Trusts in Mexico real estate can be complicated. In previous blogs, I have covered various aspects of trusts, but today I want to discuss trust complications and how to handle them.
Trusts are created to allow foreigners to have ownership rights of properties within the restricted zone in Mexico, which is all land located within 100 kilometers (62 miles) of any national border and within 50 kilometers (31 miles) of any ocean. This method has been very successful for Mexico and foreigners alike.
Primary beneficiaries receive from the trust bank the rights to pay for the property, remodel or reconstruct it or sell it or bequeath it to secondary beneficiaries.
What do the secondary beneficiaries do when one of the primary dies? If the other primary beneficiary inherits the rights of the deceased party, he/she needs to notify the bank and then pay the tax transfer fee, notary and filing fees to assume the legal right to be the sole primary beneficiary. He/she should make sure there are secondary beneficiaries named for succession.
When is this change done? If you are not going to sell the property right away, then go ahead and make the transfer formal and acquire the escritura showing the change. Make sure the bank accepts your position as an addendum to the original escritura.
If you are selling the property, you can ask the notary if it is possible to make these changes and pay for them as part of the closing with a new buyer. They may agree to wait or not.
It is important to understand that delays of transferring the property can bring problems to successors. If the second primary beneficiary dies before a transfer is made, the heirs then have to pay for the transfer of both deceased parties before they can be legally recognized as beneficiaries.
The ISR has already changed the classification of a Mexican fideicomiso from a trust to a nominee agreement. What this simply means is less paperwork for expats who own property in a fideicomiso in Mexico.
As you can see, using trusts in Mexico real estate can be complicated. Here are a few mistakes I have seen:
1. A Mexican citizen married to a foreigner takes the property without a trust. Upon the death of the Mexican citizen, the foreigner has to sell or apply and pay for a new trust in order to continue use of the rights under the trust. The heir cannot have the rights of the property without a trust.
2. Make sure that you put your fideicomiso escritura and all records of payment of yearly trust payments and predial tax payments in a safe place. Tell your children or heirs where the papers are stored.
3. At closing, understand the annual fees you will need to pay and how you should pay them. You will have an annual trust fee, property tax and federal zone concession payments (if you are on the beach or ocean front). You also will have HOA fees, utilities, repair and maintenance costs annually. Finally, you will owe taxes to Mexico if you earn income by renting your property.
4. If you want to be eligible for partial capital gain exemptions, you have to register your rental business at an address that is not the property itself you are leasing.
5. Not realizing that the fideicomiso trust you have is a will and does not need probate to be legally proved.
6. Making a mistake by putting the property into your will using different heirs than the secondary beneficiaries’ names in the trust itself. The trust will prevail.
7. Not understanding how to set up beneficiaries in the trust. Do not rely on English terms. Ask professionals to help you state how you want heirs to receive rights of the trust.
Using trusts in Mexico real estate can be complicated, so make sure you rely on real estate professionals who have the experience to guide you through the process.
This article is based upon legal opinions, current practices and my personal experiences in the Puerto Vallarta-Bahia de Banderas areas. I recommend that each potential buyer or seller of Mexican real estate conduct his/her own due diligence and review.