Mexican trusts

Raoul Rodriguez-Walters

Note: This article was last updated in 2008. It remains in our archive for historical purposes as a general guide only to Mexican trusts. For current up-to-date information, a competent lawyer or Mexican notary should be consulted.

MEXICAN TRUSTS
WHAT IS A MEXICAN TRUST?
PARTIES TO A MEXICAN TRUST
PURPOSES OF MEXICAN TRUSTS
WHO CAN BE TRUSTEE?
THE TECHNICAL COMMITTEE EXPLAINED
TRUST PRIVACY
FUNDED OR UN-FUNDED
REVOCABLE VS. IRREVOCABLE
MEXICAN INCOME TAXES
TRUST EXPENSES
TRUSTS TO HOLD PROPERTY IN THE “RESTRICTED ZONE”
TRUSTS AND WILLS
MEXICAN TRUSTS FROM THE US PERSPECTIVE

MEXICAN TRUSTS

Often Americans, Canadians and other foreigners come to Mexico and decide that it would be real nice if they purchased some property here – perhaps a house or a condo. Often this property is located on or near the beach. At some point in the process of purchasing this property someone will tell the prospective buyers about this thing called a “bank trust”. They may be told that it is “against the law” for foreigners to directly own real estate in the “restricted zone” (property at near the beach and international borders). I suspect that it is a little scary to hear those words for the first time.

Traditionally, the only institutions authorized to offer trustee services in Mexico have been the banks (hence the phrase “bank trust”), and their services have at times been wanting. Since banks have returned to private hands, and further considering that insurance companies have also begun to offer trustee services, things have begun to change for the better, albeit slowly

I want to show you how Mexican trusts are structured, what your rights are, and in fact, how they can be used to your benefit.

WHAT IS A MEXICAN TRUST?

Mexican trusts have their particularities, which we will explore, but in their general concept they are similar to their U.S. counterparts. Simply put, a trust is an agreement to transfer property to a third party that will hold title to the property and that will administer the same in favor of designated beneficiaries. A Mexican trust is an agreement entered into pursuant to Mexican legislation.

PARTIES TO A MEXICAN TRUST

There are up to four characters that play a role in Mexican trusts: the creator (fideicomitente), the trustee ( fiduciario), the beneficiary (fideicomisario), and a fourth party allowed, but not required by Mexican law, is the technical committee ( comité técnico). A trust is called a Fideicomiso. Think of the creator as the playwrite, the technical committee as the director, the trustee as the actors and the beneficiaries are the audience who will enjoy the play.

The creator decides what property will be transferred to the trust, how the assets will be managed, who will administer the property and who the beneficiaries are. In Mexico, the trustee is always a financial institution, and it holds title to the property. Trustees are legally bound to ensuring that the trust agreement is adhered to. The beneficiaries receive the benefits of the property in trust, usually income, principal or a combination thereof. These benefits are almost always subject to restrictions as to how, when and under what circumstances the beneficiaries may enjoy them. Finally, the technical committee, if any, makes recommendations or takes decisions pursuant to the trust agreement, which are then implemented by the trustee.

PURPOSES OF MEXICAN TRUSTS

Anything goes as far as what one can stipulate in the trust agreement, as long as its purpose is legal. Most trusts in Mexico are created for family and estate planning purposes. In Mexico the most common uses for trusts are:

1. remove property from possible future creditors;
2. remove property from the reach of certain family members or ex-family members;
3. condition the transfer of property to beneficiaries;
4. secure the privacy of the creator;
5. involve an independent third party in transactions involving property;
6. hire the trustee to manage assets in favor of the beneficiaries who are not able to do so on their own;
7. guarantee a private mortgage;
8. hold property in the restricted zone when the beneficiary in not a Mexican citizen;
9. manage bequests to charities.

The trust agreement specifies how the property in the trust will be administered, how the property rights are divided, when the property can be distributed and to whom. Contrary to what happens in the U.S., trusts in Mexico are not much used for the avoidance of probate or tax planning purposes.

WHO CAN BE TRUSTEE?

Only financial institutions in Mexico can act as trustees. Under no circumstances can the creator of a trust, or any other entity, serve in this capacity. Traditionally, only Mexican banks were authorized to serve as trustees. Recently, however, insurance companies have also been getting into the act. For example, Hartford has set up offices in Mexico, and one of their goals is to provide superior trust services in Mexico.

It is important to remember that trustees are required to provide their services on a fiduciary basis. This means that they are held to a higher standard in handling trust assets than they are in handling their own assets. They must always put the interests and wishes of the creator first. It is also important to remember that the assets in the trust do not belong to the trustee (or to the technical committee). Trust assets belong to the trust and are maintained for the beneficiaries.

THE TECHNICAL COMMITTEE EXPLAINED

A unique aspect of Mexican trusts is the technical committee. Technical committees are organized in accordance with the trust agreement, and its duties and obligations are spelled out in this document. There are no limits put on the powers of the technical committee, beyond what is stipulated in the trust document. Therefore, it is possible to set up a trust that requires that a technical committee be composed of only one individual, the creator. The trust agreement can allow the creator to make all decisions regarding the assets in the trust. Thus, while it is not possible for the creator to act as trustee, the creator can still maintain all decision-making powers. The trust agreement can also call for the technical committee members to be reimbursed for their time and expenses.

TRUST PRIVACY

In Mexico, very strict secrecy laws protect trusts. The creator, the technical committee and the beneficiaries remain entirely private. I am told by Mexican trust attorneys that trustees will not identify the creator, the technical committee, or the beneficiaries, even if ordered to do so by a Mexican court. However, the parties to the trust could conceivably sue each other and bring the misunderstanding into court. For example, if the beneficiaries decided to sue the trustee, the identities would be revealed to the courts, but the court proceedings would not be subject to review by the general public.

FUNDED OR UN-FUNDED

Trusts in Mexico can be set up so that the trustee and the technical committee, if there is one, are paid from trust assets. In this case, it would be necessary for the trust to have enough assets to provide for an income stream for this purpose. This income stream would be the result of trust investments.

An un-funded trust, on the other hand, requires that someone pay for the trustee fees at least annually from sources other than trust assets. This would be the case of most trusts that hold real estate in the “restricted zone” and which is owned by non-Mexican citizens.

REVOCABLE VS. IRREVOCABLE

Here again we find an interesting difference with U.S. trusts. In Mexico it is possible to set up an irrevocable trust. However, if the creator and all the beneficiaries are in agreement, the irrevocable trust can be transformed into a revocable trust, or dissolved altogether.

MEXICAN INCOME TAXES

If a trust is created for business purposes, it will be considered a taxable entity. The trustee, or the beneficiaries, are required to obtain a tax-identification number for the trust, file tax returns, and pay taxes if due. Income that remains after taxes can then be retained in the trust or disbursed according to the trust agreement. Trust income, which has already been subject to taxation within the trust, will not be taxed twice. Thus, if the trustee has already paid taxes on trust income, the beneficiaries need not pay Mexican income taxes again.

An example of a trust with a business purpose is property purchased in the “restricted zone” that is then rented out, either on a full or part time basis. Mexico considers this Mexican source income and the country reserves the right to tax any income generated in Mexico. Trust income is taxed at relatively high corporate levels.

On the other side of the equation we have trusts that do not have a business purpose. In this case, income, if any, will pass through to the beneficiaries and will be subject to the regular income taxes of the beneficiary.

TRUST EXPENSES

There are no standard trustee fees and thus these are open to negotiation. Fees for real estate trusts for non-Mexican citizens range from $250 USD per year to 1% of the value of the property, paid annually. Obviously, the more complex the trust, the more expensive it is to administer, and the higher the fees.

TRUSTS TO HOLD PROPERTY IN THE “RESTRICTED ZONE”

I would like to make special mention of the property purchased by non-Mexican citizens in the “restricted zone” considering its importance to so many expats. There are some issues that need to be kept in mind. Because you are the creator of the trust, you have the right to choose the trustee. You do not need to use the financial institution first suggested to you. Shop around. Who has better service, more reasonable fees, which financial institution provides the best value?

Remember that not only do you create the trust, you generally are also the beneficiary. As beneficial owner, you have certain rights. In fact, you can do with the property absolutely anything any other owner could do. You can sell it, rent it (keep in mind that rent is considered Mexican source income), leave it unoccupied, gift it, divide the ownership rights among your children, provide for a life estate for the surviving spouse, remodel, etc. For all intents and purposes, it is your property to do with as you please.

Banks usually provide you with a standard trust agreement. While you cannot get away from transferring title to a trust, as the creator you have the right to design the trust agreement in a way that is in your best interests, so it is worth negotiating this point. You can also request that a technical committee form part of the trust. The technical committee could, for example, be an independent third party that would keep an eye on the trustee, and visa-versa. Finally, and this is important, you have the right to change the trustee. If you do not feel that you are receiving the services you deserve, or if you believe that the fees are unjustified, switch trustees. If you have problems, give me a call.

TRUSTS AND WILLS

As in the U.S., Mexican trusts can work as Will substitutes. For example, if you live in Puerto Vallarta and your condo is in a trust, and further assuming that you do not own any other property in Mexico, a Mexican Will might not be necessary. The trust agreement states who will receive the property at your death. Usually this is a spouse, followed by other family members.

However, if you own other property in Mexico, for example real estate outside of the restricted zone, cars, an art collection, etc. a Mexican Will is still a good idea. A Mexican Will would cover property caught outside the trust. As mentioned in a previous article, Mexican Wills are inexpensive to draft and probate in Mexico is relatively inexpensive, quick, and private. Another possibility is to place all of your Mexican property in a trust, greatly increasing your privacy and creditor protection. An analysis of your particular circumstance would be recommended before taking such a step and you want to make sure that you have a good working relationship with the trustee and technical committee.

Also, you can stipulate that the executor of your Mexican Will set up a trust per your instructions.

MEXICAN TRUSTS FROM THE US PERSPECTIVE

Finally, a quick word about what the US authorities think about foreign trusts, including Mexican trusts. The IRS requires that you inform the service of any foreign trusts in which you hold an interest. Also, even though a trust may be considered irrevocable in Mexico, it may or may not be considered irrevocable by the IRS. This distinction would be important for the estate planning aspects of any US person. In addition, Mexican trust income that has already been subjected to taxation within the trust would not be subject to Mexican income taxes at the personal level, as mentioned; however, this same income would be subject to US income taxes.

As always, please do not take any decisions on these issues before consulting with your attorney, accountant and other trusted advisors.