Client Alert

Why Should You Care About Trust Administration?

You’ve been appointed as trustee of an irrevocable trust. No big deal, right? Think again. It’s a high-stakes game and understanding how to properly manage an irrevocable trust is crucial. Good administration protects everyone’s interests, keeps you out of legal trouble, and helps the trust do what it was designed to do.

Let’s break down the essentials—no legal jargon, just what you need to know.

1. Follow the Trust’s Distribution Terms—No Shortcuts!

• Understand the Distribution Language: The trust agreement is your primary authority. It spells out exactly when, how, and to whom distributions must be made. Carefully review the distribution provisions—some trusts require mandatory payments at certain ages or for specific purposes (like health, education, maintenance, or support), while others give the trustee discretion within defined limits.
• Strictly Follow the Instructions: You must honor the distribution terms as written in the trust agreement, unless they conflict with Texas law. Deviating from these terms can expose you to legal liability. These aren’t guidelines; they are rules.
• Document Every Distribution: Keep detailed records of each distribution, including the amount, date, recipient, and the specific reason or provision in the trust that authorizes it. This documentation is essential for demonstrating compliance and protecting yourself if questions or disputes arise.
• Communicate with Beneficiaries: Open and regular communication about how and why distributions are made helps manage expectations and minimize misunderstandings. There may be exception but communication is usually key.

Bottom line: The distribution language in the trust agreement is not optional—trustees must follow it exactly. If you’re ever unsure, seek professional guidance to avoid costly mistakes.

2. Don’t Forget Taxes—The IRS Is Watching

• Grantor vs. Non-Grantor Trusts: Some irrevocable trusts are treated as “grantor trusts” for tax purposes, meaning the person who created the trust (the grantor) is responsible for paying income taxes on the trust’s income, even though the assets are held in the trust. In contrast, “non-grantor trusts” are separate tax entities and must pay their own income taxes, with the trustee handling the filings and payments. The terms of the trust agreement and how the trust is structured determine which rules apply.
• Non-Grantor Trusts File Their Own Tax Returns: Most irrevocable trusts must file a federal tax return (IRS Form 1041) if they have any taxable income, $600+ in gross income, or a nonresident alien beneficiary.
• No Texas State Income Tax: Good news—Texas doesn’t require a separate state return for trusts.
• Trustee’s Job: For non-grantor trusts, the trustee is responsible for filing returns, reporting income and deductions, and sending out Schedule K-1 forms to beneficiaries. For grantor trusts, the grantor reports the trust’s income on their personal tax return.
• Pro Tip: Work with a tax professional and keep organized records all year. It makes tax time much less stressful.

3. Crummey Notices—Yes, You Need to Send Them

• What’s a Crummey Notice? If the trust is used for making annual exclusion gifts, you likely need to send beneficiaries a written notice (a “Crummey notice”) letting them know they can withdraw new contributions within a certain timeframe.
• Why Bother? Sending this notice is what allows annual exclusion gifts to qualify for the annual gift tax exclusion. Miss it, and you could waste valuable exemption and lose valuable tax benefits.
• Best Practices: Send notices promptly, keep copies, and get written acknowledgments when possible. There’s no official Texas form—just make sure your communication follows the provisions of the trust agreement and is clear and dated.

4. Successor Trustees—Who’s Next in Line?

• Check the Trust Agreement: It should say who takes over if the current trustee can’t serve. Sometimes it’s a named person; other times, there’s a process (like a vote or court appointment).
• Exercising Appointment Powers: If you have the authority to appoint a successor trustee—whether as a trustee, beneficiary, or other party—review the trust agreement for the specific process. This may involve providing written notice, obtaining consents, or following a set procedure outlined in the trust. Make sure to document every step, including the acceptance of the new trustee and any required notifications to financial institutions or other parties. Have the successor in place before something happens.
• Follow the Rules: Texas law usually honors the trust’s instructions for appointing successor trustees. If the trust is silent or the named individuals are unavailable, state law provides default rules, often involving court intervention.
• Keep Everyone in the Loop: Notify beneficiaries about any changes in trusteeship and update records with banks or other institutions promptly. Clear communication helps ensure a smooth transition and avoids confusion.

5. Stay Proactive—Plan for the Future

• Review Regularly: Laws and family situations change. Revisit the trust every so often to make sure it still fits the goals and objectives of the trust.
• Strategic Moves: Even though irrevocable trusts are often thought of as “set in stone,” there can still be opportunities for strategic planning. Trusts can sometimes enter into transactions such as sales and asset swaps. With careful planning and professional guidance, you may be able to adapt the trust to meet evolving needs and maximize benefits for the beneficiaries.
• Stay Informed: Keep in touch with your estate planner, financial advisor, and tax pro to stay ahead of any changes.

6. General Fiduciary Duties – Know Your Obligations

• Duties Owed to Beneficiaries: A Trustee is in a fiduciary relationship with the Trust beneficiaries. As such, the Trustee must always act in good faith and in the best interest of the beneficiaries. Some of these fiduciary duties include:
  • Duty of Loyalty: Be careful to avoid self-dealing and conflicts of interest between yourself and the Trust beneficiaries. Take caution when entering, in your individual capacity, any transaction involving the trust assets or beneficiaries. Even if such transaction is permitted by the terms of the Trust Agreement, it must be properly structured and disclosed. Contact your legal and financial advisors to avoid potential issues.
  • Duty of Prudence: Manage Trust assets with care. Stay informed about the Trust assets and seek professional advice where needed.
  • Duty of Impartiality: Don’t play favorites! Treat all beneficiaries fairly, and consider the rights and needs of each beneficiary, according to the terms of the Trust Agreement.
  • Duty to Segregate: Never comingle Trust assets with personal assets. Keep the trust property separate and safeguard against loss or waste. Expenses related to a Trust asset should be paid from the appropriate Trust.
• Breach of Duty: A Trustee who breaches their fiduciary duties may be removed and may be personally liable to the beneficiaries for any losses incurred as a result of the breach.
• Ask for Help: Don’t guess! When in doubt, contact your professional advisors for guidance.

Final Thoughts

Administering an irrevocable trust isn’t just about paperwork—it’s about protecting the family’s future. By following the trust’s terms, staying on top of taxes, sending required notices, and planning ahead, you’ll keep things running smoothly and avoid costly mistakes.

Questions?

Don’t go it alone. If you’re unsure about any part of trust administration, reach out to a qualified professional for guidance tailored to your situation.

This alert is for informational purposes only and does not constitute legal advice.

Effective September 1, 2025, Texas Senate Bill 1318 (SB 1318) will substantially alter the landscape for non-compete agreements involving physicians and other health care practitioners. This new law amends the Texas Business & Commerce Code to impose strict requirements on the enforceability of restrictive covenants in the health care sector. Employers, practice groups, and health care organizations should review and update their employment and contractor agreements to ensure compliance with these sweeping changes.

Key Provisions of SB 1318

1.   Scope of Application

New and Renewed Contracts. SB 1318 applies to non-compete agreements entered into or renewed on or after September 1, 2025. This will likely mean that old provisions in contracts that auto-renew will become non-compliant when they renew.

More Health Care Providers. The law covers not only physicians licensed by the Texas Medical Board, but also extends similar restrictions to dentists, professional and vocational nurses, and physician assistants. This marks a significant expansion from prior law, which focused primarily on physicians. Interestingly, it does not apply to other providers like podiatrists, chiropractors, or mental health providers.

2.   Duration and Geographic Limitations

• One-Year Maximum Duration: Any non-compete agreement with a covered health care practitioner may not restrict practice for more than one year following the termination of employment or contractual relationship.
• Five-Mile Geographic Restriction: The restricted area may not exceed a five-mile radius from the location where the practitioner “primarily practiced” prior to termination. For practitioners working at multiple sites, it is critical to clearly define the “primary practice location” in the agreement to avoid ambiguity and potential disputes.

3.   Buyout Requirement and Cap

• Mandatory Buyout Provision: All covered non-compete agreements must include a buyout clause, allowing the practitioner to be released from the restriction by paying a specified amount.
• Buyout Cap: The buyout amount cannot exceed the practitioner’s total annual salary and wages as of the date of separation. This replaces the prior “reasonable price” standard and eliminates the option for arbitration to determine the buyout amount. Employers must ensure that the buyout figure is clearly stated and does not surpass this statutory cap.

4.   Written Clearly and Conspicuously

• The law requires that all terms and conditions of the non-compete be set forth “clearly and conspicuously” in writing. Vague or ambiguous language may render the agreement unenforceable.

5.   Good Cause Required for Enforcement

1. If a physician is involuntarily discharged without “good cause,” any non-compete restriction is void and unenforceable. “Good cause” is defined as a reasonable basis for discharge directly related to the physician’s conduct, job performance, or employment record. Employers should maintain thorough documentation of performance and disciplinary issues to support any assertion of good cause.

6.   Additional Patient Access Protections

• The law preserves existing requirements that non-compete agreements must not deny physicians access to patient lists or medical records and must allow for the continuation of care for patients with acute illnesses.

7.   Preemption of Other Laws

• SB 1318 expressly preempts any conflicting common law or statutory provisions regarding the enforceability of non-compete agreements for covered practitioners.

Practical Implications and Recommended Actions

1.   Immediate Review

We recommend clients immediately audit their current agreements, particularly focusing on contracts that auto-renew after September 1st. Agreements entered into or renewed on or after September 1, 2025, must comply with the new requirements. Non-compliant provisions will not be enforceable.

2.   Define Primary Practice Location

For practitioners who work at multiple sites or remotely, it is essential to specify the “primary practice location” in the agreement to ensure the enforceability of the five-mile restriction.

3.   Update Termination Protocols

Employers should establish clear protocols for documenting the reasons for any involuntary termination, particularly to demonstrate “good cause” if enforcement of a non-compete is anticipated.

4.   Communicate Changes to Stakeholders

Inform current and prospective employees, as well as human resources and legal teams, about these changes to ensure consistent application and understanding across the organization.

5.   Monitor Existing Agreements

While SB 1318 applies prospectively, courts may look to the new statutory standards when evaluating the reasonableness of pre-existing agreements. Employers should give careful consideration before enforcing older agreements with broader than necessary restrictions.

Consequences for Employers and Practitioners

For employers, failure to comply with SB 1318 may result in non-compete agreements being declared void and unenforceable. This means that an employer may lose the ability to restrict former employees from competing within the defined time and geographic scope, potentially impacting patient retention, business goodwill, and competitive advantage. Additionally, attempting to enforce a non-compliant agreement could expose the employer to legal challenges, increased litigation costs, and reputational harm within the health care community. Employers may also face difficulties in recruiting and retaining talent if their agreements are perceived as overly restrictive or not in line with current law.

For health care practitioners, non-compliance with the new statutory requirements may create uncertainty regarding their post-employment rights and obligations. Employers may now be motivated to allege wrongdoing by the provider to support a determination of “good cause”. Providers subject to overly broad or non-compliant provisions may feel compelled to limit their professional opportunities unnecessarily or may become involved in costly legal disputes to challenge unenforceable provisions.

Given these significant consequences, we recommend that all health care employers and practice groups act now to review and update their agreements and internal procedures. Ensuring compliance with SB 1318 will help protect your organization’s interests, minimize legal risk, and foster a fair and competitive environment for health care professionals.

Conclusion

SB 1318 represents a significant shift in Texas law, reflecting a broader national trend toward limiting restrictive covenants. Non-compliance can have immediate consequences for both employers and health care providers.

For further guidance or assistance in revising your non-compete agreements to comply with SB 1318, please contact our office. Our team is available to provide tailored advice and support to ensure your organization remains compliant and protected.

Coe v. DNOW LP,__ S.W.3d __, No. 14-23-00410-CV, 2025 WL 1759382 (Tex. App.—Houston [14th Dist.] June 26, 2025, no pet. h.).
Chief Justice Christopher, Justice Wise 

The Texas Uniform Trade Secrets Act (TUTSA) has long been the primary vehicle for civil claims involving misappropriation of trade secrets in Texas. But just how far does TUTSA’s reach extend? The Houston Fourteenth Court of Appeals recently tackled that question head-on in Coe v. DNOW LP, holding that TUTSA preempts any claim that relies on the same facts as a trade secret misappropriation claim—including conspiracy, civil theft, and certain breach of fiduciary duty claims. 

Background: A Mass Exodus and a Trade Secrets Showdown

DNOW, a pump seller, faced a mass departure of employees—around thirty in all—who left to join a direct competitor, Permian Pump & Valve. DNOW alleged that thirteen of those former employees, along with Permian and its owner, not only misappropriated trade secrets but also conspired to do so, committed civil theft, and (for some) breached fiduciary duties. The jury sided with DNOW, and the trial court awarded damages and attorney’s fees on all fronts. On appeal, the defendants argued (among other things) that TUTSA should preempt the duplicative theories. 

The Court’s Analysis: “Same Facts” Means Preemption

The Fourteenth Court of Appeals made clear that TUTSA’s preemption provision is not just window dressing. To this end, it adopted the “compare-the-facts” or “same conduct” test: if a claim is based on the same conduct as a trade secret misappropriation claim, it is preempted by TUTSA. Simply adding an extra element (like an agreement in a conspiracy claim) cannot save a claim from preemption if the underlying facts are the same. 

The court was explicit: “if proof of some other theory of liability would also prove misappropriation of a trade secret, then a claim under that other theory of liability is preempted.” This effectively prevents “artful pleading” that would otherwise allow plaintiffs to sidestep TUTSA’s preemption framework by re-labeling their claims. 

However, the court drew a line between trade secrets and mere confidential information. Claims based on the misuse of confidential information that does not meet the statutory definition of a trade secret are not preempted by TUTSA and may proceed. But if the claim is, at its core, about trade secret misappropriation, TUTSA is the exclusive remedy. 

Impact: Conspiracy, Civil Theft, and Fiduciary Duty Claims Narrowed

• Conspiracy: Claims for conspiracy to misappropriate trade secrets are preempted. Plaintiffs cannot use conspiracy as a workaround to impose joint and several liability for trade secret misappropriation. 
• Civil Theft (TTLA): Claims under the Texas Theft Liability Act that are based on the same facts as a TUTSA claim are preempted (the court also clarified that mere copying of information, without intent to deprive the owner of its use, does not constitute theft under the TTLA).
• Breach of Fiduciary Duty: To the extent these claims are based on trade secret misappropriation, they are preempted. However, claims based on misuse of confidential information that fall short of trade secret status can still be brought.

Bottom Line

Coe v. DNOW LP is a significant development for Texas trade secrets litigation. The decision reinforces TUTSA’s role as the exclusive civil remedy for trade secret misappropriation and sharply limits the ability to pursue overlapping claims based on the same facts. For businesses, this means careful attention must be paid to how claims are pleaded and to the distinction between trade secrets and other confidential information. Plaintiffs and defendants alike should expect courts to scrutinize the factual basis of each claim and to enforce TUTSA’s preemptive effect with rigor. 

With the new school year approaching, schools and youth organizations should update their policies to reflect changes found in SB 571, which amends the Texas Education Code and Texas Family Code with expedited timelines for the reporting obligations of professionals who reasonably suspect child abuse or neglect.  These changes impact both public and private schools.

Key Changes

1. Professionals Have 24 Hours to Report                 

Already effective as of June 20, 2025, a large range of professionals—including employees (arguably even when working in a volunteer role for their employer or another organization)—must comply with a shortened reporting deadline. A professional with reasonable cause to believe a child has been abused or neglected now has a non-delegable duty to make a report within 24 hours of first having reasonable cause to believe abuse or neglect of a child has occurred. This is quicker than the previous 48-hour requirement. Texas Family Code § 261.101(b).

In this context, “professional” is broadly defined to include teachers, nurses, doctors, day-care employees, employees of a clinic or health care facility that provides reproductive services, juvenile probation officers, and juvenile detention or correctional officers. Even when working in a volunteer capacity, those who fit this definition should report within 24 hours.

2. Public Schools Have New and Quicker Reporting Deadlines     

A principal of a public school has the further obligation to notify the superintendent or director within 48 hours of becoming aware of evidence an educator engaged in abuse, an unlawful act, involvement or solicitation of a romantic relationship, solicitation or engaging in sexual contact, inappropriate communications, or failure to maintain appropriate boundaries with a student or minor. Texas Education Code § 22A.051(c).

Similarly, the superintendent or director of a public school, after receiving notice or otherwise becoming aware of the same evidence listed above, must file a report with the State Board of Education Certification within 48 hours. This report must be made through TEA’s internet portal. Texas Education Code § 22A.051(d).

This 48-hour deadline exists alongside the 7-business-day deadlines that principals, superintendents, and directors must still follow in other reporting circumstances.

3. Private Schools Have New Obligation

The Chief Administrative Officer of a private school now has the same obligation as a superintendent or director of a public school: upon becoming aware of evidence an educator engaged in abuse, an unlawful act, involvement or solicitation of a romantic relationship, solicitation or engaging in sexual contact, inappropriate communications, or failure to maintain appropriate boundaries with a student or minor, the Chief Administrative Officer must notify the State Board of Educator Certification within 48 hours by filing a report through TEA’s internet portal. Texas Education Code § 22A.301(a), (c), (d).

Protecting Your Professionals

Ahead of the 2025-2026 school year, clients should review and update employee handbooks, training material on abuse and neglect reporting, and any additional internal documents to reflect the new 24-hour reporting requirements. Additionally, public and private schools alike should update reporting policies regarding the new duty of principals, superintendents, directors, and chief administrative officers to complete the online report within 48 hours.

Failure to comply with these new deadlines may result in prosecution for failure to report child abuse. A felony indictment may be presented within four years from the date the offense was discovered; an indictment may be presented within three years from the date the offense was discovered.

Please let us know if we can assist you in navigating the new legislation, updating your policy language, or analyzing how this impacts your organization.

With the scheduled expiration of the Tax Cuts and Jobs Act (“TCJA”) looming, 2025 was shaping up to be a critical year for estate planning. On July 4, 2025, the uncertainty that hung over planners and clients lifted when President Trump signed the One Big Beautiful Bill Act (the “Act”). The Act provides much needed clarity and stability for individuals.

New Law

The dreaded snap-back to roughly $7.5 million in 2026 is gone, and the elevated federal estate tax exemption amounts have been extended beyond their original sunset date of December 31, 2025. This means that individuals may continue to transfer significant wealth without incurring federal transfer taxes.

For the remainder of this year, the last inflation adjustment under the TCJA is still in effect with an exclusion amount of $13,990,000 per individual. As of January 1, 2026, the Act sets the federal transfer tax exemption to a flat $15,000,000 per person, with 2025 as the new base year for inflation indexing. Unlike the TCJA, the increased exemption amounts under the new legislation do not expire and will continue to increase each year.

What This Means for Planners and Clients

With the exemption extension now law, the urgency that surrounded 2025 planning has eased and planners and clients can breathe a sigh of relief. Clients no longer face a year-end deadline to “use it or lose it,” and planners can shift from crisis-mode to long-term strategic planning. However, tax policy is subject to change as administrations shift, and while the new law permanently extends the TCJA-era exemption, “permanent” exemptions have been reversed before.

Moreover, there are a number of reasons it may still be beneficial to make transfers sooner rather than later, such as locking in today’s valuations for assets expected to appreciate, or capturing discounts that could shrink once markets rebound or previously shelved tax regulations tighten.

What You Can Do Now

The high exemption presents an opportunity to engage in thoughtful, strategic planning without the pressure of a hard deadline.

• Review and Update Your Estate Plan. Use this as an opportunity to reassess your objectives and ensure your estate plan aligns with your current financial situation and family goals.

• Consider Strategic Lifetime Gifting. Even without a looming deadline, many clients may still benefit from making lifetime gifts to take advantage of valuation discounts, asset appreciation outside the estate, and creditor protection.

• Stay Engaged and Educated. Although the new law provides welcome certainty, estate tax policy is subject to change. Staying engaged with your financial advisor, estate planner, and tax professional ensures that your plan evolves with future developments.

The scheduled expiration of the Tax Cuts and Jobs Act (“TCJA”) is just around the corner, and both clients and planners are waiting to see what this next year will bring to estate tax laws. This article will discuss the current law, the changes on the horizon, and how to navigate the uncertainties surrounding the estate tax.

Current Law

Under the current law, individuals may make gifts not to exceed a certain combined value to any number of people without triggering a transfer tax obligation. Each year, this allowable gift amount increases to account for inflation.

As of 2025, each individual can make gifts with a combined value of $13,990,000 to friends, family members, charities, etc. without triggering the dreaded “Estate Tax.” In 2017, individuals were permitted to transfer only $5,490,000 tax free. Later that same year, the TCJA temporarily altered this amount. Under the TCJA, the federal tax exemption (the “Exemption Amount”) was doubled from $5,490,000 in 2017 to $11,180,000 in 2018. If the TCJA is not renewed, in 2026 the Exemption Amount is scheduled to revert to its original value, bringing the Exemption Amount back down to $5 million indexed for inflation, around $7.5 million for 2026.

The Exemption Amount can be used at any point during your lifetime or at your death and is “locked in” the year it is used (the year you make the gift or the year you pass away). Although everyone has the option to make gifts at any point during their lifetime, in the past, most individuals have arranged for these transfers to take place at their death in order to maximize the amount of tax-free money that can be passed to their loved ones. But, with the looming possibility of a significant decrease in the Exemption Amount on the horizon, locking in the 2025 Exemption Amount becomes an attractive option for many.

What We Expect

If the Exemption Amount reverts back down to $5 million indexed for inflation, a number of individuals who would not have met the Estate Tax threshold under current law would now surpass it. Since the Exemption Amount gets “locked in” the year that it is used, individuals making gifts in 2025 will be able to utilize the $13,990,000 Exemption Amount before it potentially sunsets.

While there is no way to be certain if the current administration will decide to renew the TCJA, or otherwise alter the Estate Tax landscape, we believe it is likely that the current law gets extended. Nonetheless, we do not expect DC to get this done until late Q3 or Q4.

This creates a challenge for both clients and planners. Due to the dramatic potential decrease in the Exemption Amount, planners will likely end up at capacity and be unable to take on new clients or big projects late in 2025. Further, successful gift planning and execution takes time and thoughtfulness and should not be rushed.

What You Can Do Now

Clients need to start considering adjustments to their estate plans in light of the two possible outcomes. In order to effectively prepare for the year to come, consider the following:

1. Talk with your planner about options to set the stage for late 2025 gifts. Certain planning can be done now to set you up for successful end of year gifting if it appears the Exemption Amount will go down on January 1, 2026. What can your planner do for you now?

i.  Create irrevocable trusts that are ready to be funded on short notice

ii. Form and fund new entities that can be used for gifting

iii. Obtain necessary valuations/appraisals of assets for gifting

iv. Prepare (but not execute) documents you will need in order to make these gifts

2. Talk with your financial advisor about potential assets for a gift and consider whether any planning or reorganization needs to be done now to prepare for transferring those assets. What can you do to prepare?

i. Make a list of all the assets you currently own

ii. Analyze asset cash flow and potential for appreciation

iii. Think about who you would like to ultimately receive these assets

3. Make sure you keep up with the latest developments! Stay up to date by visiting the IRS website, following the news, and setting reminders near the end of the year to check in with your planner and financial advisor about your options.

As discussed in our 2023 Overview of the Corporate Transparency Act (CTA), the CTA was enacted by Congress in 2021 to combat the use of anonymous shell companies in money laundering and other illicit financial activities, requiring most smaller companies to file beneficial ownership information (BOI) reports with the Financial Crimes Enforcement Network (FinCEN), disclosing, among other things, the identities of natural persons who own or control at least 25% of the reporting company (the “Reporting Rule”)​. The Reporting Rule would have required millions of U.S. and foreign businesses to report their beneficial owners to FinCEN. As discussed in our previous Client Alert, the Reporting Rule and the CTA itself have been the subject of ongoing delays and litigation, including a federal court stay that paused enforcement until it was lifted on February 17, 2025. Shortly after the stay was lifted, the Trump administration signaled it would narrow the Reporting Rule, and, on March 21, 2025, FinCEN issued an Interim Final Rule (the “IFR”) that removes BOI reporting requirement for U.S.-formed entities and U.S. persons. In today’s Client Alert, we provide a brief overview of the IFR and discuss how businesses should respond.

Key Takeaways

• Elimination of Domestic BOI Reporting: The IFR removes the BOI reporting requirement for U.S.-formed entities and their beneficial owners, including updating or correcting previously filed BOI reports. Relying on “the exemptive authority provided in the Corporate Transparency Act and the direction of the President,” FinCEN has exempted companies created or registered in the United States from the definition of “reporting companies” under the CTA. FinCEN explained that “the Secretary of the Treasury has reassessed the balance between the usefulness of collecting BOI and the regulatory burdens imposed by FinCEN’s BOI reporting requirements” and found that requiring BOI from domestic companies would impose heavy burdens yet yield information not “highly useful” to law enforcement.
• Continued Obligations for Foreign Entities: FinCEN revised the definition of a “reporting company” to include only entities formed under foreign law and registered to do business in a U.S. state. These foreign reporting companies must still file BOI reports with FinCEN. 
• U.S. Persons Exempt from Reporting: Foreign reporting companies are not required to report any beneficial owners who are U.S. persons. In practice, a foreign company with only U.S. owners has no reportable BOI under the IFR. For purposes of the IFR, FinCEN defines “U.S. persons” by reference to 26 U.S.C. § 7701(a)(30) of the Internal Revenue Code, meaning individuals who are U.S. citizens or residents under federal tax law.

Revised Filing Deadlines for Foreign Companies

The IFR extends BOI filing deadlines for foreign reporting companies. Any foreign reporting company registered to do business in the U.S. before March 26, 2025, must submit an initial BOI report by April 25, 2025. Foreign entities registering on or after March 26, 2025, will have 30 days from their registration to file their initial report.

Enforcement Posture and Next Steps

Even though the IFR lifts the BOI reporting burden for U.S.-formed entities and U.S. persons, a cautious compliance approach is advisable. FinCEN is accepting public comments on the IFR through May 27, 2025, and expects to issue a final rule later in 2025, which could further alter reporting requirements under the CTA. Companies that submitted BOI reports before the IFR took effect should consider the following steps to ensure a prudent compliance posture:

• Maintain Records of Filed BOI: Prior BOI submissions remain on file with FinCEN, and FinCEN has not indicated any plan to delete or purge those BOI reports. A conservative practice is to retain copies of what was filed and ensure internal beneficial ownership information is kept up-to-date. This documentation can be useful for a business’s records in case any questions arise about its BOI filings.
• Monitor Final Rules and Legal Developments: The IFR is not the final word on the CTA, and FinCEN plans to issue a final rule before the end of 2025, which could further alter reporting requirements under the CTA. Additionally, ongoing court challenges to the CTA’s constitutionality and scope could impact future reporting requirements. Stay alert for the final FinCEN rule or any court decisions that might alter BOI reporting obligations.
• Consider State-Level Transparency Laws: Keep in mind that the federal reprieve under the IFR does not affect any state-imposed disclosure requirements. Several states are moving forward with their own beneficial ownership transparency laws. For example, New York’s LLC Transparency Act will require BOI-like filings for entities formed or registered in New York starting January 1, 2026. Similar legislation has been proposed in California, Maryland, and Massachusetts.

Although the IFR exempts domestic entities and U.S. persons from reporting obligations under the CTA, businesses should continue treating BOI as sensitive, required data for other compliance contexts, and businesses should stay tuned for the final rule’s publication and any further guidance from FinCEN which could alter their reporting obligations under the CTA.

The U.S. Financial Crimes Enforcement Network (“FinCEN”) recently amended its anti-money laundering rules (the “New AML Rules”) to require most investment advisers registered with the SEC (“RIAs”), and all private fund managers that report to the SEC as exempt reporting advisers (“ERAs”), to adopt written AML Programs for the first time. In addition, FinCEN and the SEC have jointly proposed rules (the “Proposed CIP Rules”) that would require these RIAs and ERAs (“Covered Advisers”) to adopt formal Customer identification programs (“CIP”) similar to the KYC requirements currently imposed on banks and broker-dealers. In today’s Client Alert, we provide a brief overview of the New AML Rules and the Proposed CIP Rules and suggest best practices that every investment adviser should consider. This alert does not cover all of the requirements of the Bank Secrecy Act and the FinCEN rules, and before you implement your AML Program, you should consult with qualified legal counsel.

Covered Advisers

While the New AML Rules apply to most RIAs and ERAS, FinCEN has created exemptions for certain advisers, including: (i) state-registered investment advisers; (ii) foreign private advisers; (iii) family offices; (iv) mid-sized and multi-state RIAs; (v) pension consultants; (vi) SEC-registered advisers with no reportable AUM; and (vii) advisers exclusively serving mutual funds or other regulated investment vehicles already subject to AML rules.

New AML Program Requirements 

Each Covered Adviser must develop a written, risk-based AML Program designed to detect and prevent money laundering and terrorist financing by January 1, 2026. If you are a Covered Adviser, your AML Program must include:

• Internal Policies and Controls: Detailed procedures to monitor, detect, and report suspicious activity.
• Employee Training: Regular training programs that ensure your personnel understand red flags and the protocols for reporting unusual or suspicious activity.
• Designation of AML Compliance Officer: Appointment of a dedicated compliance officer responsible for the AML Program. The AML Compliance Officer can be the same person as your Chief Compliance Officer.
• Independent Testing: Routine independent audits of your AML Program to assess its effectiveness and adherence to regulatory requirements, which may be performed either by independent internal personnel (personnel not involved in managing or implementing the AML Program), or by a qualified third party. If a third party is used for independent testing, it cannot be the same third party that is performing AML services.
• Risk-Based Customer Due Diligence: Performing customer due diligence (“CDD”) on your clients and private fund investors (collectively, “Customers”), including (i) developing a Customer risk profile, (ii) conducting ongoing monitoring to identify and report suspicious Customer transactions to FinCEN, and (iii) maintaining and updating Customer information.

FinCEN Reporting Requirements

In addition, your AML Program must include procedures to:

• Report Suspicious Activity: File Suspicious Activity Reports (“SARs”) with FinCEN for transactions (or attempted transactions) of at least $5,000 when there is a reasonable basis to suspect illicit activity.
• Report Currency Transaction: File Currency Transaction Reports (“CTRs”) with FinCEN each time you receive more than $10,000 in currency (cash) or negotiable instruments from a Customer.
• Maintain Records: Keep records of each SAR and CTR and supporting documentation.

Proposed Customer Identification Rules

While the New AML Rules require basic Customer due diligence, they do not require a full CIP at this time. However, under the Proposed CIP Rules, Covered Advisers would be required to implement a formal CIP. Key aspects of the Proposed CIP Rules include:

• Identity Verification Procedures: Covered Advisers would be required to adopt risk-based procedures to allow you to form a reasonable belief that you know the true identity of each Customer at onboarding by using documentary or non-documentary methods. Covered Advisers would be required to collect at least the following information on each Customer: (1) name; (2) date of birth for an individual or the date of formation for any person other than an individual; (3) address; and (4) a government-issued identification number.
• Record Maintenance: Covered Advisers would need to retain detailed records of the identifying information used to verify each Customer’s identity and maintain these records for a prescribed period.
• Watch List Screening: Covered Advisers would be required to check customer identities against government and international watch lists (e.g. OFAC lists), ensuring that high-risk individuals or entities are promptly flagged.

Notably, the Proposed CIP Rules stop short of requiring Covered Advisers to collect information on the beneficial owners of a legal entity Customer, but FinCEN has hinted that such requirements could be imposed on Covered Advisers in the future, and in the meantime, Covered Advisors should make a risk-based determination regarding the need to collect beneficial ownership information based on a customer’s risk profile.

Risk-Based Programs

Both the New AML Rules and the Proposed CIP Rules emphasize a risk-based approach, meaning that the extent of the AML/CIP Program may vary based on the risk profile of your Customer base. For example, an RIA that only advises U.S. institutional investors would not need to have as robust an AML Program as an RIA that advises foreign persons or offshore funds.

While the New AML Rules do not require Covered Advisers to implement full CIP procedures at this stage, as a best practice, you should begin to integrate these procedures to ease the transition when the Proposed CIP Rules are finalized based on the risk profile of your Customers.

Recent SEC AML Enforcement Action  

Despite the fact that Covered Advisers are not subject to the New AML Rules until the beginning of 2026, the SEC recently brought an enforcement action against a private fund manager for misrepresenting the extent of its AML Program. The SEC alleged that Navy Capital Green Management LLC (“Navy Capital”), a private fund manager, made material misrepresentations regarding its AML policies and procedures to its investors. These misrepresentations included claims that the firm had implemented sufficient internal controls and investor due diligence measures that were either not in place or not being followed. The SEC’s allegations highlighted a series of internal failures—ranging from inadequate employee training and insufficient Customer due diligence, to the lack of independent testing of the AML Program. These failures resulted in an investor using an offshore account to launder money through the Navy Capital fund. 

The SEC instituted cease and desist proceedings against Navy Capital and entered an order imposing sanctions and a $150,000 civil penalty. This case illustrates that having a written AML Program is insufficient if it is not effectively implemented and monitored and underscores the need for continuous training, periodic independent audits, and clear, enforceable internal controls.

Best Practices for Compliance

To comply with the New AML Rules — and to prepare for the Proposed CIP Rules—Covered Advisers should take the following steps:

1. Assess AML Risk Profile:
   • Determine if your firm would be subject to the New AML Rules and the Proposed CIP Rules or if it meets an exemption.
   • Conduct a detailed risk assessment focusing on Customer types, geographical exposure, and transaction patterns.
2. Review and Update Any Existing AML Policies:
   • Perform a gap analysis comparing your current AML policies, if any, to FinCEN’s new AML requirements and the anticipated CIP provisions.
   • Update written policies to include internal controls, employee training, independent testing, and procedures for Customer due diligence and identification.
3. Enhance Due Diligence and Onboarding:
   • Revise onboarding procedures to collect and verify identification documents and screen new Customers against relevant watch lists.
   • Incorporate enhanced due diligence measures for Customers from high-risk jurisdictions, particularly politically exposed persons.
4. Define and Monitor Delegation Arrangements:
   • If any AML functions are outsourced (e.g., to a fund administrator), update your service provider contracts to ensure clear delegation of responsibilities.
   • Establish oversight mechanisms to monitor third-party performance and compliance with AML standards.
5. Implement Training and Staffing Initiatives:
   • Appoint a dedicated AML compliance officer and build a cross-functional team responsible for AML oversight.
   • Develop a comprehensive training program that includes both the policies and procedures required by the New AML Rules and, as a best practice, the Proposed CIP Rules.
6. Conduct Independent Testing:
   • Schedule periodic independent reviews of your AML Program to confirm its effectiveness and identify areas for improvement.
   • Use lessons from enforcement actions (e.g., the Navy Capital settlement) as benchmarks for strengthening internal controls.
7. Monitor Regulatory Guidance and Enforcement Trends:
   • Stay up to date on further guidance and rules from FinCEN and the SEC, including the finalization of the Proposed CIP Rules, and adjust policies accordingly.
   • Learn from recent enforcement actions to avoid misrepresentations and compliance gaps that can lead to significant penalties and loss of investor confidence.

All investment advisers and private fund managers should promptly take measures to implement or update their AML Program in anticipation of the effective date of the New AML Rules and in preparation for your next visit from the SEC or investor due diligence questionnaire.

A major legal development has cleared the way for enforcement of the Corporate Transparency Act (CTA). On February 18, 2025, Judge Jeremy Kernodle of the U.S. District Court for the Eastern District of Texas granted the Government’s motion to stay his January 7, 2025, order in Smith v. U.S. Department of the Treasury that had halted CTA enforcement. Judge Kernodle’s new order in Smith stays the effect of his original January 7 order pending the Government’s appeal of that order. Combined with a recent Supreme Court stay in a parallel case, this new order puts CTA reporting requirements back into effect for most companies, albeit with a deadline extension to March 21, 2025. As discussed in our 2023 Overview of the Corporate Transparency Act, the CTA was enacted by Congress in 2021 to combat money laundering and illicit financial activities. It requires most smaller companies to file beneficial ownership information (BOI) reports with the Financial Crimes Enforcement Network (FinCEN), disclosing, among other things, the identities of natural persons who own or control at least 25% of the reporting company. In today’s Client Alert, we provide a brief overview of the CTA’s legal challenges and discuss how businesses should respond to recent developments.

Supreme Court Ruling on January 23, 2025

On December 3, 2024, Judge Amos Mazzant of the Eastern District of Texas issued a nationwide preliminary injunction enjoining the enforcement of the CTA (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). The Government promptly sought relief in the U.S. Supreme Court on December 31, 2024, and, on January 23, 2025, the Supreme Court stayed the Texas Top Cop nationwide injunction that had halted enforcement of the CTA, pending the appeal of that injunction; however, this Supreme Court ruling did not settle the issue of the CTA’s immediate enforceability due to another challenge brewing in a different Texas federal district court.

The Second Texas Injunction

In Smith, Judge Kernodle issued a separate nationwide stay of CTA enforcement on January 7, 2025, finding the CTA likely unconstitutional. On February 5, 2025, the Government filed a motion for stay of that nationwide order pending appeal, which requested that the Smith stay be lifted in light of the Supreme Court’s January 23 order lifting the Texas Top Cop injunction. Judge Kernodle granted the Government’s request to stayhis own preliminary order on February 17, 2025, allowing FinCEN to resume enforcement of the CTA, pending appeal.

Upcoming Challenges to the CTA

Although the two nationwide orders halting the CTA’s enforcement have been lifted pending the appeals of those orders, challenges to the CTA still loom on the horizon. In the Texas Top Cop case, oral arguments are set for March 25, 2025, in the Fifth Circuit Court of Appeals, after which Judge Mazzant could declare the CTA unconstitutional (his December 3, 2024, injunction was merely a preliminary injunction). On the congressional front, Republican Senator Tommy Tuberville has reintroduced the Repealing Big Brother Overreach Act, which would repeal the CTA altogether. The Senator and his supporters argue that the CTA imposes unnecessary burdens on small businesses while infringing on privacy rights. On the executive front, the Trump administration has signaled its support for the CTA by moving to stay the Smith nationwide order, albeit the Government’s motion and FinCEN’s subsequent statements have indicated that the Government may attempt to reduce the CTA’s burdens on small businesses.

FinCEN’s Notice and Suggested Next Steps

After Judge Kernodle stayed his nationwide order in Smith, FinCEN swiftly issued a notice on February 19, 2025 (the “Notice”), to help companies navigate the sudden reactivation of CTA requirements, which extends the reporting deadline for most companies by 30 days to file initial, updated, or corrected BOI reports. This 30-day extension period ends on March 21, 2025. Notably, the Notice also states that “during this 30-day period FinCEN will assess its options to further modify deadlines, while prioritizing reporting for those entities that pose the most significant national security risks. FinCEN also intends to initiate a process this year to revise the BOI reporting rule to reduce burden for lower-risk entities, including many U.S. small businesses.”

While it remains unclear if FinCEN will further modify deadlines, businesses should nonetheless prepare to comply with the March 21 deadline. We suggest that you:

• Circle the new deadline of March 21, 2025, on your calendar. Even if you believe further extensions or relief might come, operate under the assumption you must file by this deadline.
• Work with your legal counsel to determine if your business (or businesses) needs to file a BOI report with FinCEN, if any exemptions apply to your business(es), and what information you need to report to FinCEN.
• If you have already filed your BOI report, remember that you must update your BOI report with any changes to the information reported. FinCEN’s Notice reiterates that companies which have already submitted a BOI report must update any changed information by March 21.

Don’t wait to act. Now that the Smith order is lifted and FinCEN’s authority to enforce the CTA has been restored, the prudent course is to promptly consult with your legal counsel and prepare BOI reports as soon as possible in consideration of the March 21 deadline. Being proactive ensures you won’t be caught off guard if no further reprieve is granted

Since our prior discussion about the Fifth Circuit’s allowing a preliminary injunction against the Corporate Transparency Act (CTA) to remain in force pending appeal, the legal landscape surrounding the CTA has only grown more complex. Separate proceedings in different federal courts have yielded a patchwork of enforcement rulings that leave businesses uncertain about their compliance obligations. The U.S. Supreme Court very recently stayed a preliminary injunction issued by one federal district court, seemingly allowing the CTA to go into effect. A different federal district court, however, issued its own preliminary injunction and stay order that enjoined the operation and enforcement of the CTA. As discussed in our 2023 Overview of the Corporate Transparency Act, the CTA was enacted by Congress in 2021 to combat money laundering and illicit financial activities. It requires most smaller companies to file beneficial ownership information (BOI) reports with the Financial Crimes Enforcement Network (FinCEN), disclosing, among other things, the identities of natural persons who own or control at least 25% of the reporting company. In today’s Client Alert, we provide a brief overview of the current legal tug-of-war and discuss how businesses should respond.

Supreme Court Ruling on January 23, 2025

On December 3, 2024, Judge Amos Mazzant of the Eastern District of Texas issued a nationwide preliminary injunction enjoining the enforcement of the CTA (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). On appeal, the Fifth Circuit’s motions panel subsequently stayed that preliminary injunction on December 23, 2024, only for a merits panel of that same court to lift the stay and reinstate the preliminary injunction on December 26, 2024.(For a more in-depth discussion of this injunction, see our Client Alert from December 30, 2024.) The Government promptly sought relief in the U.S. Supreme Court on December 31, 2024. On January 23, 2025, the Supreme Court stayed the Texas Top Cop Shop nationwide injunction that had halted enforcement of the CTA. The U.S. Supreme Court’s ruling was expected to settle the issue of the CTA’s enforceability for the time being. Meanwhile, however, another challenge to the CTA was brewing in a different Texas federal district court.

The Second Texas Injunction

In the midst of this legal tug-of-war, on January 7, 2025, Judge Jeremy Kernodle of the Eastern District of Texas issued an order in a separate case (Smith v. U.S. Department of the Treasury), preliminarily enjoining enforcement of the CTA against the plaintiffs there and staying the effective date of the CTA’s Reporting Rule nationwide. Judge Kernodle found that the plaintiffs “ha[d] demonstrated that the CTA and its implementing rule are likely unconstitutional, that they face a substantial risk of irreparable harm absent an injunction, and that the balance of equities and public interest support preliminary relief.” This second order creates an unusual situation where, despite the Supreme Court’s recent ruling in the Texas Top Cop Shop case, businesses are still not required to comply with the CTA reporting requirements while the Smith nationwide stay remains in effect. The government has not yet appealed the Smith ruling, but there is still time for it to do so.

FinCEN’s Updated Guidance on January 24, 2025

In response to these conflicting rulings in Texas Top Cop Shop and Smith, FinCEN has clarified that reporting companies are currently not obligated to file BOI reports. Moreover, FinCEN has assured that no penalties will be enforced for non-compliance while the injunction or stay remains in effect. However, FinCEN has left the door open for reporting companies to voluntarily submit their BOI reports.

Other Potential Challenges to the CTA

Adding another layer of uncertainty, on January 15, 2025, Republican Senator Tommy Tuberville reintroduced the Repealing Big Brother Overreach Act which would repeal the CTA altogether. The Senator and his supporters argue that the CTA imposes unnecessary burdens on small businesses while infringing on privacy rights. As of the time of this writing, the Trump administration, which took office on January 20, 2025, has not issued any official statements regarding the CTA. However, the administration has been active in rescinding various executive orders from the previous administration, indicating a potential for further policy shifts that could impact the CTA’s future.

What’s Next?

The legal future of the CTA remains unclear. While FinCEN continues to prepare for potential enforcement, businesses should remain cautious and monitor further developments. Key considerations for businesses include:

• Staying up to date on rulings from the Fifth Circuit and other courts.
• Preparing to comply with FinCEN’s reporting requirements in case the Smith injunction and stay order are lifted.
• Consulting legal counsel to navigate these uncertain waters.

For now, the CTA remains trapped in a legal tug-of-war, so business owners and legal practitioners alike must remain alert as this issue continues to wind through the courts.