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BUYING PROPERTY IN MEXICO
The following articles are courtesy of The Guadalajara Colony
REPORTER, THE PROS & CONS OF REAL ESTATE (BANK) TRUSTS Changes to the Foreign Investment Law in recent years have meant that foreigners can obtain direct ownership of property in the interior of Mexico. Up until 1989, the titles ofall property bought by foreigners in Mexico needed to be held in a trust (fideicomiso) administered by a Mexican bank. Now, foreign buyers are only obliged to keep property in trust that is located within 100 kilometers of a Mexican border or 50 kilometers from the ocean (known as the restricted zone). On the surface, it appears that owning property outright in Mexico is the way to go.However, some real estate experts say there are benefits for foreigners who decide to keep their properties in a bank trust, even though the properties are located outside the restricted zone. When a fideicomiso is established, the bank becomes the titleholder of the property and acts on behalf of the buyer, following his or her instructions to the letter. The foreigner has the same rights over the property as a direct deed owner, being able to use, rent, alter and sell the property as desired.
According to Chapala lawyer Guillermo
Martinez Cuen, the costs of bank trusts can vary.
Speaking at a seminar organized by the Grupo Inmobiliaria del Lago (GIL) in
2000 in Ajijic,
Martinez explained that Bancomer and Serfin charge $ 300 US plus tax to set up a
real
estate trust for a single property, and an annual fee of $ 400 US. These fees
are fixed and
specified in the contract signed by the bank and the foreigner. Not all Mexican
banks have
One of the primary
advantages of having a property held in trust is the flexibility with
beneficiaries and secondary beneficiaries and avoiding probate. With a direct
deed, a
foreign property owner must draw up a Mexican will. In the trust, the bank is
the owner
on paper and the beneficiaries are the original purchasers. If a couple is named
as During his talk to GIL members, Martinez pointed out that if no substitute beneficiaries are named in the trust, the property will go through probate and extra costs will be incurred. According to Martinez, it will take about two weeks for a property to be transferred to substitute beneficiaries following the death of a main beneficiary. He said the new beneficiaries can put a property on the market in a matter of weeks following the death of the original beneficiary. One example of a foreign couple who might benefit by having their property held in trust was given by Martinez. "WaIter and Mabel are not married but share a home. Walter has six children and Mabel has four and the couple want everything divided equally," Martinez said. Putting the property in trust would be the best option, so it could be divided into ten equal shares, he explained. "In a direct deed, WaIter and Mabel each own 50 percent of the property, so Walter's six children get 50 percent and Mabel's four children get 50 percent." Some real estate experts say that designating a bank as the title holder of a property that is underused or used for only part of the year gives it greater protection from encroachers. Writes Ginger Combs-Rarnirez in "The Gringo's Investment Guide," "The bank is a very present owner, protecting the property from wheeler-dealers who see an opportunity for an unused piece of real estate." In the experience of some property owners, however, banks are often reluctant to become involved in long legal matters relating to trusts in their care. On the other hand, in her book Combs-Rarnirez does cite a case where a bank stepped in to clear up a problem with federal authorities after marijuana plants were discovered growing on a property belonging to foreigners who had been absent from Mexico for several years. In the long run, setting up and maintaining a real estate trust will be more expensive than getting a direct deed. Nevertheless, real estate trusts seem to work adequately for hundreds of foreign home owners living by Mexico's beaches. Those who want further information about the advantages and disadvantages of trusts and direct deeds should talk to a reputable real estate company. First, make sure the realtor is affiliated with a recognized association such as GIL or AMPI (the Mexican Association of Professional Realtors). BUYING OR SELLING YOUR PROPERTY IN MEXICO
MAKING SENSE OF A MEXICAN TRUST By Raoul Rodriguez-Walters An international financial planner. He can be reached at mexadv@aol.com This article first appeared in the Guadalajara Colony Reporter, August, 2001.
Canadian and US
citizens and other foreigners often decide to purchase scenic property either on or near the beautiful beaches of Mexico. At some point in the process,
the perspective buyer will be informed of a thing called "bank trust;" and
they may be told that it is illegal for foreigners to directly own real estate in the "restricted zone" (property at or near the beach and international borders). I suspect that it is frightening to
hear those 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.
Parties to a Mexican trust There are up to four characters that play a role in Mexican trusts: the creator (fideicomifente), the trustee (fiduciario), the beneficiary (fideicomisario), and a fourth party allowed, but not required by Mexican law, the technical committee (comite tecnico). A trust is called a fideicomiso. Think of the creator as the playwright, the technical committee as the director, the trustee as the actors and the beneficiaries as 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.
Uses 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.
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 United States, trusts in Mexico are not often 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 (if interested, call Laura Garcia at 01 (555) 481-8210).
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
hot belong to the trustee (or to the technical committee). Trust assets belong to the trust and
are maintained
The technical committee. A unique aspect of Mexican trusts is the technical committee. Technical committees are organized in accordance with the trust agreement, and their 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 unfunded 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 are owned by non Mexican citizens.
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 US dollars per year to one percent 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.
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 expatriates. 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 trust suggested to you. Shop around. Who has better service and more reasonable fees? Which financial institution provides the best value?
Generally,
the creator of the trust is also the beneficiary and has 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
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 vice-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.
Trusts and Wills As in the United States, 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 a. zone, cars, an art collection, etcetera, a Mexican will is still a good idea. A Mexican will would cover property caught outside the trust. 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 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.
Mexican Trusts and IRS Finally, a quick word about what the U.S. authorities think about foreign trusts, including Mexican trusts. The Internal Revenue Service (IRS) requires that you inform them of any foreign trusts in which you hold an interest. Also, even though a trust may be considered irrevocable in Mexico, it mayor may not be considered irrevocable by the IRS. This distinction would be important for the estate planning aspects of any U.S. citizen. 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 U.S. income taxes. As always, please do not make any decisions on these issues before consulting with your attorney, accountant and other trusted advisors.
Raoul Rodriguez- Waiters is an
international financial planner. He can
be reached at |
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