NAFA member, Scott Nielsen, Chief Marketing Officer with TVPX Aircraft Solutions, discusses Non-Citizen Trust agreements.
Why do NCT trust agreements contain language limiting a trustor’s control over the trustee?
One of the few ways non-US citizens may register aircraft in the United States is to form a Non-Citizen Trust (“NCT”) whereby a US citizen company is appointed as trustee to own and register the aircraft on behalf of the non-US citizen. The NCT agreements include fairly strict language limiting the amount of control (“Control Language”) the non-US citizen can exert on the trustee. For example, trustees have full discretion to take actions related to the ownership and operation of the aircraft that is subject to the NCT. Such language is not an invention of trustees. The US Code and FAA rulings make it clear that the registered owner of an aircraft must be actually controlled by a US citizen and may not be merely an agent of a non-citizen*. The issue surrounds concern about control of the US air transport industry and fear that aircraft assets may be used nefariously or “against the best interests of the United States”.
In theory, the Control Language seems extremely problematic. In practice, the provision is rarely ever an issue. First of all, any discretionary action taken by the trustee as outlined in the Control Language must be done “with due regard for the interests” of the non-US citizen. Second, the aircraft operating agreement which accompanies every NCT, grants the non-citizen beneficiary or its designee the sole right to operational control of the aircraft, as well as the obligations to conduct operations within the parameters of FAA regulations, as any FAA authorized operator would be. The trustee has no interest in becoming involved in actual aircraft operations.
Finally, it should be noted that while the Owner Trustee is the legal owner of the aircraft and retains control for the express purpose of “protecting the interests of the United States,” the non-US citizen is the beneficial owner of the aircraft and retains all economic benefit. The trust is a pass-through entity meaning all income “passes through” the trust to the beneficial owner. The Trust Agreement precludes the Owner Trustee from selling the aircraft without the beneficial owner’s authorization, and any proceeds from such a sale go directly to the beneficial owner.
The owner trust structure is such an attractive option for aircraft registration in the US because it allows both the regulatory agencies and the aircraft owner to achieve their primary objectives. Regulatory agencies are assured of the registered owner’s compliance with the US citizenship requirements and the aircraft owner can have the aircraft registered in their preferred jurisdiction, while still having decision making authority as to operations and the ultimate sale of the aircraft.
For information about owner trusts please contact Scott Nielsen at +1.801.877.0509 or scott@tvpx.com.
*For the incurably curious, the citations can be found in 49 USC 44102 and 49 USC 40102(a)(15).
This article was originally published by Scott Nielsen with TVPX Aircraft Solutions on February 10, 2021.
