United States: The Family Office: Planning For Private Aircraft Assets

Jonathan Epstein and John Hoover are Partners in the Washington D.C. office

HIGHLIGHTS:

  • Family offices are increasingly involved in structuring and managing the ownership or use of private aircrafts for business and personal travel.
  • The optimal structure will vary depending on a number of factors, including expected usage, mix of business versus personal or other uses, and the structure of the family assets.
  • Careful planning on ownership and operation can result in significant tax savings or deferment and ensure compliance with regulatory requirements.

The past decade has seen the growth of the family office as a separate legal entity to manage the assets of families, coordinate multi-generational planning and philanthropic activities and otherwise act as stewards for family assets. Hence, it is logical that when the family members use private aircraft for business and personal travel, the family office is often involved. Aircrafts are expensive assets to acquire and operate and careful planning on ownership and operation can result in significant tax savings or deferment as well as avoid regulatory and liability pitfalls.

What Is the "Optimal" Structure for Owning and Operating the Aircraft?

The optimal structure will differ depending on a number of factors, including expected usage, mix of business versus personal or other uses, and the structure of the family assets and income stream. In addition, the "optimal" structure must balance objectives that may conflict with one another.

  • Tax Planning. A large family office may have sufficient revenue and operations to support the use of a private aircraft in connection with the family office's business. In many cases, the use of the private aircraft on family office business can be structured as a charter or lease to the family office. However, it is often difficult to justify having the family office own and operate the aircraft on all flights, including personal and other business flights. If the family office is not operated profitably, then it risks being classified as a "hobby," resulting in adverse tax consequences.
  • Regulatory Compliance. If the aircraft is going to be operated as a private aircraft (and not by a Federal Aviation Administration (FAA)-certificated air taxi operator/charter manager), then there are strict limits for when a company can provide the aircraft with crew for use to another entity or person for compensation, even by the company's owners. In practice, this means that the family office cannot typically act as a "flight department" company, or set up a separate company to own and operate an aircraft for family members. However, there are several mechanisms commonly used to allow cost-sharing among family members and entities, including: 1) dry lease arrangements and 2) timesharing agreements.
  • Limiting Liability. Since protecting family assets is a key charge of most family offices, structuring aircraft ownership and operation to mitigate liability is an important factor. This can be done through several means, including 1) ensuring adequate insurance coverage, 2) segregating ownership and operations of the aircraft from the main assets of the family, and 3 ensuring that corporate formalities are honored to prevent potential plaintiffs from "piercing the corporate veil."
  • Functional and Sustainable Structure. While complex reimbursement structures may make sense on "paper," simpler structures tend to work better in the long term because: 1) the administrative burden is lower and 2) they reduce the risk that over time, intracompany payments or other formalities are ignored (therefore busting the tax or regulatory object that was sought).
  • Usage and Succession Planning. Similar to multi-owner aircraft, given the high value and significant cost of private aircraft, careful thought should go into planning usage, as well as how and when the aircraft assets would be sold or otherwise allocated in the future.

What Role Should the Family Office Play with Regard to Private Aviation?

The family office plays a key role in the initial planning and ongoing accounting for the aircraft.

  • Planning. No one knows the family asset structures like the family office manager. A good aviation lawyer or tax advisor will want to fully understand not only the family asset structure, but which individuals and entities will use the aircraft, the percentage of personal to business use expected, how family members feel about using a charter manager, and even the plan for disposition of the aircraft if a key individual dies or becomes incapacitated. Hence, the family office has a key role in the planning stage.
  • Accounting. There are a plethora of tasks that the family office is well suited to oversee.

    • Ownership structures are often complex, with intracompany leasing or other cost reimbursement structures that may require intercompany payments and, in some cases, the collection of state sales taxes (or, in the case of timesharing arrangements, federal excise taxes).
    • Setting up and monitoring the purpose of each flight and the type of traveler onboard is critical to being able to properly depreciate the aircraft and determine which costs are deductible.
    • Depending on how personal use is structured, there may be "imputed" income to certain individuals that would need to be reported. Ensuring that key contracts such as insurance are maintained and key vendors paid. Ensuring that funds are not commingled. For example, that where one entity is required to pay for services, such payments are made from that entity's bank account.

Can the Family Office Own or Operate the Aircraft?

There are scenarios where the family office may be able to own and operate the aircraft directly, such as when the family office entity actually owns significant assets and has significant income. Similarly, the structure may work where the aircraft is "operated" by a charter manager or in the case of fractional shares. However, in many cases, the family office may not be the "best" entity to own the aircraft for several reasons. There are the strict FAA rules about cost-reimbursement for aircraft that are privately operated. Further, from a tax perspective, the family may not have sufficient income or operations to justify the use of a private aircraft. Hence, from a tax planning perspective, it may not be in a position to benefit from depreciation of the aircraft.

Should We Use a Professional Management Company?

For the family office, a good professional aircraft management company can be invaluable in hiring pilots, overseeing maintenance, and arranging hangar and insurance coverage. In addition, many managers are also FAA-certificated air taxi operators. As such, they can fly the aircraft in charter for third parties, help generate revenue to defray some of the fixed costs of owning and operating the aircraft, and be beneficial for tax planning purposes. However, there are costs associated with using a manager, and some families may not want their aircraft used by third parties.

Do We Need to Develop Our Own Expertise?

While you can rely on advisors for planning, having someone within the family office who is familiar with the regulatory and tax issues particular to aviation – and who understands the rationale behind the structuring – is invaluable. For example, it is not uncommon that as time goes on, employees may seek shortcuts in what information is collected or cease making intracompany payments to simplify procedures. Having someone periodically attend business aviation conferences, as well as monitoring news and client updates put out by law firms and advisors, can also be helpful.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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