Below is an article that Michelle Wade first published on Forbes.com titled: Family Offices: How to Create a Team of Aviation Experts When Investing in a Jet to help the family office team buy a jet after assembling a diverse team to advise on the purchase.
Article – Family Offices: How To Create A Team Of Aviation Experts When Investing In A Jet
Carefully structuring the ownership and operation of a family jet can yield significant benefits for a family office. However, aviation regulations are not intuitive, typically cannot be found in one easy-to-read website and are frequently misunderstood, which is why assembling a team of trusted advisors can be beneficial.
Safety concepts (not business or tax concerns) underlie aviation regulations. It can be time-consuming and labor-intensive to keep current on the ever-changing requirements set forth by entities such as the Federal Aviation Administration, Internal Revenue Service and your state’s Department of Revenue, as well as the financing and insurance requirements that affect a family jet. But when working with the flight department, a tax advisor, business attorney and outside aviation advisors, the family office’s needs, tax goals and aviation regulations can be compiled into a comprehensive recommendation on how to best use the family jet.
As a private jet lawyer, I have a few best practices on why and how to work with a team that can set your family jet operation up for success.
The Importance Of Hiring Subject Matter Experts For your Family Office Jet Purchase Team
Aviation — and the ownership and operation of a family jet — is highly regulated. For example, FAA regulations will impact a family jet’s usage if the family sells a business without advance planning for the future use and ownership of the family jet; FAA regulations even impact private flight options, such as purchasing a fractional interest or buying an interest in an aircraft with other families. And if the registration and operation of the family jet do not satisfy FAA requirements, additional taxes occur, or an insurance investigation determines the family jet is not in compliance with the insurance policy and an insurance claim is denied, liabilities can arise.
It might be tempting to only use the family estate planning or business attorney to structure the ownership and operation of the family jet to avoid these liabilities. However, creating your team of aviation advisors can help you avoid common missteps, liabilities and violations, such as the tempting trap of segregating the aircraft and the crew in their own entity and allowing that entity to charge individuals and other groups for flights. This operation also violates FAA regulations and could result in additional taxes, FAA civil penalties, a public FAA press release, voiding the insurance coverage or triggering a cross-default clause by violating the terms of the jet’s financing.
And while family office tax advisors typically know their way around bonus depreciation and are aware of the federal excise tax on aviation transportation, they may miss the differences between the tax plan and FAA regulations. A common misconception is that if the IRS treats an entity as disregarded, the FAA will also treat the entity as disregarded.
All of these factors are why, after the initial decision on how your family office will use the jet, ongoing involvement with experts in aviation is important. A tax advisor and chief pilot, for instance, may independently handle tax and aviation issues involving the family jet. A chief pilot would know how to fly the aircraft and could oversee the many safety responsibilities of the flight department. However, the chief pilot likely would not receive the information required to determine if the aircraft remains validly registered after an ownership or management change.
So, as an aviation lawyer myself, I’ve seen firsthand that an annual meeting that includes the family office, tax advisor, flight department and aviation lawyer to discuss any changes that occurred in the prior year is useful to avoid potential liabilities or noncompliance with FAA regulations.
Selecting The Right Team For Your Family Office & the Private Jet Purchase
When selecting the aviation team to advise the family office, include team members who are subject-matter experts and familiar with the details of your family’s planned usage, dynamics and business. One team member should also know your family’s priorities to help rank the alternatives for the ownership and operation of the jet.
After all, a team of only subject-matter experts might not produce optimal results because they don’t know your family. On the other hand, a team that knows your family but lacks the required depth of subject-matter expertise might not produce a result that complies with aviation and tax regulations. Each team member should also work well with the other team members.
Between annual meetings, your family office can have a conversation with members of the aviation team before a change is made to any entity involved with the family jet. This conversation can save you from needing to explain to the family why the family jet is grounded.
Putting It All Together
Planning for the acquisition of a family jet — and the ongoing operation — involves the family office working as a team with an estate planning or business attorney, tax advisor, pilot and aviation lawyer. Each member’s area of expertise is complex, and the interaction of the rules and regulations of each area determines the final recommendation. Each member of this team has valuable input, but no single team member has all the necessary information. An ongoing annual review by this team can help avoid regulatory, liability and tax risks. And as a result, the family office can focus on family issues and planning instead of researching the nuances of the federal aviation regulations.
The information provided here is not legal advice and does not purport to be a substitute for the advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.
Michelle M. Wade is a Partner with the aviation law firm of Jetstream Aviation Law, P.A. and counsel clients on the acquisition, financing and operation of corporate jets operated under Part 91 and Part 135 of the US Federal Aviation Regulations. Jetstream Aviation Law can be found at www.JetstreamLaw.com. Michelle Wade (firstname.lastname@example.org)