You have determined that you need to utilize an owner trust. What do you do now?
Contact Flight Department and Aviation Counsel
First, involve your aviation counsel and the flight department. Transferring your aircraft to an owner trust requires filings with the FAA and the International Registry. If there is a loan, the lender will need to be notified so the loan documents can be amended. Do not risk defaulting under your loan documents by trying to do this without notifying your lender. Coordination with the flight department is needed to avoid transferring the aircraft to the trust the day before an international flight is scheduled. Coordination with the flight department will also avoid scheduling the transfer when the aircraft is in a jurisdiction that will assess sales tax on the transfer.
Work with Tax Advisor
Second, involve your tax advisor. There may be federal and state tax implications of a transfer to an owner trust. Once the tax advisor knows the FAA requirements, they can work with you to structure the best plan for taxes. Aircraft owner trusts are frequently treated as grantor trusts, however your tax advisor knows your specific facts.
Select Trustee
Third, select your trustee. There are several companies which regularly serve as owner trustee for aircraft trusts. Working with a company experienced in serving as owner trustee for aircraft trusts will save time and money over updating your existing trust to register the aircraft or even creating a new trust for your aircraft using the same trustee that you used for your estate planning trusts.
Know the Fees
Fourth, once you have selected your trustee you will first want to review their fee letter. There will be an initial set-up fee and an annual fee for serving as trustee.
Complete KYC for Trustee
Next you should obtain their due diligence requirements so you can begin to gather the required information. Simultaneously with gathering the due diligence information you can begin to review and comment on the trust agreement and operating agreement. The trustee will need to be informed of any subleases, timeshares and other agreements.
FAA Limitations on Changes to Trust Agreement
When reviewing the trust agreement and operating agreement there will be certain sections you cannot change due to FAA requirements.
Notify Insurance Agent
You also need to notify your insurance agent of the change of registered owner.
The Paperwork and the Process
—– Before the trustee can accept you as a customer the government requires that they perform due diligence. That is why all of the information and documentation is provided to the trustee.
— When you sign the trust agreement, you are creating a trust with the selected provider as trustee and your company as trustor. The trustee must also provide an Affidavit confirming to the FAA that they meet the FAA’s requirements for serving as a trustee
— Depending on your tax planning, you may need to file a sales tax exemption certificate
— The bill of sale transfers the aircraft from the trustor (you) to the trustee of the trust.
— The trustee will use AC form 8050-1 to register the aircraft in its name with the FAA.
— If you need to make an international flight within a few days after the change of registration, the trustee will also need to file a Declaration of International Operations based on information you provide to them.
— The transfer of the aircraft from you to the trustee is registered on the International Registry (IR) as a contract of sale. You will need to hire an FAA escrow agent to file the documents with the FAA and make the proper registrations on the IR.
— The operating agreement (also called the operating lease agreement) is the document that transfers the right to use the aircraft back to the trustor. This is often treated as a lease.
— Once the aircraft is leased back to your company/trustor, it can then be subleased, interchanged, timeshared or placed on a charter certificate, depending on the structure you have created with your aviation counsel and tax advisor and that is allowed by your lender.
— The trustee will need to be covered by your insurance. The trustee will require that they receive an insurance certificate reflecting the required coverages.
The registration and planning for a business aircraft is complex and the optimal structure varies greatly from one aircraft to the next. Working with an aviation attorney experienced in business aviation can produce a more efficient process, reduce costs, timely address regulatory and tax compliance, and add value by creating a tailored corporate aircraft registration and operational structure.
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 (mwade@jetstreamlaw.com)
The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.
