Aircraft Owner Trust Succession

Over the past several months, many aircraft owners who own their aircraft through an owner trust have been notified that the trust company that serves as the trustee of the trust (“Owner Trustee”) is resigning as trustee. The standard trust agreement allows the Owner Trustee to resign upon 30 days written notice to the Trustor (the ultimate aircraft owner). In a situation such as this, what are the Trustor’s options and what are the possible ramifications of the resignation?

Aircraft ownership trusts are often created to meet the statutory definition of “Citizen of the United States” set forth in Title 49, Section 40102(a)(15) of the United States Code so that the aircraft can be registered in the United States. If the trust arrangement was originally created to satisfy this test, the Trustor should determine whether the Trustor’s fact pattern has changed such that the trust arrangement is no longer necessary. For example, if the Trustor is an individual or a company controlled or managed by one individual, has that individual become a citizen of the United States since the trust was formed? Alternatively, if the Trustor is a corporation or a limited liability company (“LLC”), does that entity now meet the citizenship test which it failed to meet originally?

Both corporations and LLCs face a threepronged citizenship test under Section 40102(a)(15). First, the corporation or LLC must be incorporated or formed and existing under laws of the United States or any state, the District of Columbia or a territory or possession of the United States. Second, all of the following management tests must be satisfied: (i) the president must be a United States citizen, (ii) at least two-thirds of the managing officers/managers must be United States citizens, and (iii) at least two-thirds of the directors must be United States citizens. Finally, at least 75 percent of the voting interests (corporate shares or LLC membership interests) must be owned or controlled by citizens of the United States, and the entity must be under the actual control of United States citizens.

If an Owner Trustee is still necessary to meet the citizenship requirements or if the ownership structure was used for another reason that is still relevant, such as confidentiality, then a replacement Owner Trustee must be selected. The selection should be based on skill set, bandwidth, reputation and commitment to being in the market for a long duration so that another replacement does not have to take place. If the resigning Owner Trustee has suggested a replacement trustee, be sure the suggested replacement meets the selection requirements listed above before hiring them.

Upon selection of the new Owner Trustee, the structure of the trust arrangement should be examined carefully – not only based on what the FAA Civil Aircraft Registry requires and how the selected Owner Trustee prefers to document the transition, but also with close attention to the potential tax ramifications of the transition. It is important that the arrangement be deemed a succession and not a sale, which could trigger sales and use tax in the state where the aircraft is located at the time of filing or the state where the aircraft is primarily used and based. If the trust is assigned instead of succeeded there may be unnecessary tax risks.

When working with the new Owner Trustee, one important item to consider is the length of the resignation notice period. If possible, the notice period should be extended beyond the standard 30 days because it is clear to me after handling several of these transactions recently, that 30 days is often not enough time to facilitate and complete the appointment of the successor Owner Trustee.

As the Owner Trustee market changes, Trustors will need to shift and adjust as necessary. However, making sure the succession is necessary, structured properly and that the new Owner Trustee will be committed to the industry for a long time can help avoid a future succession or a need to restructure the ownership again in the near future.

  Amanda Applegate - Partner, Aerlex Law Group