The FAA has been a registry of convenience for years. A reliable filing system and well-established regulations and guidelines help to make it a model for the world. As a result, owners, operators and financiers have consistently chosen to register aircraft in the US, even if they never set wheels on US soil. And while only US “citizens”1 may register aircraft in the US, through trusts2 created with the statutory and regulatory blessing of the FAA, non-US citizens have been regularly able to facilitate US registration without difficulty for many years.
The U.S.-based owner trust satisfies the citizenship requirement that a non-U.S. owner cannot. Trusts are used for many reasons in the commercial and general aviation sectors including certainty of U.S. citizenship for U.S. and non-U.S. based business entities, simplification of financing and repossession, optimization of tax planning and convenience of import and export of aircraft by non-U.S. citizens. It’s oftentimes the simplest solution to a complicated problem and it is estimated that more than 10,000 trusts have been utilized over the past 25 years. Title to the aircraft is transferred to the trust under a written trust agreement detailing the respective rights, obligations and liabilities of the trustee and trustor. Thereafter, the trustee manages and maintains the trust assets for an annual fee.
This long-established practice was clouded with uncertainty earlier this year when the FAA was reported to have imposed a moratorium on the review for approval of owner trusts with implications that some US aircraft registrations under earlier approved trust structures could also be invalidated. This “moratorium” was reportedly in response to an investigation conducted by the FAA following accidents involving US-registered corporate aircraft. The owners, in this case owner trustees, reportedly had little knowledge or information on the actual operators and/or operations of their aircraft. In addition, the actual operators of the aircraft may have been the trustors themselves. It is suspected that title had been delivered to the owner trustee with possession being immediately turned back to the trustor without completing necessary filings evidencing transfer of operational control to the operator through a lease or other agreement. Details remain sketchy because the FAA has not been forthcoming with the industry about the trigger for their action.
What is known is that a wholesale change to this practice, particularly if applied retroactively, would have a devastating impact on the aircraft finance and leasing markets. On transactions that relied on this ownership structure, citizenship covenants would be triggered, lender security and perfection could be lost, tax benefits would be impacted and the business of U.S.-based aircraft finance as it presently exists would be fundamentally changed.
A group of commercial and general aviation industry professionals took an unprecedented united front in response to the threat. A behind-the-scenes organizing effort brought attorneys, lenders, lessors, manufacturers and others to jointly sign letters and take other action expressing grave concern over the anticipated changes. They offered to work with the FAA in order to fashion a workable solution to the as-yet unidentified concern. They sought to ensure that any change to this longstanding practice was done with industry input, with full knowledge of the facts and was not unnecessarily broad in response to an isolated incident. At the same time, they prepared to challenge any unilateral move by the FAA to impose such changes without the required public review. In response, and in an effort to calm the waters, the FAA expressly disclaimed the existence of any moratorium and confirmed the status quo — for now — but noting that the matter remained under review. Unfortunately, as of the date of this writing, the FAA’s concerns remain unclear.
Given what is at risk, ISTAT members and member companies must be mindful that this issue remains unresolved. The aviation community should be prepared to support and lead efforts to ensure that any move by the FAA to change the owner trust protocol is done not only with industry input, but also with our industry’s needs in mind. After all, it’s a matter of trust.
- A “citizen of the United States” is defined at 49 U.S.C. §40102(a)(15) and means: “(A) an individual who is a citizen of the United States; (B) a partnership each of whose partners is an individual who is a citizen of the United States; or (C) a corporation or association organized under the laws of the United States or a State, the District of Columbia, or a territory or possession of the United States, of which the president and at least two-thirds of the board of directors and other managing officers are citizens of the United States, which is under the actual control of citizens of the United States, and in which at least 75 percent of the voting interest is owned or controlled by persons that are citizens of the United States.” ↩
- Owner Trusts — 14 C.F.R. §47.7; Voting Trusts — 14 C.F.R. §47.8 ↩