Navigating Transfers of Federally Regulated Aircraft

• Citation: Vol. 48 No. 1 Pg. 30
• Year: 2025
• Pages: 30

Navigating Transfers of Federally Regulated Aircraft No. Vol. 48 No. 1 Pg. 30 Wyoming Bar Journal February, 2025

By Kaylee A. Harmon

Although estate planners frequently deal with the transfer of commonly owned assets such as homes, cars, and financial accounts, it is less common to encounter certain federally regulated assets, such as airplanes. Unsurprisingly, there are a fair number of restrictions and requirements to be considered when dealing with a conveyance of such assets. These restrictions can operate as a trap for the unwary practitioner.

Many wealthier clients may own a non-commercial aircraft for their own private use. From an estate planning perspective, it may be tempting to transfer ownership of such an aircraft to a Wyoming limited liability company or other form of asset holding company for many reasons, including liability protections and anonymity. However, practitioners should be aware of the special legal issues that can arise with this particular type of asset.

Part 91 of the Federal Aviation Administration (FAA) regulations typically governs the operation of small, non-commercial aircraft purchased for personal or business use.^[1] In comparison to commercial operations, which are governed by Part 135 of the FAA regulations, operations under Part 91 offer much-desired flexibility for clients in areas such as personnel and policies, pilot duty days, aircraft maintenance, operation during various weather conditions, and runway lengths. If a client uses their aircraft for "compensation or hire," the operation of such aircraft is no longer governed by the flexible provisions of Part 91 and will instead be subject to the rigid commercial provisions of Part 135 of the FAA Regulations.^[2]

If a client establishes a disregarded entity, such as a limited liability company, to hold title to an aircraft for the sole purpose of facilitating the client's personal use and the transportation of owners and guests, that entity will be considered a "flight department company" by the FAA.^[3] Flight department companies are not eligible to operate under Part 91 because capital contributions to the entity, and any other payments for expenses, are considered "compensation."^[4] Because the flight department company rule prohibits operation, not mere ownership, of aircraft for personal use, the company's operations in this circumstance would be governed by Part 135 relating to commercial use.^[5]

One practical solution to this problem is for clients to enter into a "dry lease" with a separate operating entity, which refers to a lease of the aircraft only, without the crew.^[6] The lessee can be the client or another individual who owns or manages the operating entity.

The lessee will need to pay an agreed-upon rental amount for the aircraft based on the hours of operation, and will take responsibility for providing and paying the operation expenses of its own flight crew or a separately-contracted flight crew. Based on FAA guidance, the lease agreement should indicate who is responsible for maintenance and insurance of the...