#161 - Aircraft Ownership, Insurance, and Liability with Scott Williams

[00:00:00] Hey everyone, welcome back to Passive Income Pilots. It's Oshkosh week coming up and boy, do we have some great aviation content for you. It's Tait Duryea and Ryan Gibson here for another week of education. Ryan, how you doing man? I'm doing great. You know, I bought an airplane not too long ago and I put it in an LLC and I am going to talk about, we're going to talk about today. All the mistakes that you made. I made a lot of mistakes. All the mistakes that I've made.

[00:00:28] And the best part is Scott Williams is my attorney who we're going to bring on, who set up my entity and put my airplane in. He was pretty upfront with me about how silly some of the things I did were. So take it from me, do it the right way. Scott is going to help you set up your entity, your dry lease, all the things that you need to properly own an airplane. And we're going deep into all those factoids. Okay, if you're a pilot and you own an airplane, think about owning an airplane. Or you're a ferry pilot.

[00:00:58] If you're ferrying an airplane from point A to point B or doing something or flying somebody else's airplane, you have to listen to this show. Yeah. Even flying someone else's. Yeah. You have to listen to this because you're going to learn you're taking on serious liability unless you tweak one or two things. And we're going to, we're going to share that information on the show. And I think you're going to really like, you're going to like, oh my God, I never realized the liability I was taking on when I fly someone else's airplane.

[00:01:23] And you might even think, oh, well, there's an open pilot warranty on the plane and, or I'm named or whatever. You still are going to be carrying a lot of light. So we're going to talk about what that nuance is on the show today. All the strategy behind putting in an entity, when it doesn't make sense, when do I get the depreciation, the taxes, all that stuff. We're going to get covered on the show. Absolutely. Tait, who do we have coming on? Scott Williams, general aviation law.org. He's the principal attorney. He's also a pilot there.

[00:01:53] And yeah, we're going to get into all this stuff. So I'm excited. Let's get into the show. Let's do it. Welcome to Passive Income Pilots, where pilots upgrade their money. This is the definitive source for personal finance and investment tactics for aviators. We interview world-renowned experts and share these lessons with the flying community. So if you're ready for practical knowledge and insights, let's roll. Scott, thanks for coming on.

[00:02:23] And really looking forward to getting into all the semantics around entity formation and buying airplanes and what we need to do this the right way. But Scott, why don't you give a little background about who you are and tell us a little bit about yourself. Sure. Thank you for having me. I'm Scott Williams, principal and founding attorney at the General Aviation Law Firm.

[00:02:44] We're all things GA, part 91, helping people buy and sell airplanes and stay in part 91 and not avoid getting into a part 135 situation. Background as a pilot, 38 years, about 4,000 flight hours, mostly in piston singles. I own a Cirrus SR-22 Turbo that I keep at Camarillo. And I'm a past president of the Cirrus Owners and Pilots Association. Fantastic. Wow. That's great.

[00:03:14] What got you into flying? What got me into flying? I was a cadet in Air Force ROTC at UCLA. And even though I wasn't going to be a pilot candidate, a bunch of my fellow cadets were walking in trying to get hours to become a pilot. And they'd pound their chest and say, I just sold an airplane today. I'm like, really? If this guy can be a pilot, I can do it too. Went out to Santa Paula when I was in college in a Cessna 150.

[00:03:43] Two men in a can and got my license in three months and my instrument three months later. And here I am. Well, a fun fact. Camarillo was my very first solo cross-country. So, I know the airport well, or at least from 20-something years ago, I do. And we were talking before we hit record here that you're headed out to Oshkosh. You taking the Cirrus? Absolutely.

[00:04:09] Leaving Camarillo for Wichita, Kansas overnight on Saturday and then into Oshkosh Sunday for the big Cirrus party Sunday afternoon. So cool. Monday, I'll be presenting in Oshkosh on aircraft lawsuits. Where and why? Okay. Well, we'll get into that. Wow. Well, that just supercharged maybe what we can talk about today. Maybe we get a little sneak peek before your Oshkosh interview. You bet.

[00:04:34] Well, Scott, we met because I bought into an airplane and you set up my entity and my LLC to buy that airplane. And I'm actually just using it mostly for personal use. But I felt it was good to entitle it or title it into an entity.

[00:04:53] And there was lots of little things that I learned along the way that I had no idea, which is, you know, things like a dry lease and really kind of just the whole avoiding me being in an entity, avoiding part 135. But can you just kind of get our listeners, you know, that are listening to this, maybe just the basics of why you would even want to put your airplane into an entity in the first place? Sure.

[00:05:18] If you are a U.S. citizen and you want to buy an airplane, you've got two choices. You can put it, pre-choices, you can put it in your own personal name. You can put it into your trust for probate avoidance purposes, but that provides zero liability protection. Or you can put it into an LLC, provided that at least 75% of the members and two-thirds of the managers are U.S. citizens, you qualify to be in an LLC.

[00:05:42] The two big reasons you want to have an aircraft in an LLC and not in your personal name have to do with liability, A, if other people are flying the plane for any reason. That could be a partner or it could be a post-maintenance or a ferry flight. The other big reason is that someday you're going to want to sell your airplane. And when you sell it, and heaven forbid, if the next owner crashes the airplane, who does a plaintiff's lawyer sue?

[00:06:11] They sue the pilot in command, the current owner alleging improper maintenance, and hey, while we're at it, let's just name all of the past owners claiming they didn't do good maintenance either. You want them suing your LLC and not you personally. So while the LLC doesn't necessarily protect you from your own negligence as pilot in command, it generally provides protection when other people fly it or for subsequent ownership. That's a great point. Very interesting.

[00:06:39] So, you know, there are a couple ways that, and I don't want to get into the taxation, but so is an LLC just as a disregarded entity sufficient? Do you look to set up partnerships? I know that S-Corps can have some unintended tax consequences if you were to move that asset out of it. So how do you recommend setting up that entity?

[00:07:00] So almost always the LLC is going to be a single member disregarded entity, either owned by an individual or perhaps by an individual's business entity so that all of the taxable activity of the aircraft flows directly to the business. If it's a multi-member LLC where you have exclusively personal use of the airplane, it's perfectly fine to have multiple members.

[00:07:26] And if there's no business use, you don't have to file partnership tax returns. All of the money coming into the LLC is a capital contribution. There's no rental income. So it's a pretty clean and tax disregarded entity, even though it's a partnership. Where it gets a little tricky is when you have multiple people buying an airplane and there is business expensing or depreciation.

[00:07:51] Now you have to look at a whole new scenario, which is each one of the owners will form their own separate LLC, single member disregarded entity. And each of these LLCs will co-own the airplane. So three people want to go in on a vision jet. Some of them or one of them may have business depreciation. Each one of those three needs to form a separate LLC and each of those three LLCs will own one third of the airplane.

[00:08:20] This way, partner A's business issues and taxation issues don't affect partners B and C or vice versa. Especially when you go to sell, you don't want to get tagged with depreciation on a asset that you never depreciated to begin with. Right. Recapture on somebody else's depreciation. Yeah. And so that kind of maybe answers an obvious question, which I'll ask it anyway.

[00:08:44] But so if you go in the three partners and they all have their own LLCs, one of those partners might not be using the airplane for business purpose at all. Is that right? And then that way they don't have to get any tax benefit. I mean, there might be one person that says, hey, I just want to be in there personally and fly it for fun. And the other two might say, I'm going to have this as a business purpose. And that allows them to depreciate and take all the deductions that they need. Is that right?

[00:09:08] Correct. So as long as all of the co-owners are personal use only, one LLC with multiple members works fine. The minute any of the members want to do any business expensing or depreciation, now we need a separate LLC for each co-owner. Now, let's say let's rewind back to if there was just one person buying the airplane and it was one LLC.

[00:09:34] Would you make that LLC that owns the airplane disregarded or would you have another layering of another LLC that that makes the business purpose or how would you structure that? So a common misconception is that titling an aircraft in an LLC provides a tax benefit. It doesn't provide a benefit, nor does it provide a detriment.

[00:09:53] In order to deduct aircraft expenses, you have to use the aircraft for business purposes and the business travel needs to be an ordinary and necessary business expense. If you meet those qualifications, then great. You get to deduct business expenses as in the cost of the aircraft, depreciation of the aircraft, multiplied by the percentage of business versus personal use. But the LLC itself doesn't need to be layered.

[00:10:21] Just having the aircraft own the LLC is sufficient. It can be owned by an individual or it can be owned by a business entity. If you're going to use an aircraft for a lot of business travel, you generally want to have your business be the member of the LLC to avoid having to transfer money back and forth with leases. It's much cleaner for the business and the LLC to be the same taxpayer. And one more question. So then just on this personal use, right?

[00:10:50] So we know you've established the reason to have the LLC, right, for liability protections. But you could also just own it in your own personal name and use it for business use, right, and get that deduction. You don't even need to have the entity necessarily at all to get the tax benefit, right? Correct. You could enjoy the tax benefits of business use in your own name, but now you've got liability issues. Again, somebody else may fly the aircraft someday.

[00:11:15] And when you do sell it, you want the allegations of improper maintenance to be against your LLC and not you personally. So Ryan, you got your 185 and you said you use it mostly for personal use. Well, maybe we'll cut that part out for the IRS. But let's say that Ryan is using his 185 half of the time to go and check on self-storage properties and the other half to go camping with his family.

[00:11:42] You know, we've talked on this show in the past in terms of tracking business aircraft use. And, you know, first of all, I've got kind of a two-part question. Number one, and I know you're not necessarily a tax attorney, so I don't want to put you on the spot too much in terms of the taxation piece. But the reason I'm asking, of course, is because the 100% bonus depreciation on aircraft is a very attractive thing for a lot of pilots out there, right?

[00:12:09] So if they have, let's say, rental property that they're going to go check on, first of all, is that reasonable and necessary? Would it be reasonable and necessary for Ryan to fly his 185 from Seattle to Texas to go and look at a property? And then the follow-up to that would be if he brought his family along, would it still be a business write-off? Okay. So two-part question.

[00:12:30] The first part is flying an airplane for an operational business like a construction company or a consulting business where you have real earned income. That's a much easier case to make for business travel. Rental properties are passive activities. And you're going to have a tough time expensing an airplane against passive activity unless you want to treat those expensive also as passive.

[00:12:58] So to deduct aircraft expenses against ordinary income, you need to have a legitimate operational business purpose. Passive activities like rental properties won't cut it. Now, if you're making lots of money on your rental properties and you want to write off the cost of travel to those properties, that may very well work and I always defer people to a CPA on the nuances.

[00:13:21] But general rule, you don't want to try to cross operational expenses, active activity with passive income or vice versa. It has to be like-to-like. With regard to the second question about taking your family along, there is a rule called CIFL, standard industry fare low, that if you start flying jets and filling those seats with non-business occupants, you're supposed to charge them the standard industry fare or airline fare and then reimburse.

[00:13:51] IRS doesn't really pursue that on piston singles or even turboprops if you stuff family in there, but you had to make the flight anyway. Anyway, I have yet to see a tax auditor even raise that issue. Very interesting. I wanted to clarify something really too. Like there's a lot of highlights that are listening to this and have rental properties and maybe they think, okay, I'm going to buy and depreciate an airplane and then I'm going to write off the trips to my rental properties.

[00:14:17] And I think what you're getting at is you're saying you can probably deduct the fuel, you know, talk to your CPA, of course. You can probably deduct the fuel and the kind of incidentals that go along with that, but putting it into like depreciation, you know, for that passive activities work, it's a little clouded, right? I mean, that's kind of the idea. Yeah, you could in theory depreciate an aircraft and apply that depreciation to the rental income, but not to your ordinary income.

[00:14:46] In other words, if you have a W-2 job, but a bunch of rental properties that are kind of breaking even, you're not going to see a tax benefit buying an airplane. I get this phone call all day long. I'm a high income W-2 earner. How do I save money on taxes? I say, tell your employer that you want to be an S corporation and have them pay your S corporation. That's the only way around W-2 lockdown. Right. That makes sense.

[00:15:12] So let's explore another option because, you know, a lot of our listeners are high income W-2 professionals. Of course, a lot of airline pilots out there and other professionals that are looking for, you know, tax optimization while also potentially having a fun toy. We've talked in the past about instead of, you know, your business buying that aircraft and going through that, which may pose a challenge to a lot of our listeners because they might not have an active trader business outside of their W-2 job.

[00:15:42] What are your thoughts on either buying an airplane and leasing it back to a flight school? And when you go and use it, you pay fair market value for it on a rental rate or buying it and putting it into some sort of a lease pool where other people can rent it and use it from you. And of course, the same thing. You would rent it from your own leasing business, essentially. The biggest problem there is that the IRS has examined the flight school angle 18 ways to Sunday,

[00:16:08] and they have declared in multiple court cases that leasing back to a flight school is a passive activity. You're not going to be able to meet the material participation test under Treasury Regulation 469 just because you say you spent 100 hours changing out the navigation cards. They've been there. They've done that. They bought your T-shirt, and you ain't going to win that argument. So the only way you win that argument is to use your aircraft for your own business purposes. Okay. Wow.

[00:16:37] That's – yeah, that's pretty key. Okay. So on that material participation test, this is one of my thing – well, let me say it this way. This is a concern that I have with some schemes, some tax schemes that I've seen circulated recently, particularly when it comes to like heavy equipment leasing, where an investor will come in, they'll put up 100 grand, and then they basically do no work.

[00:17:02] And there's a company that's pitching the investor that, oh, they're going to get this like 2 or 3X to 1 right off on their W-2. And because they, I don't know, like log in and check their reports that that's material participation. What are your thoughts on that? Without getting too deep in taxes, which is not my area of specialty, there's two basic ways to meet the material participation test for an aircraft.

[00:17:29] Either you use the aircraft in your business and you spend over 500 hours a year running that business, or you spend at least 100 hours a year managing the airplane and nobody else is spending more time than you are. As to flight schools, the IRS has already declared that ain't going to work. I can't believe this equipment leasing is a whole lot different. Yeah. Very interesting. Makes a lot of sense.

[00:17:55] And Scott, one of the things that didn't surprise me, but kind of, oh yeah, that's right. That makes a lot of sense was this whole concept of operational control. When you have an aircraft entitled in an LLC, and let's say I were to get ramp checked and my airplane was owned by my LLC, this issue of having to present a dry lease. Can you talk about the importance of that and kind of some of the details that go into that? Sure.

[00:18:21] So the IRS has said, and the FAA has said, if you own an aircraft in an LLC, and if that LLC has no real legitimate business purpose other than aircraft ownership, we basically call that a single purpose LLC. And if it flies the airplane and carries passengers, the FAA will call that a flight department company, AKA an illegal charter operation because it doesn't have a 135 certificate.

[00:18:51] So the way you get around that and the FAA approves of this is you write a dry lease. The definition of a dry lease has nothing to do with fuel. It merely transfers operational control of the aircraft from the aircraft owner, the LLC that owns it, to the business or the individual who is leasing the plane, also known as the operator. That lease can be for as little as $0 an hour. The IRS doesn't care.

[00:19:19] The FAA doesn't care about money. What they care about is who has the decision-making authority to tell a plane where to take off, where to land, and what the schedule is going to be. And that is really what the essence of a dry lease is. What the FAA is trying to avoid, which is very prevalent out there, is people basically dry leasing their airplane and then telling people what pilots they have to use. That's very much called a damp lease,

[00:19:47] which the FAA calls a 134.5 operation. And if you all know math, you round up 134.5 to 135, and you're now at a legal charter operation. So by having a dry lease between the aircraft LLC and either you individually or your business entity that's flying the plane, it's clear that the lessee, the operator, is in command and control of that airplane subject to whatever authority that the pilot in command has under FAR 9113.

[00:20:17] As long as that's done, then the FAA is cool. They just don't want to see people holding out an aircraft for charter, but calling it a Part 91 operation. So if I get ramp checked, right, in my 185, and it's owned in an LLC, it'd be reasonable to have to show evidence of this dry lease if I own it in the LLC. Is that my understanding? So technically, if the FAA FISDO inspector says,

[00:20:46] who owns the airplane? And you say, my LLC. And they ask the question, who's the operator? You never want to say, oh, it's also my LLC. You want to say, it's me personally, it's my business, and I have a dry lease. And if you could give that much of an answer, they probably won't ask you for a dry lease. On a wrong day, the wrong FISDO inspector who's got nothing better to do says, well, can I see a copy of that? And it's a good idea to have it either in the aircraft or on an iPad that you could show somebody.

[00:21:15] But rarely, if ever, are they going to ask you to hand over a paper copy, nor can they require it. The only time you're legally obligated to carry a dry lease on the airplane is if it's a large aircraft, turbojet over 12,500 pounds. At that point, a large aircraft not only has to carry the dry lease on board, you also, before you make your first flight under the dry lease, need to mail a copy to the FAA

[00:21:42] and notify the FISDO before your first flight so they can just ask questions like, hey, is this really a dry lease or is this a damp lease? That's great. Now, I'd like to switch gears just a little bit to the purchasing process. One thing that, you know, was nice to know, Scott, with working with you is that there are actually escrow companies that you can buy airplanes through. And I know it's kind of a silly thing, but you wouldn't think of that in a small like Cessna,

[00:22:11] but that actually really smoothed out the process. Can you kind of talk through the benefits of using an escrow company, what they're going to do for you? I'll tell you mine was 400 bucks to do it. So, you know, for a small Cessna, I can share that that's about how much I paid, about 450 or something like that. But can you kind of explain to our listeners, you know, some sort of the benefits of using an escrow company? Sure. The two main reasons for using an escrow are, A, it's a neutral third party to hold the money and make sure the funds are good.

[00:22:40] So for example, as a buyer, you would never, ever give money directly to a seller and then hope and pray they file the bill of sale with the FAA. Because if they don't, you're basically an unsecured creditor chasing somebody down for their airplane. The other thing is the FAA, they could technically take submissions by mail for a bill of sale or an application for registration, but the reject rate on paper submissions is very high.

[00:23:10] If you use an escrow company that's out of Oklahoma City and there's a dozen or more really good ones, they'll look over the paperwork right the first time, they'll make sure that the mistakes are gone, so that when they file it electronically with the FAA, you get a file stamp copy and the reject rate is near zero. So it provides peace of mind knowing that when they say this transaction is closed, you know your file with the FAA. If you're the seller, you got your money, not worrying about a cashier's check

[00:23:40] being forged or bouncing. And if you're a buyer, you know you have title to the aircraft at the same time escrow is releasing funds to the seller. Okay, and let's talk about insurance semantics, right? So when I'm getting a policy, when an aircraft is owned by an LLC, how do we want to make sure that the named entity is correct and the my name's on there and the entity name is on there and things like that? What are some of the semantics around that? So there's a requirement

[00:24:08] in any general aviation insurance policy that the aircraft owner or owners, if there's more than one, be what's called the insured. We also know that to be the words named insured means the same thing. As far as who else is going to be insured, you want the individual member of the LLC, including any operational business that's going to be flying it to be what's called additional insured. You want to make sure that you've got maximum protection

[00:24:37] and you've got the same coverage rights as the actual aircraft LLC that took out the policy. That's not to be confused with named pilots. If you have multiple pilots flying your airplane, maybe a professional pilot or even a friend that you're leasing it to, no issue with making them a named pilot, but you would not want to make them a named insured because they could first make a claim against your policy and dilute what little liability coverage

[00:25:05] you have left under the policy limits. So good rule of thumb is insured, also known as named insured, is the aircraft owner or owners. Additional insured should be the member, operational business or individuals and named pilots would be anybody else who's flying the plane unless they're going to meet the open pilot warranty. The drawback of the open pilot warranty is if that pilot crashes the plane, the insurance carrier could pay off the owner,

[00:25:34] pay the liabilities and then subrogate against somebody who was flying under an open pilot warranty. So you'll typically see most pilots, if they're professionals, like a maintenance or a ferry pilot, before they hop in that airplane, they'll tell you, call your broker, have me added as a named pilot with a waiver of subrogation so that if I crash this plane, your carrier is not coming after me. Yeah, and it's interesting. So I just learned about this concept as a new airplane owner.

[00:26:02] An open pilot policy on your insurance basically means that, let's say my Skywagon, let's say anybody can, let's say I'm hiking in the mountains, I twist my ankle and I get stuck there and I need a friend to come in and fly me out of there in my airplane. As long as that pilot meets certain requirements and correct me if I'm wrong here, I think my open pilot policy is like 500 hours total time

[00:26:30] and maybe 100 hours in type and so in the Cessna 185 Skywagon, then they would be okay to fly my airplane and then I would be able to still benefit from that insurance versus me saying, Tate Duryea is a named pilot on my policy and the physical name would be- Gotta call Tate. Gotta call Tate, right? Because nobody else is insured. Yeah, so I pay for an open pilot policy on my insurance right now. So anybody can fly my airplane

[00:26:59] that meets the requirements that I authorize, right? So what Scott is saying is that if you don't have them, you know, if you're a ferry pilot listening to this and someone's saying, hey, go ferry my airplane somewhere, I think that's gold advice to make sure that you get added to the named pilot on the insurance policy. Do I have that right? Did I read that back okay? That's correct. Except named pilot alone is insufficient. You want to be named pilot with a waiver of subrogation. Got it. In other words, the carrier has to agree,

[00:27:29] yes, this named pilot is covered and if he crashes, we're not going to come after him for his or her negligence. Right, right, right. Wow. That's a huge piece of liability. That's huge. Yeah. Yeah. Absolutely. Yeah. Question for you. Scott, correct me if I'm wrong, but I think you used the term open pilot warranty and Ryan, you were saying open pilot policy. Are those two the same thing? Are we just using different words for them? Open pilot warranty is the correct terminology, but Ryan's use of the word policy

[00:27:59] kind of meant the same thing. That would be for a pilot who's not named on the policy as a pilot, but meets the qualifications of experience that they still have coverage. And so this is a, an additional line of coverage, Ryan, that you pay for in addition to whatever other baseline insurance you have that allows for a non-named pilot that meets these qualifications to actually just step in and fly your airplane. That's correct.

[00:28:28] It's not a separate policy. It's just a provision within his existing policy. Right. It's like a rider, an additional. Very interesting. This is all new to me and it's funny. I actually, I fly a Bonanza that I don't own that is owned by an LLC and I literally dry lease it, but I don't know if we actually have a written dry lease and I have been ramp checked and they didn't ask me a single thing about a dry lease or who owns the airplane. So anyway, very interesting. Maybe we need to get one of those typed up. Are you named as a pilot? I am.

[00:28:58] I am. I'm on the insurance. Yes. But I don't think we have a dry lease typed up. So that would probably be something good the dry lease would be important as would be making sure that not only are you a named pilot, but that you're a named pilot with a waiver of subrogation so that the carrier that ensures that airplane would not come after you in the event of a mishap. This is why we do this podcast. That's gold right there. Yeah. Gold. Okay. But talk me through, Scott,

[00:29:27] if you don't mind, you know, two part question. You know, I was referred over to you very highly favorable by another pilot and you did all my paperwork, but kind of talk a pilot through like what they would expect to go through if they hired you and, you know, what, what are you doing for them? What are you setting up? If you don't mind sharing, you know, kind of rough costs, if you don't, if you don't mind sharing that, that would be, that would be great. Sure. So a typical email inquiry or call I get is

[00:29:57] I'm buying an airplane, either myself or with partners. You know, how do we set up the structure and how does this whole thing work? I'll provide anybody a short free consultation to walk them through the process. Again, if it's single owner, personal or business use, then one LLC is fine. If it's multiple business, if it's multiple owners and any of them have business use, we need a separate LLC for each owner. As of right now and today

[00:30:25] in July 15th of 2026, we charge a flat legal fee of 1625 for the LLC formation plus whatever the filing costs are in the state where the LLC is domiciled. Those range anywhere between 50 and 500 depending upon the state. A common question that I often get asked that you were going to ask me but I'm forecasting you're going to ask me is where should the LLC be domiciled? That's my next question. And I hear lots of this, well,

[00:30:54] you need to be in Delaware or Montana has privacy and Wyoming is a good city and that's all fine and dandy until you park your airplane someplace. The bottom line is you need to domicile the LLC or LLCs where the aircraft is primarily based. Because if you form your LLC in Wyoming but you park your plane in California, California says whoop-dee-doo, by virtue of parking your airplane here, you're doing business in California

[00:31:23] and we want you to pay the same franchise minimum tax as a California LLC, you need to register your Wyoming LLC as a foreign entity in California and there is really zero benefit to having that LLC formed in Wyoming. An exception would be if you're basing the aircraft in multiple states throughout the year. Now, I know a few people that would probably argue that it would make more sense to form in Wyoming because it has better

[00:31:52] charging order protection and better liability and whatever and then to foreign file in California. In fact, right after we finish this podcast, we're actually recording a podcast with Adam Kinte from Nevada Corporate Headquarters. What are your thoughts on that just in terms of stronger protections from a Wyoming LLC versus a California LLC? Okay. So, again, if an individual is flying an airplane, the LLC provides no liability protection

[00:32:22] for that pilot because they're the pilot, they're the operator, they're the lessee and the only protection they really have is their own insurance. If insurance doesn't cover it or the claims exceed the limitations of insurance, their personal assets are exposed and that doesn't mean a hill of beans where that LLC got formed. The only thing that the charging order does is to go after the equity in the aircraft and I'm telling you that yes, there's more hoops to jump through with a Wyoming LLC

[00:32:52] than in some states but as a practical matter, I'm telling you if you're a plaintiff's lawyer, you know what you're doing, you're going to get the equity out of that aircraft somehow, some way, whether it takes you a week or six weeks, you're going to get it. So, a lot of people have this false sense of security forming Wyoming or Delaware or Montana LOCs when they really base their aircraft in California, Texas or Florida. It doesn't provide

[00:33:21] the protection that you think it does. What about, so, I mean, you kind of perked my interest in the beginning where, you know, you can put this in your trust and you mentioned, you know, it doesn't have that protection but I guess you could still have, I mean, I would imagine you can point the LLC that owns the airplane as owned by your trust. I mean, is that how most people do it? Sure. I mean, the main purpose that most of us have a garden variety

[00:33:50] family revocable trust is for probate avoidance and if you own an LLC in your own personal name, unfortunately, the probate code in most states doesn't have an exemption for aircraft the way it does for vehicles or vessels. So, when you die and your aircraft is worth a million dollars, that's going to trigger a probate. So, really, in this case, if it's a non-business use aircraft, just personal only, your trust should be the member of the LLC

[00:34:19] and then the aircraft is owned by the LLC. Very, very good advice. I have homework to do. This is why we do the podcast. This is why we do the podcast. I have some work to do on my paperwork. That's very good and, you know, and talk, let's talk about annual maintenance requirements for this LLC, right? Because obviously you set it up, it's all good, it's in the right spot. What, what do I have to do every year, every quarter or every other few years? What are kind of the ongoing requirements? Sure.

[00:34:49] On a federal level, usually nothing because the LLC will either be a disregarded entity or if it's a multi-member personal use LLC, it has no income and no tax returns to file. On a state level, every state is different. Some states have an annual filing fee of, say, in Nevada, $400 a year. In some states like Montana, it's like $100 a year and then in California you have to pay that ubiquitous $800 franchise minimum tax every year

[00:35:19] whether you have any income or not. So every state's different, but they range generally from a low of zero to a high of about $800. Wow, that's interesting. And that's just standard, that has, just to be clear with the listeners, that has nothing to do with the fact that there's an aircraft in it, that's just a standard LLC, it doesn't matter whether it's an LLC for real estate or business or anything, so just to be clear. Correct. So even if your aircraft, even if your LLC has nothing in it, the air that you're trying to maintain the LLC in good standing

[00:35:48] is going to incur a fee each year in most states. Thank you. Scott, let's talk about this liability. You know, it's always nice to hear that, you know, well, I've got it in an LLC and I've got my insurance and, you know, tell us a story about a crash or something that happened and, you know, some things that may be surprised the owner because I, whenever I think about, you know, well, it's an LLC, I always think, yeah, but I still have to litigate, right? I still have to hire an attorney

[00:36:17] to fight against it staying, you know, in the LLC and them not coming after me personally and all these things. I mean, do you have any kind of stories around how crashes have gone and how the entity really stood the test of time and protected that pilot owner? Sure. So, all I can say is that the best insurance is always the first line of defense. Get the best policy you can. Try to avoid getting a policy with sublimits per passenger. It just doesn't go very far.

[00:36:46] If your experience level allows, get a smooth policy with at least a million and preferably, you know, two million in coverage for a piston single. You're flying a turbine, try to get five million. Having said all that, if the insurance is exhausted or didn't pay for any reason, how much of a protection is the LOC. If you're the pilot in command, zero because the LOC didn't fly the plane, you did. But if you're talking about your partner went out and crashed an airplane and those damages

[00:37:16] exceeded the limitations of the insurance, how easy is it for a plaintiff's lawyer to pierce an LOC veil? It's a lot harder than you think. Merely naming somebody in a lawsuit doesn't mean you're piercing a veil. It just means you're making an allegation. I'll make this statement that's going to make a lot of you shocking. In 25 years of practice, I have yet to see a single aircraft LLC veil be successfully pierced at trial because

[00:37:45] a court said you didn't maintain LOC formalities. Now, I can't make that statement about corporations because corporations have a lot more administrative compliance issues like shareholder meetings and director meetings and minutes, but LOCs are fairly simple entities. For most purposes, it's form and forget. Don't forget to pay your annual filing fee and you're good. So I can tell you that the LOC doesn't protect the equity in your aircraft,

[00:38:15] but it will generally provide very good protection for the member who is not the pilot in command. Something that stuck with me there was the fact that you said if you're a single owner member of the LLC and you're flying it personally, it doesn't do much. Can you kind of elaborate there on that? I mean, if I fly my own airplane that's in an LLC, you're basically saying if I crash it, there's probably not much protection because I'm personally flying it. Is that what you're saying? Right, because the LLC

[00:38:45] isn't the operator that's leasing the plane or flying the plane. You are. So as the dry lessee, you have operational control. That is your responsibility for whatever happens to an airplane in flight. And unfortunately, as the pilot, you can't rely upon the protections of the LLC because the LLC wasn't the lessee. You were. So devil's advocate, if I'm going to buy my own airplane, no business use,

[00:39:14] personal toy, why put it in an LLC? Two reasons. One, even though you think you're going to be the only pilot, there will come a day where you need a ferry or a maintenance post-maintenance flight done. And if that pilot crashes your plane, you don't want to be responsible for their negligence. Right. The big reason is that after you sell your airplane, if somebody else crashes it and alleges that the previous owner, you, was not doing proper maintenance, you want that owner to be

[00:39:43] your LLC and not you personally. There it is. Yeah, that's a good circle back, right? We covered that in the beginning, but it also kind of skipped over. We didn't talk about the fact that if you're personally flying it, you could be personally liable. We talked about insurance and you kind of briefly went over the insurance not being that sufficient and then the per passenger and you had a term for it. Can you kind of go through that slowly? Just as we look at a policy, I think I went through it with

[00:40:13] my insurance broker. It seemed like a pretty weak policy per passenger and that was kind of my takeaway was there wasn't how does that semantically work when I'm looking at an insurance policy? How is that working per seat? And by the way, just to make sure we're perfectly clear, I have six seats in my airplane. Don't assume that your policy is going to like you have to insure every single seat and I know that might be just basic knowledge for some but when I bought, you know, got the airplane, it only had insurance on four

[00:40:43] seats. And I actually had to add the two additional seats into my policy to make sure that those seats were covered. So would you mind kind of walking us through that, Scott? Great. So first things first, the only insurance that you have for an aircraft in motion is your aircraft insurance policy. All of the umbrella policies in the world have aviation exclusions. So you can say, well, I've got a $3 million personal umbrella. That doesn't mean a hill of beans when you crash an airplane because there's no coverage. Your umbrella policy will

[00:41:13] not cover that activity for the same reasons that a personal policy doesn't cover business activities. So try to get the highest amount of coverage in liability that you can. When I say liability, we're excluding the conversation about hull coverage. That should be fair market value of the hull. The liability coverage can fall into one of two flavors. It can be a smooth policy where you get a million dollars of liability coverage and any one passenger could claim all million dollars.

[00:41:43] And that usually makes the passenger or their estate go away. But if you have a sublimit per passenger, either $250,000 or heaven forbid, $100,000, that means that your million dollar policy as to that passenger who was on your airplane isn't really a million. It's only $100,000. And if they get very serious injuries and sue you for $900,000, your carrier is going to say, well, thanks very much, but we're not paying them $900,000. We're only paying

[00:42:12] them to $100,000 and we're done. And now you're faced with what's called excess liability where you may have to reach in your pocket to satisfy that plaintiff's lawyer coming after you. So for this reason, every pilot, every aircraft owner should make their best effort to get what's called a smooth policy, meaning no passenger sublimits. Not everybody qualifies for a smooth policy. If you're a brand new pilot, low time or very low time in a particular make

[00:42:41] and model, it may take you a year or two of ownership to get the experience in that airplane for the carrier to want to write you with a smooth policy. I just upgraded my policy two years ago to 2 million smooth on my own Cirrus. I would not have qualified for that three years ago when I bought it. Very interesting. Now, that's really, really important because, I mean, so let's just say, I mean, in my scenario, I don't have a smooth policy because I have fewer than 100 hours in type and I think my

[00:43:11] coverage is 100,000 per passenger and I think that was the best I could get. Could I have my passengers sign a waiver? Interesting. And basically acknowledge, because I've heard this story, right, because I hang out with a lot of high net worth individuals, right? And they're going to fly on my airplane and, you know, and acknowledge that, hey, that your insurance coverage is far below, you know, what you might come to expect if something were to happen and, you know, is that something you've heard of or done? Absolutely. I get asked every

[00:43:41] week, you know, can you draft me a waiver for my passengers because I want to protect myself. I'll condense a one hour explanation into two minutes. Waivers have a strong deterrent effect, meaning if they're signed, they're binding against the person who signed them unless the waiver is deemed to be unconscionable, but they're not necessarily binding on their estate if they perish. Having said that, most estates or families look at a waiver and go,

[00:44:11] oh, that was their wishes, I think I'll follow that. For a waiver to be enforceable, number one, it has to be negotiated and it has to be signed with enough reasonable notice to read it and understand it. So I tell people, you want to have a passenger sign a waiver, you better email them that waiver three days before the flight, not in the hangar saying we're departing in five minutes. That's just not going to fly. You're going to have that waiver deemed unconscionable.

[00:44:40] If a waiver says you can recover against my aircraft insurance and here's the limits, but no more, that waiver may very well be enforceable as to the passenger who signed it in the event that they are injured but don't die. Those waivers are generally enforceable enforceable in most states. Every state's different. A lot of facts and circumstances can challenge a waiver. The big thing is how much notice do they have to

[00:45:10] review it and to say I've got questions or I want to change the language. As a general rule, if you're a Part 91 pleasure operator, you can tell your passengers sign this waiver or you don't fly with me and that works. It works for Angel Flight. Angel Flight has everybody sign a waiver and those waivers are generally enforceable. Where you have trouble with waivers is commercial operations, especially business operations. You can never ask

[00:45:39] an employee to sign a waiver because they always have rights of workers' compensation and other insurance policies that can't be waived. That's fantastic. That's really good. And you mentioned something which made me think of a whole different topic along this line, which is Angel Flight. Because one of the big things I want to do with my airplane is donate it back to charity or 501c3 purposes. And I just signed up for Angel Flight and I'm going to go through my training and I'm already getting text messages to be proffered into

[00:46:09] going on to some trips and things like that. Talk to me about that. Tell our listeners about if you do Angel Flight, now you have people you don't know on your airplane. How does insurance work with that? And I know you're not a spokesperson for Angel Flight per se, but what kind of insurance or protections do I have flying other people around that I don't know? Okay, so you have the same protections as any other passenger on your aircraft. Plus, you have the Angel Flight waiver that every passenger

[00:46:38] has signed before they ever got booked on a flight. Angel Flight covers that for you. In the old days, they used to have you sign the waiver at the aircraft and have the FBO mail it, which I had advised many years ago on their legal advisory committee not to do. Instead, have it pre-signed well before. Also, Angel Flight has their own supplemental insurance that backs up the pilot's own insurance. The limits will vary between each Angel

[00:47:07] Flight region, but all I can say is you've actually got better coverage flying for Angel Flight than you do under your own policy. That's great. Scott, I know we're coming up here on time, but I'm sure we have some listeners that are headed to Oshkosh. They might be able to catch you speaking. Can you give us a little preview or a little teaser of what you're going to be talking about out there? Sure. Monday morning at 830 a.m., I'll be talking about aircraft lawsuits, why and where, what triggers

[00:47:37] a lawsuit involving an aircraft and not just crashes, but aircraft lawsuits involving the purchase or sale of an airplane, something the owner discovers after buying the airplane and they want to sue the seller. Rarely does the seller want to sue the buyer. If they get their money, they're happy. But I've got cases right now in court involving paint jobs gone wrong and allegations of fraud. I've got training done by an instructor that was

[00:48:07] alleged to have negligently instructed a student who then crashed and killed himself and a commander. It'll be a fun, fun topic of conversation. It'll be 830 to 945 in the forum workshops on Monday at Oshkosh. That's great. Well, I wish we were going because I'd love to attend that session, but maybe next year. We'll have to have you back on the show and talk about it. That sounds like an awesome topic to walk through. Yeah. No, so Scott, thank you so much

[00:48:37] for coming on and sharing your time and wisdom. Obviously, you are a massive resource to me personally, which is why I wanted you to come onto the show and share your knowledge with the listeners. How can people get in touch with you, hire your firm, and obtain your services for airplane stuff? Certainly. Go to our website, which is generalaviationlaw.org. You'll find a lot of our information, articles you can read about the purchase process, the co-ownership process,

[00:49:07] why your aircraft should be in one or more LOCs, and I'll offer any general aviation pilot a short, free consultation to see if we're a good fit to work together. I interface with many of the best aviation tax CPAs out there to help you maximize your deductions on depreciation and other expenses. They handle the tax, I handle the legal, and we're all one big happy family. Wonderful. We'll link to that in the show notes. Thank you again. This has been fantastic.

[00:49:36] I can't wait. We're going to have to have you back on because I've got lots more questions. Look forward to it. Thanks, Scott, and have a safe flight out to Oshkosh and enjoy the trip. Will do. Thanks, guys. Thanks, guys. Good night. Thank you. Thank you.