Pilots Guide to Co-Ownership
Table of Contents
Importance to Members
An aircraft purchase, new or used, is always a significant investment. A common and simple way to diffuse this cost is by sharing the expense with other purchasers. A co-ownership agreement can halve, or even quarter the cost of ownership. This subject report provides information on how to properly set up a tenancy in common or a joint tenancy. The Q & A section provides answers to commonly asked questions, but if there is information you still need, don’t hesitate to call the Pilot Information Center at 800-USA-AOPA (872-2672) Monday through Friday, 8:30 to 6:00 ET. AOPA’s aviation technical specialists would be happy to help you.
The Co-Ownership Concept
The concept of co-ownership is very simple. It is nothing more than two or more individuals sharing the responsibilities of owning an aircraft. Obviously, when you spread the costs of aircraft ownership among multiple owners, your costs decrease. The apparent simplicity of this arrangement is what attracts a number of aircraft owners to a co-ownership arrangement.
In a co-ownership arrangement, you have the opportunity to select the co-owners, choosing people whose aircraft needs and flying habits complement your own. The term "co-ownership" is often used interchangeably with "partnership." However, these two arrangements are not technically the same. A partnership involves an association of two or more persons who carry on as co-owners of a business for profit. Therefore, a partnership involves something far more complex than simple shared ownership. The objective of a partnership is to make a profit. So, if all you want to do is share the ownership of an aircraft with another person, you will be co-owners, not partners.
There are different types of co-ownership arrangements. The most common is called tenancy in common. The other general type of co-ownership is called a joint tenancy. In a tenancy in common, the co-owners are called tenants in common or co-tenants. In a joint tenancy, they are called joint tenants.
The most important distinction between these two forms of ownership has to do with the disposition of each co-owner's interest when he or she dies. The interest of a tenant in common passes to a person's heirs according to his or her will, or according to state statute if there is no will. The heirs and the surviving co-owner(s) then become tenants in common. The joint tenancy, on the other hand, is characterized by a right of survivorship, which means that the interest of a deceased joint tenant passes to the surviving joint tenant or tenants. In the context of aircraft co-ownership, this would mean that if you die, your share of the aircraft would go directly to your co-owner and not to your heirs.
In most states, a co-ownership arrangement is presumed to be a tenancy in common and will only be considered a joint tenancy if that provision is explicitly created. Even the use of the term joint tenancy or joint tenants is not a clear enough expression to create a joint tenancy in most states because people often use such terms in a non-technical sense to refer to a tenancy in common. Therefore, if for some reason you wish to create a joint tenancy, you should expressly refer to the right of survivorship in addition to using the terms joint tenants or joint tenancy.
Once you have made your decision to enter into a co-ownership arrangement, your next important step will be to sort out the obligations of each of the co-owners. We strongly suggest that you take the time to draw up a list of "ground rules" for each co-owner to abide by. The next step is to take this list to an attorney who can draft a co-ownership agreement that will bind all the co-owners. The extra time and the relatively small additional expense involved in doing this will far outweigh the risks of disagreements and misunderstandings that are bound to occur down the road.
Co-Ownership Agreement Checklist
To help you and your attorney put together a co-ownership agreement, here's a checklist of some essential matters you should include in your agreement:
- Identity of the Parties and Aircraft: It may seem obvious, but don't forget to list the full name and address of each co-owner along with the date of your agreement. It's also a good idea to spell out the make and model of your aircraft along with its registration and serial numbers.
- Title to the Aircraft: Specify how the aircraft will be held by the co-owners - joint tenancy, tenancy in common, or other arrangements.
- Financing: In many cases, each co-owner will personally finance his or her own share of the aircraft's cost. If this is not the case, the details of financing arrangements should be spelled out in the agreement. AOPA's Aircraft Financing Program can help you obtain pre-approval and financing with a quick turnaround. For more information call 1-800-62-PLANE (627-5263).
- Insurance: The co-owners should agree on the type and amount of liability insurance they want to carry. Consideration should also be given to hull insurance, deductibles, and whether you will get "in-motion" or "not-in-motion" coverage. You must make it clear that all aircraft operations must be in accordance with the terms of the co-owners' insurance coverage. For instance, allowing no commercial operations and limiting aircraft use to pilots with certain ratings or minimum hours. You will also want to decide who is responsible for deductibles in case of an accident. AOPA's Aircraft Insurance Program can provide you with a free quote. To get your free quote and get answers to your insurance questions, call us at 1-800-622-AOPA (2672).
- Basing: Where will your aircraft be based? You might consider limiting the number of days your aircraft can be taken from its home base without special permission from the other co-owners.
- Authorized Pilots: You should decide who you want flying your aircraft. After you've decided, put your restrictions in the agreement.
- Aircraft Scheduling: Depending on your aircraft usage, it may be necessary to create a formal system for scheduling your aircraft. A flexible, but carefully spelled out set of guidelines can save a lot of headaches in the future.
- Fixed Expenses: There should be some procedure spelled out for the payment of fixed expenses, including insurance, tie-down fees, annuals, and hangar fees. Will these expenses be paid based on equal shares by all co-owners or adjusted based on hours flown? Perhaps a fund can be maintained at a fixed level and be replenished by the co-owners on a regular basis.
- Operating Expenses: These are expenses like fuel, oil, and maintenance which generally increase with aircraft use. You may decide to bear these costs equally or in proportion to hours flown.
- Overhaul Fund: Some co-owners like to set up a fund which will be used at a later date to pay for the inevitable engine overhaul. If you think an overhaul fund is a good idea, you must decide how much should be contributed and how often contributions must be made. It may also be necessary to decide whether you want to refund any portion of the contributions to co-owners who sell their share of the aircraft.
- Aircraft Improvements: Procedures should be put in place in case some or all of the co-owners want to improve the aircraft in some way, such as by adding equipment. Do all co-owners have to agree before making any new improvements? How will improvements be paid for? Perhaps an adjustment will have to be made for each co-owner's share of the aircraft if they pay for improvements.
- Federal Aviation Regulations (FARs): This should go without saying, but you still may want to specify that all operations will be in accordance with the FARs. If there is a violation of the FARs and the FAA decides to impose a civil penalty against the co-owners as the "operator" of the aircraft, rather than against the individual pilots, you should decide on who will be responsible for paying the fine.
- Co-owners Responsibilities: It might be a good idea to delegate specific duties to each co-owner. These duties might include bookkeeping, scheduling, and maintenance.
- Timely Payments: The success of your co-ownership will depend in great part on how conscientious each co-owner is in meeting his or her financial obligations. Set deadlines for payment and penalties for delinquencies. If delinquencies reach a specified point, you may want to trigger a forced sale of the defaulting co-owner's share of the aircraft.
- Life Insurance: Co-owners may want to maintain life insurance policies naming the other co-owners as beneficiaries. This will allow the other co-owners to buy out the interest of a deceased co-owner.
- Sale of Aircraft: Decide how funds will be distributed when and if all the co-owners make a decision to sell the aircraft. Be sure to call our experts at the Pilot Information Center at 800/USA-AOPA (872-2672) or visit our Web site www.aopa.org/members/vref/for help in valuing your aircraft.
- Voluntary Sale of Co-Owner's Interest: This may be one of the most important considerations in drafting your agreement. Thought should be given to valuation of the co-owner's interest and notifying the remaining co-owners of the decision to sell. You must also determine whether remaining co-owners should be given a first shot at buying the selling co-owner's interest in the aircraft. Perhaps you will want to restrict the selling co-owner's ability to transfer his or her interest to third parties.
- Forced Sale of a Co-Owner's Interest: Provisions should also be made for those difficult situations where a co-owner fails to meet his or her obligations under your agreement. Decide on what deficiencies or defaults will trigger a forced sale. How will the expelled co-owner's share of the aircraft by valued? How will adjustments be calculated for amounts owed to remaining co-owners?
- Death of a Co-Owner: This situation must be addressed with the understanding that, in most cases, the deceased co-owner's family is the new co-owner of the aircraft. In many cases, it would be wise to provide for a sale in accordance with the rules you have drawn up for voluntary sale of a co-owner's interest.
- Arbitration: It may be a good idea to provide in advance for arbitration of disputes in lieu of litigation, which can be more costly and time-consuming. Be careful to follow any special requirements your state may have for arbitration clauses.
- State Law: Decide which state law you want to govern your agreement in case of disputes.
Again, this checklist is designed as a guideline for drafting your co-ownership agreement. Remember, a professionally drafted agreement can save you a lot of anguish in the future.
Now that we have covered some of the basics of co-ownership and co-ownership agreements, let's take a look at some specific questions we frequently hear from members.
Frequently Asked Questions About Co-Ownership
Q: When an aircraft is transferred to or from a co-ownership arrangement, whose name(s) should appear on the FAA Bill of Sale (AC Form 8050-2)?
A: If a group of co-owners are buying an aircraft, all of their names must appear in the "Purchasers" block of the FAA bill of sale. Likewise, if a group of co-owners sell an aircraft, they must all sign as "Sellers" on the bill of sale.
Q: How should co-owners fill out the FAA Registration form (AC Form 8050-1)?
A: First, the form block titled "Type of Registration" must be checked at the box labeled "Co-owner." Then all of the co-owners names must appear in the block titled "Name of Applicant." If co-owners are added or deleted, the registration must be amended to reflect the names of the new aircraft owners. The FAA fee for issuing a certificate of registration is $5. (See the sample aircraft registration application.) The FAA will also need a supporting bill of sale showing the transfer from the previous co-ownership to the new co-ownership.
Q: If co-owners change the mailing address listed on their certificate of registration, who do they notify?
A: Notification must be given to the FAA Aircraft Registry, P.O. Box 25504, Oklahoma City, Oklahoma 73115 within 30 days after a change in the issuers' permanent mailing address. The FAA will then issue a revised certificate of registration without charge.
Q: Can a corporation be a co-owner?
A: Yes. Under the FARs governing registration (see FAR section 47.2), co-owners can be corporations who are citizens of the United States or one of its possessions. A corporation is considered to be a citizen of the United States when its president and two-thirds or more of the board of directors and other managing officers are individuals who are United States citizens. In addition, at least 75 percent of the voting interest in the corporation must be owned or controlled by persons who are United States citizens.
Q: If a co-owner dies, who should sign the bill of sale if the deceased co-owner's share of the aircraft is sold or transferred?
A: The executor or administrator of the estate of the deceased co-owner must sign the bill of sale and submit a certified copy of letters testamentary or letter of administration appointing him or her as the executor or administrator of the estate. If a co-owner dies without a will, the FAA will accept an "Heir at Law" affidavit which affirms that: 1. No will exists; 2. There is no court appointed administrator and to the best of the affiant's knowledge there will not be; and 3. That he or she is the person who has the right to dispose of the aircraft under applicable state law.
Q: When co-owners purchase an aircraft, what tax consequences can they anticipate?
A: Probably the most significant tax consequence will be a sales or use tax on the purchase of the aircraft. Most states have sales or use taxes and they are becoming more and more aggressive in collecting these taxes. (See AOPA's Aviation Services booklet titled Pilot's Guide to Taxes: Income, Personal Property, Sales, and Use ). Please keep in mind that if a new co-owner comes on board, he or she will also be responsible for a sales or use tax based on the amount he or she paid to be a part owner of the aircraft.
Q: Can a co-owner be held liable for damages if another co-owner is involved in a mishap?
A: Generally, yes. As an aircraft owner, you may be held liable for any aircraft operations regardless of who is flying the aircraft. In some states, there is even a presumption of liability on the part of the aircraft owner. (This is one of the questions that should be broached with a local attorney.) Considering purchasing AOPA's Legal Services Plan. Just $33 a year puts the aviation legal assistance you need on your side all year long. Apply online or call toll-free: 1-800/USA-AOPA (872-2672).
Q: How should co-owners insure their aircraft?
A: The aircraft should be insured under one policy and all co-owners should be identified in that policy as policy holders.
Q: How does a co-ownership group apply for an aircraft radio station license?
A: It should be noted that the Radio Station License is no longer required by FCC for US-registered aircraft. However, there is an ICAO requirement for the license for international travel. You will need a Radio Station License only when travelling in another country. When applying for the license, be certain to include a notice "For International Travel," otherwise your application may be returned unprocessed.
Co-owners planning to fly outside the United States should complete Federal Communications Commission (FCC) Form 605 (see the sample form) and submit the $115 fee to the FCC at Aviation Aircraft Radio Service, PO Box 358280, Pittsburgh, PA 15251-5280. To get FCC Form 605 call 888/225-5322. Note that the form does not have a special box for a co-ownership application under item 12. The FCC has indicated that a co-ownership should apply as a "partnership." In addition, if new co-owners are added or old ones leave, there is no need to apply for a new radio station license. Co-owners must also fill out and submit FCC Form 159, Remittance Advice, with the application.
Sample Co-Ownership Agreement
A sample agreement was drafted by Duane J. Higbee. This agreement has been reviewed by the author with only minor substantive and editorial changes being made for the purpose of this report. Mr. Higbee has found success with this agreement in his aircraft co-ownership, and we believe that a careful review of his agreement will benefit you and your attorney when you draft your own co- ownership agreement. We urge you not to copy this agreement and "fill in the blanks." You'll be investing a substantial amount of your money in your co-ownership arrangement. Having a qualified attorney draft your agreement will be well worth the cost. To view this sample agreement, please follow this link.
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