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.
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.
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.