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THE BASICS OF
MEXICAN TRUSTS: THEIR USES FOR MEXICAN HOLDINGS
Introduction:
With more and more United States
citizens owning property in Mexico and with the population of the United
States increasingly having a large Mexican component, it is increasingly
common to have the issue of Estate Planning or ownership of real estate
require some involvement of Mexican law.
United States
citizens, long used to utilizing living
Trusts,
expect that their advantages may be useful in Mexico and the reader is
advised to read our various articles on
Wills and Trusts
to obtain the basic information on the United States estate planning
tools used for achieving flexibility and tax savings in United States
estate creation.
The purpose of this memorandum is to
provide a brief general analysis of the trust tool in Mexico, the
different types of trusts, as well as several examples of their
practical applications. This article is only an overview and the reader
is strongly advised to obtain United States and Mexican qualified legal
and tax advice before proceeding to create the relevant documentation.
Basic Mexican Trust
Structure:
1. The Essential Transfer. By
virtue of a trust, a person, named “fideicomitente” or
“settlor,” transfers to a trustee, the entitlement to one or
more assets or rights to be destined to legal and determined purpose,
the fulfillment of which is entrusted to the trustee. The formation of a
trust must always be evidenced in writing. Once an asset is contributed
to a trust, such asset ceases to be the property of the settlor and
becomes the property of the trust, forming part of the trust’s assets.
2. Parties. In order to form a
Mexican trust, a settlor and trustee are required. Unlike the law in
the United States, a Mexican trust may be valid even if no beneficiary
is named in the act of its incorporation, as long as the trust’s purpose
is lawful and determined. The role of each of these parties may be
described in further detail as follows:
a) The Settlor
is the party, which can either be an individual or a legal entity, who
incorporates the trust and contributes the assets which will become a
part of the trust’s assets. In certain cases the judicial or
administrative authorities may act as settlors. Generally, the settlor
designates the beneficiaries as well as the members of the technical
committee of the trust (both figures will be described in further
detail below).
b) The Trustee
is the party responsible for receiving the trust assets, and has the
obligation to maintain them and use them for the sole purpose or
purposes for which the trust was incorporated. As opposed to other
trust systems in the world, Mexican law reserves this capacity
exclusively to banking institutions, and in certain cases, to other
financial institutions which are entitled to act as trustee under
Mexican law.
c) The
Beneficiary is the individual or legal entity having the right to
receive the product of, and be benefited by the trust. The settlor and
beneficiary may be the same person; however, unlike the United States,
and except for the guarantee trusts, the trustee may never act
simultaneously as beneficiary and trustee.
d) In addition to
the parties set forth above, there are two figures which play certain
operating roles in a Mexican trust: the trustee delegates and the
technical committee.
Since the trustees are
legal entities, they may not personally carry out their
responsibilities, and such responsibilities necessarily have to be
performed through a representative. Such representative of the
trustee is known as trustee delegate. The trustee delegates are
responsible for performing the actions necessary to fulfill the purpose
of the trust in the name and on behalf of the trustee. Trustee
delegates must additionally comply with certain requirements set forth
by law for their appointment.
The technical committee is the
management body of the trust. Generally the technical committee is
appointed by the settlor for the purpose of following-up and instructing
the trustee in connection with the purposes of the trust. However,
occasionally such committee is appointed by the beneficiary, depending
on the nature of the trust.
It is readily apparent that the Mexican
trust is far more complex, far more regulated and, due to the need for
multiple entities and parties, much more cumbersome and expensive than
the streamlined United States counterparts which have formed the basics
of the typical estate planning for an American family. Further, since
banks are required to be the Trustees and charge an annual fee, the use
of trusts in Mexico is often more expensive if done when the settlor is
still alive.
Trust Law In General in
Mexico:
There are certain types of trusts
expressly forbidden by law, such as:
(a) secret trusts;
(b) trusts which benefit different
persons successively which must be substituted by the death of the
previous person, except when such trust is made in favor of people
living or conceived at the time of death of the settlor; and
(c) except in certain cases, the trusts
with a duration of more than fifty years.
A trust is extinguished upon the
occurrence of any of the following events:
(a) the fulfillment of its purpose;
(b) when it has become impossible for
the trust to achieve its purpose;
(c) when it has become impossible for
the trust to fulfill the condition precedent to which its effective term
is subject;
(d) upon the fulfillment of the
condition subsequent to which it was subject to;
(e) upon the express agreement among
the settlor, the trustee and the beneficiary;
(f) upon its revocation by the settlor,
as long as it reserves itself such right at the time of formation of the
trust; and
(g) when it has been determined that it
was formed fraudulently against the interests of third parties.
Additionally, if the trustee concludes
the exercise of its duties due to its resignation or dismissal, and its
substitution is not possible, the trust will be considered to be
extinguished.
Upon extinction of a trust, all the
assets contributed to it and that continue to be part of the trust
assets will be distributed in accordance with the terms agreed by the
parties in the trust agreement. If no express provision exists, they
will be distributed in accordance with the legal provisions in effect.
Nature of the Trust
Estate
At the time a trust is incorporated,
the trustee becomes legally entitled to the trust assets, which ceases
to be property of the settlor. This transfer takes place even in such
cases in which the settlor and beneficiary is the same person, given the
fact that the trustee is considered the entitled party to such assets
during the term of the trust. Mexican law grants the trust assets an
autonomous nature; such trust assets are different than the assets of
the trust parties and even if under the control of the trustee, such
assets are not deemed to be part of its assets given the fact that they
are destined to a determined purpose pursuant to the trust.
Neither the trustee nor the settlor may
individually perform acts of ownership with respect to the trust assets,
being able to act only within the limits which have been set forth in
the corresponding trust agreement. Contrary to the civil property
concept in which a party has the right to freely enjoy and dispose of
its assets, under the trust entitlement such right does not exist
since the parties may not dispose of the possession and the assets to
their benefit.
Types of Trusts
Mexican law does not limit the types of
trusts which may exist, given that each of them may have distinct and
specific characteristics. For purposes of this article, described below
are the four most commonly used types of trusts:
a) A Guarantee Trust is formed for
purposes of guaranteeing the fulfillment of a payment obligation in
favor of the beneficiary or beneficiaries. The same guarantee trust may
be used to simultaneously or successively guarantee obligations of the
settlor with different creditors. Only in this type of trust may the
trustee simultaneously act as trustee and beneficiary, as long as the
purpose of such trust is to guarantee obligations in its favor.
The contribution of real estate to a
guarantee trust must be evidenced in a public deed. When referring to
personal property, the trust agreement may set forth certain rights for
the settlor with respect to its use and the use of its products. In any
event, the person having the physical possession of the assets will be
responsible for the loss, damage or detriment of the trust assets.
b) In a
Management Trust, certain goods
are contributed to the trust with the purpose of being managed by the
trustee. Among this type of trusts are the trusts for resource
management, for representation, for social assistance or welfare, or the
most common of them, the trust for testamentary purposes.
c) In an
Investment Trust certain assets
are contributed to the trust for their investment. In this type of
trusts generally the settlor and beneficiary is the same person,
although in some cases (for example, the trust of retirement plans or
savings) in which the settlor and beneficiary are different persons.
d) A
Public Trust is a trust formed
by a branch of government or one of its entities for purposes of
promoting areas for development, and having an organizational structure
similar to that of other government entities. This type of trust
generally is formed for specific developments and projects, or for the
development of certain activities. These trusts are not subject to the
maximum duration of fifty years set forth by law.
Practical Applications
Some examples of practical
applications of trusts are set forth below for reference purposes:
a) Guarantee Trust
Generally. This type of trust provides that if the debtor-settlor,
or a third party, does not comply with certain obligations, the trustee
will use the assets contributed to the trust to satisfy the agreed
payment obligations in favor of the beneficiary. The trust agreement
may set forth the form in which the trustee will make a nonjudicial
disposal of the assets or rights forming the trust estate. In a trust of
this nature, the settlor may not take any action or exercise any
disposal right with respect to the assets contributed to the trust once
the trust has been formalized.
b) Trust for Testamentary
Purposes. This trust operates similarly to a testamentary trust in
the United States. In this type of trusts, the assets of a settlor are
transferred to a trustee at the time of their death to carry-out the
instructions of the settlor with respect to such assets and in the
benefit of third parties.
c) Trust for Real Estate in
the Restricted Zone. Mexican law prohibits foreigners to purchase
real estate located in the restricted zone. The restricted zone is
defined as the territory comprising 50 kilometers from the Mexican
coasts and 100 kilometers from the Mexican borders. Due to such
restriction, and as a method to promote the development, particularly of
tourist zones, the formation of trusts whereby the trustee acquires
property rights with respect to real estate located within the
restricted zone was implemented, with the prior authorization from the
Ministry of Foreign Affairs. Consequently, the trust permits foreigners
to be holders of the rights to use and to benefit directly from the
product of the sale of any such assets, without legally holding title to
such restricted real estate. The beneficiaries may be foreign
individuals or entities, or Mexican entities with foreign shareholders.
d) Other Practical Examples
. In addition to the specific examples that have been provided in the
foregoing paragraphs, there are many other applications to the trust.
Additional examples may be trusts incorporated for stock listing,
investment, retirement and pension funds, among others.
Enforcement of United
States Trusts.
It is possible but not simple to have a
Trust created in the United States enforced as to property in Mexico.
Quite often the Trust has been created without the Settlor recognizing
the fact that property located in another jurisdiction may have
different laws as to Trusts but, at times, placement of the Mexican
property in the United States Trust is done quite intentionally.
Though it can be a rather complex
process requiring numerous translations and various court appearances,
experienced Mexican counsel can normally carry out the instructions in
the United States Trust in Mexico though most Mexican attorneys
recommend using a Mexican trust if at all possible. Such a decision
requires involvement of both United States and Mexican legal counsel and
tax advice as well. What is important to note is that the added
flexibility available in trusts can be achieved, albeit with more
complex requirements.
Further, one can, via “right to use”
provisions in a Mexican Will, accomplish many of the goals of a typical
American Trust, but avoid the entire problem of appointing a Trustee or
seeking to enforce a United States Trust. The unique circumstances of
each family must be considered before a final decision is made.
Conclusion.
Unlike many jurisdictions, Mexico not
only recognizes the existence and uses of Trusts, but will enforce
United States Trusts in certain circumstances. It may be anticipated
that as more and more Mexicans and United States citizens own property
in their respective neighbors, that the laws will become more and more
alike in these fields. But there is no question that the mechanics of
creating and enforcing the provisions of Mexican Trusts are currently
more complex than the United States counterparts and competent and
experienced legal and tax advice is essential on both the United States
and Mexican side. The reader should also review our article on
QDOT Trusts for the issue of use of
United States trusts for the benefit of foreign nationals. |
