Aircraft, like many other assets, may be owned in trust by a third party on behalf of another in the United States. These are known as owner trusts, but how do they work? Aircraft Guaranty offers insights…
Today’s global economy has created an aircraft market where sales, leases, financings and other transactions involving parties from many locations are not limited to large-scale airlines. Owner trusts are used by many different entities for multiple different reasons.
As the use of owner trusts has broadened, regulations and practices have been developed collaboratively between the FAA and the aviation industry. Here, we will outline the safety and security measures that are currently in place for all trust accounts.
Trustee Applicant Requirements
The FAA has long required that an owner trustee applicant provide a copy of each document legally affecting a relationship under a trust. In short, this means that all owner trustees are under the same obligation as all other aircraft owners to comply with FAA laws and regulations.
The obligation to prove themselves to meet the FAA’s requirements is on the beneficiaries of the trust. To do this, they must provide the potential owner trustee with the following:
Once the beneficiaries provide all necessary documentation to the owner trustees, the trustees are obligated by ‘Know Your Customer’ laws to thoroughly vet any and all beneficiaries before submitting documents to the FAA.
This includes running Office of Foreign Assets Control (OFAC) checks on everyone they are considering putting into trust.
The 2013 FAA Policy Clarification
In 2013, there was an extensive review of the FAA’s policy for registering aircraft in Trust. The resulting Policy Clarification gave the FAA more transparency regarding the beneficiaries of the trusts filed at the FAA.
The FAA now requires and reviews all operating agreements or similar side agreements that allow the trustee to transfer control of the aircraft to the beneficiary. Where no such agreement exists, the trustee is required to provide ‘adequate assurances’ as to why, based on a list of what the FAA would consider ‘adequate assurances’.
The FAA is clear that silence on this issue is not sufficient, and that it reserves the right to review all documents that affect the relationship established under the trust.
The 2013 Policy Clarification also states that the FAA requires all owners (including trustees) to be able to provide the following information within two business days of its request:
The FAA further expects that a trustee should be able to provide the following information within five business days of the request:
Trustees and FAA Requirement
By law, the FAA imposes important safety obligations on all owners of aircraft. This requires that all owners (and therefore trustees) must maintain current information about the identity and whereabouts of the actual operator of an aircraft and the location and nature of the operation on an ongoing basis.
Owner trustees must also provide these operators with critical safety information in a timely manner. They must respond to all FAA inquiries and investigations of alleged violations of the FAA regulations.
Trustees work closely with the FAA to vet these trusts and meet the FAA requirements. In fact, owner trustees are able to collect and store more data on the beneficial owners of these aircraft than the FAA, and they keep files ready to respond to an FAA query within the allotted two-day window.
Quality trustees thoroughly vet their trustors long before they ever put them in trust. Because of the nature of the trust relationship, trustees further develop and maintain relationships with their beneficiaries throughout the life of the trust.
The use of owner trusts is common for Commercial, Business and General Aviation. Trusts are a key part of aircraft manufacturing, sales, service, financing and other aviation industries in the US and around the globe.
Trusts are a viable structure used for viable reasons by countless entities that wouldn’t otherwise be able to register their aircraft in the US.
The History of Aircraft Trusts
Aircraft trusts are an acceptable means for registering aircraft in the United States. What was initially set up to assist the commercial aviation industry is now also used by private aircraft owners to obtain US registration.
The Civil Aeronautics Act of 1938 states that the owner of an aircraft is the person who holds the legal title to it. The FAA expanded this rule in 1939, when it determined that the buyer under a conditional sales agreement is the owner for FAA registration purposes, even though the title to the aircraft was vested in the seller and remained in the seller until all payments were made.
As sales became more complex over the years following this ruling, it was expanded to include nominal purchase option leases, synthetic leases and other forms of leases generally referred to as ‘finance’ leases.
Once an aircraft owner is identified, the next step is to determine if the owner is eligible to register the aircraft. The Transportation Code states that only aircraft owners who are citizens of the US are permitted to register an aircraft.
In the 1970s, ownership of aircraft by trustees became common to accommodate the investment of multiple equity parties in an aircraft. The FAA recognized registrations of these aircraft, even though non-US citizen investors were beneficiaries under the trust agreements.
Initially, the FAA required that non-US citizen beneficiaries could not have more than 25% interest in the aircraft. For aircraft with non-US citizens having more than 25% interest, the FAA would approve registration of the aircraft in the name of an owner trustee.
These 1970s FAA opinions were in response to changes in the way aircraft were being financed. Because investors and equity partners from outside the US were investing in aircraft, the ruling was used for commercial airlines, and even today it facilitates globalization in our economy.
On January 1, 1980, an amendment to the Federal Aviation Regulations (FARs) proposed by the FAA became effective. This amendment covered the registration of aircraft subject to various forms of ownership, which for the first time included trustee-owned aircraft. It set the requirements applicable to the registration of the aircraft owned by trustees.
The last sentence in the amendment states that “nothing in this paragraph prevents those persons from having more than 25% of the beneficial interest in the trust”. This refers to people who are neither US citizens nor resident aliens.
There have been many changes in financing, leasing, and operating arrangements for aircraft over the years. It is no longer common to find multiple equity investors as beneficiaries under one trust in aircraft financing, leasing, or operating arrangements, although there are often multiple owners of an aircraft which means there may be more than one non-citizen trust (NCT) owner of an aircraft.
Aircraft Guaranty has been helping owners register their aircraft since 1989, and is available to answer any questions you may have on trusts.