport or driver’s license)

The report is filed with the Financial Crimes Enforcement Network (FinCEN), and failure to comply can result in significant penalties, including fines or even criminal charges.

If you are a small business owner with concerns about how the Corporate Transparency Act affects your estate plan or business structure, our estate planning law firm is here to guide you through the process. Reach out to us for for a referral to our network of compliance advisors and to ensure you stay compliant while safeguarding your business and family’s future.

Proposition 19

Californians have passed Proposition 19 with a little over 51% of the vote. It will significantly change the California property tax scheme as it applies to parent-child transactions.

There are two main components to Prop 19:

1. Over-55 Rule. The first component allows homeowners who are either over 55, have severe disabilities, or are victims of natural disasters or hazardous waste contamination to purchase a new residence and retain their property tax assessment from thier current home. In other words, you can “take” your current property tax rate with you to your next home, even if the new home is worth more than your current home. And you can do this up to 3 times in your lifetime. This provision takes effect on April 1, 2021.

1. Limited Parent-Child Exclusion. The second component dramatically limits what is called the “parent-child exclusion” from reassessment. Parents may no longer transfer unlimited amounts of property to children and escape reassessment. This one takes a bit more explanation. This provision takes effect on February 16, 2021.

A Brief Explanation of the Parent-Child Exclusion

In very broad terms, the California property tax scheme--or “Prop 13”--taxes owners of real property (the legal term for “real estate”) based on the property’s “assessed value.” To keep things simple, think of the “assessed value” as the purchase price of the property. Based on that purchase price, the tax collector imposes a ~1% tax. The property tax is not adjusted until or unless there is a “change in ownership.” When there is a change in ownership, the value of the property is reassessed. Reassessment can increase the property taxes dramatically for the new owner. 

In 1986, California voters allowed for an exception to the general “change in ownership” rule that triggers reassessment. The exception is that if parents transferred their property to their children (either by gift, inheritance, or sale), then the assessed value (i.e. property tax rate) would carry to the children. In other words, if you received property from your parents, you would continue to pay the property tax rate your parents were paying. This exception was unlimited when parents transferred their primary residence, and was limited in value when parents transferred property that was not their primary residence (e.g., vacation home, rental property, etc.).

Now let’s fast forward to February 16, 2021. When Prop 19 takes effect, the parent-child exclusion described above will be abolished. In its place will be a far more limited exception. The new exception only allows escaping reassessment if parents transfer property to their children AND the children use the transferred property as their primary residence. In other words, if the children do not live in the house and want to use it as a rental property (or keep it vacant) then the property will be reassessed. 

For example, if a parent bought a house in 1972 for $200,000, then their property tax might be $2,000 a year, regardless of the house’s increasing market value. If the parents transfer the home to a child (either gift, inheritance, or sale) after February 16, 2021, and the child does not live in the house, the property will be reassessed to its current fair market value (say $2,000,000) and the tax will jump to $20,000 a year.

Your Options Going Forward

There is no straight answer here. There are MANY unknowns at play here: the pandemic, a potential recession, other changes in the law in the near future, and particulars about your life and family. All that we know is that Prop 19 will dramatically change parent to child transfers going forward. If you were planning to leave your children property with the presumption that they would enjoy property tax savings, then you may want to consider transferring to them prior to February 2021. However, please understand that a lifetime transfer now may carry capital gains implications forward to your children. It’s a balancing act. We cannot emphasize this enough: there is no one-size-fits-all solution here. Contact us immediately to discuss your situation, things you can consider, and available options.

A side note on timing: The California election is not certified until December 11. After that, there will be regulations that are issued about how Prop 19 will be implemented and how it will work. While we can provide guidance at this point, there are still some questions outstanding that we won’t know the answers to until after that date.

An Ambiguous Disposition: Right of Survivorship on Bank Accounts

Late in 2019, the California Court of Appeal issued a decision (Placencia v Strazicich) which impacts people with beneficiaries on bank accounts. 

In the case, Ralph Placencia had a joint bank account that had an express right of survivorship in favor of one of his daughters. However, before he died, Ralph left a will stating that he wanted the proceeds of the bank account to go to all three of his daughters (not just the one whose name was jointly on his account). 

The conflict between the beneficiary designation and Ralph’s will lead to litigation. After analyzing the law, the court determined that a will, in and of itself, cannot render a beneficiary designation ineffective. However, the court did allow for a very limited circumstance where a decedent’s intent, shown by “clear and convincing” evidence, may invalidate a beneficiary designation. Even if that evidence is contained in statements made in a will. 

In other words: if you have a joint account with another person (e.g. a parent), the right of survivorship on the joint account is not absolute. Even though this court decision is very limited in scope, it does reinforce the principle that the right of survivorship will be determined by the decedent’s intent—which can be supported by statements made in a will, among other forms of evidence. 

Make your intentions clear. Almost every case dealing with an ambiguous gift will come down to the decedent’s intent.