What To Do When Your Aircraft’s Owner Trustee Resigns

October 2017

There are many reasons why your aircraft may be owned in trust. Some lenders prefer to secure their loans with United States Federal Aviation Administration (FAA) registered aircraft and take a pledge of a trust interest. Some aircraft are placed into trust for estate planning purposes. Perhaps the most common reason is that the FAA aircraft registration system is an owner based registry and FAA rules restrict U.S. aircraft ownership to persons or entities that qualify as U.S. citizens under a strict definition of what constitutes U.S. citizenship. When non-citizens wish to register their aircraft at the FAA, one common way is to employ a non-citizen trust in which the trustee is a U.S. citizen and the trustee agrees to maintain certain control over the asset in matters regarding U.S. security and defense.

So far, so good, right? So what happens if your aircraft is in a trust and you receive a letter from the trustee stating that it intends to resign from its trustee responsibilities? Will this invalidate your registration? Could it result in a default under a lease or loan against your aircraft? In order to best examine the consequences of receiving an owner trustee resignation letter, imagine a hypothetical N registered aircraft owned by a domestic trust (the “Trust”) with the beneficiary of the trust (the “Beneficiary”) being foreign, the trustee a U.S. bank (the “Resigning Trustee”) and the aircraft currently subject to financing by a lender (the “Lender”). We’ll call the aircraft “N-1FMJ”[1].

First, a little background. The FAA initially adopted regulations regarding non-citizen trusts in 1979 (found in 14 C.F.R. Section 47.7), and the rules have remained in effect almost unchanged since that time. On September 10, 2013, however, the FAA issued its Policy Clarification for the Registration of Aircraft to U.S. Citizen Trustees in Situations Involving Non-U.S. Citizen Trustors and Beneficiaries[2] due to problems the FAA had encountered in obtaining operational and maintenance information as to aircraft under certain trusts. The review clarified the FAA’s position regarding the transparency of the beneficial owner’s use of the aircraft, but it also increased obligations on the trustees and provided more independence for the trustees should they decide they no longer wished to bear those responsibilities. Among the new and improved trustee powers, trustees have the right to resign from their trustee responsibilities at any time and for any reason.

The Beneficiary in our example is not a U.S. citizen but would like to keep N-1FMJ registered with the FAA. When the Beneficiary receives the resignation letter, it will need to keep a trust in place and will need a successor trustee (the “Successor Trustee”). Because of the existing financing, however, the Beneficiary needs to determine whether a change in trustee could result in a breach of the existing financing and confirm if there are time limits in which to act to avoid a breach. Even if no potential breach exists, the Beneficiary will need to contact the Lender and, at a minimum, work together to jointly agree on a Successor Trustee. The Beneficiary also needs to reach out to the potential Successor Trustee and reach an agreement with that trustee on how to proceed. The Successor Trustee will likely need to do its own ‘Know Your Customer”/ Patriot Act due diligence on the Beneficiary and determine if it is at liberty, legally, to do business with the Beneficiary.

Assuming all falls into place among the parties, the new relationships will need to be documented at all levels. The existing trust agreement will need to be amended to outline the resignation and assumption agreements between the Resigning Trustee and Successor Trustee. Any amendment to the trust agreement will also need to be submitted to the FAA Aeronautical Center Counsel for approval. There will also likely need to be amendments to the security package with the Lender, including but not limited to FAA title registration changes, UCC filing amendments and new registrations and corresponding discharges with the International Registry. If things do not fall so neatly into place, it could be possible to explore other structures to allow for the Beneficiary to keep N-1FMJ registered with the FAA.

In many ways, setting up a new trust at the time of an aircraft’s purchase is easier than changing trustees during the course of an aircraft’s ownership. Receiving a resignation letter from a trustee can be an intimidating occurrence, one that many aircraft owners may have never expected. The beneficial owner’s citizenship, financing status of the aircraft and jurisdiction of the aircraft’s registration are all complicating factors which will need to be independently assessed and handled accordingly. If you’ve received a resignation letter from the trustee of your aircraft, don’t be alarmed. You will, however, need to take prompt action to ensure that the registration status of your aircraft is not in jeopardy.

Luckily for our hypothetical Beneficiary, the Resigning Trustee, Successor Trustee, the Lender and their attorneys all worked closely and expeditiously and N-1FMJ never missed a day of operation.

If you need further information on these or related matters, contact Garrett Caffee at 952-995-9500 or garrett.caffee@fmjlaw.com. Click here to learn more about our Transportations and Logistics practice group.

[1] Not a valid N-Number.

[2] AFS-751 Information Bulletin 13-01.