Aircraft held in Trust – I did not know that!

We regularly work with high net worth clients. Perhaps some of those clients own aircraft. I read an article last night that alerted me to some technical requirements that a trustee must deal with when an aircraft is titled in a Trust.

If a client transfers title to the aircraft to an existing Trust, or to a Trust that is created for a different purpose beyond just holding title to the aircraft, the Trust instrument will have to be amended in order to satisfy the Federal Aviation Administration (FAA’s) requirements. Note, too, that in some states the transfer of title to the aircraft to a Trust or LLC might also trigger the imposition of a sales or use tax.

The FAA imposes multiple requirements for a Trust to hold title to an aircraft. Each trustee: (i) must either be a US citizen or a resident a client. 14 C.F.R. Section 47.2; (ii) must also submit an Affidavit of Citizenship; (iii) must submit a copy of the trust instrument; and (iv) must submit an Aircraft Registration Application to the FAA. The trustee must also provide a representation of the citizenship of each trust beneficiary. If the trustee is not prepared or is unwilling to make a representation with regard to the beneficiary’s citizenship, then the beneficiary must provide a separate affidavit of citizenship. Federal Aviation Regulation (FAR) 47.7(c).

If Greenleaf Trust becomes the acting trustee of the Trust that holds aircraft on the settlor’s death, these steps need to be taken fairly promptly:

The trustee must register the aircraft to the trustee; several applications will have to be filed if there are co-trustees of the Trust;
The trustee’s affidavit must identify each beneficiary under the Trust who is either a U.S. citizen or a resident alien. This affidavit must also include each person who holds a security interest in the aircraft held in the name of the Trust.
If a beneficiary is neither a U.S. citizen nor a resident alien, the trustee must provide an affidavit that states that the trustee is not aware of any reason or relationship that would give the non-citizen a share of control greater than 25% to influence or limit the exercise of the trustee’s authority. The Trust instrument must provide that those persons together may not have more than 25% of the aggregate power to direct or remove a trustee for cause [but cause is not defined in the Regulation, but FAR does refer to the Restatement of Trusts, which suggests that for cause means a trustee’s willful misconduct or gross neglect. 78 Fed. Reg. 36,412 (June 18, 2013). See also14 C.F.R. 47.7(c)
The registration application refers to ‘beneficiaries of the trust’ with their ability to control or remove the trustee. Arguably a trust protector could also be viewed as holding control over the trustee’s authority, so it would be best to identify all trust protectors and their citizenship as well in the application.
The trustee must furnish a certified copy of the complete Trust instrument and a copy of each document legally affecting a relationship under the Trust. 14 C.F.R. 47.7 (c) (2)(i).
The trustee must furnish an original signed bill of sale from the present registered owner to the trustee.
The trustee must file the application for registration showing the trustee as applicant, signed by all of the trustees or co-trustees.
The trustee must pay a $5.00 fee payable to the FAA.

The FAA form can be downloaded at Information to Aid in the Registration of U.S. Civil Aircraft, AC Form 8050-94.

One last caution. The inclination of any trustee who finds aircraft as part of the trust corpus would be to promptly ‘wrap’ an LLC around that risk-asset, as a shield to protect other assets held in the Trust. But if the sole purpose of the entity, e.g. LLC or corporation, is to hold title to the aircraft there is a risk that the sole purpose entity will be considered a commercial arrangement, which will subject the aircraft to more stringent rules that are applicable to charter common carriers, when in fact the aircraft is intended only to be used for family use. Operation of an aircraft under the wrong certificate will expose the owners to steep files, e.g. $11,000 for each violation operating under the wrong certificate. 14 C.F.R. 13.305(d). See also 14 C.F.R. Part 135

The key point is that the FAA rules require that the entire Trust instrument, not just a Trust Certificate, must be filed with the FAA. Consequently, the confidentiality of the terms of the Trust, including reference to all non-aircraft assets held in the Trust, will be lost which is one of the major reasons why clients use Trusts to begin with- to avoid probate and also to preserve the confidentiality of their financial affairs. If confidentiality is important to the client, then probably a special or single purpose Trust should be used to hold title to the aircraft and not their conventional estate planning Trust.