FAQ about Trusts For Foreigners

For residential purposes. (RZT), Part 1
BY: RAUL LEON

1.- What it a Fideicomiso?

Think of a Fideicomiso like an adaptation of the American style trust to Mexican legal system. It is a legal instrument subject to mercantile federal law, that can be used in all sort of transactions such as family and living trusts, joint ventures, as a securitization instrument, for real estate developments, in warranty trusts as collateral for loans, administration trusts investment trusts, for securitization for all kind of assets and rights, infrastructure trusts to merge efforts of public and private companies and governments, public federal trusts and many more.

 One of such uses of the trust in Mexico is to allow foreigners to have the use, enjoyment and disposition of real estate property for residential purposes, located in restricted zone as if they were the direct owner.

 

 2.- Why is a Trust needed?

This type of trust is required because, in terms of Mexican Constitution (article 27), there is a prohibition for foreigners to directly hold the domain of real estate properties for residential purposes in the “Restricted Zone” which was established as a) the 100 kilometers from any borders and 50 kilometers from any coastline. Because of that, the entire Baja Peninsula (north and south) and all real estate property located within the frontiers and coasts are part of such restricted zone. This is not the case for real estate property inland on the mainland, such as San Miguel de Ayende, Chapala, Ajijic, Queretaro, Mexico City and many others, foreigners can acquire the direct domain and hold direct title of real estate property, same as any Mexican citizen.

 To comply with the Constitution, the execution of trusts within the restricted zone, requires the foreigner to obtain a permit granted by the Foreign Affairs Ministry first, this allows the Trustee to hold a specific property in trust on behalf of a specific foreigner.  This is done during the closing process by the closing agent.

 

3.- How does it work?  A Trust is comprised of 3 parties:

 a)      Trustor (settlor): Is the party who creates the trust and transfers the trust assets to the trustee, entrusting him to accomplish the trust objectives. I.E. The Seller.

b)      Trustee: In Mexico, a trustee it is mandatory and must be authorized to act as such according to Mexican law.  Currently, only banking institutions can be trustees. The trustee will hold the property of the transferred assets in trust, and is entrusted with accomplishing that trust objectives set forth in the trust. I.E. The Trust Bank-

c)       Beneficiary: it is the person or entity that receives the benefits of the trust objectives and its assets. I.E. The Buyer

 

In the Restricted Zone trust, the Trustor is the Seller of the real estate property, who transfers to the trustee (The Trust Bank) the property and the ownership domain of the real estate, entrusting such trustee to hold the property on behalf of the Beneficiary (the foreign Buyer), allowing him the use, enjoyment and disposition of the property  that the Beneficiary may choose for the property through the trustee, as if the beneficiary was the direct owner, but subject to the rules and restrictions contained in the permit and the trust.

 The Trustee is a banking institution chosen by the buyer or his closing agent, but that may be provided by the seller, as well, as in the case of taking over an existing trust. An annual administration fee is charged by the Trustee to hold the property in trust on behalf of the foreigner or Beneficiary.

 The Beneficiary is the foreigner Buyer that, as it has been said, can use the property freely, as if it was the direct owner, but, through the trustee and subject to the permit and trust restrictions. The beneficiaries can rent, sell, transfer, will, put a lien or mortgage on the real estate property at their free will but, they must do all through the Trustee, who holds legal title and is the legal owner. In other words, you must inform the Trustee is you plan to construct, demolish, change the use, etc.

 Per the Constitution, these trusts are valid for 50 years, renewable for another 50 years, after which the beneficiary can make a new trust on his behalf.  So essentially, trusts are a way of having ownership for a lifetime and beyond.

 It is very important to be very clear, although the Trustee (the Bank) is the legal owner of the real estate property for all legal effects, trustee cannot use or encumber or sell the property for his own interest, and in his accounting must show any assets held in trust in an independent accounting.  It is shown and held as assets in trust, so if the trustee fall into bankruptcy.  It is not subject to a foreclosure or any lawsuit that leads to the loss of the Trustee’s assets.  The trusts are protected by law.  A judge is obligated to take all assets held in trust and designate a new trustee. There is no risk for the Beneficiary.

 Also, when the acquisition is done through a trust, there is no purchase contract, the property title is held through the trust and is recorded in Public Registry.

 

A Three Part Series. See Part 2, next issue.

 

By Raúl León, Attorney At Law, Expert in Mexican Trust (Fideicomiso), Commerce & Real Estate Attorney.From US: Cel. 011 521 624-151- 6332,, Local Cel: (624) 151-6332,

e-Mail: posaideon@prodigy.net.mx posaideon@gmail.com ,