The opportunity for foreigners to enjoy the beautiful ocean and beaches in Mexico allowed this country to benefit in a big way. In the 1970s and 80s, Mexican leaders were looking to acquire more foreign direct investment to pay for infrastructure and economic development in the country.
One way to acquire direct investment would be to capitalize on this resource of nature. The Mexican Constitution does not allow foreign ownership on the boundaries of the country. The writers of the Constitution did not want foreign ownership of its shorelines to be invaded by countries who wanted to conquer Mexico.
Many government leaders, notaries and attorneys worked on a plan to achieve direct investment from foreigners and not violate or try to change their Constitution. Romans had a system of selling or giving ¨rights¨to others for possession of land and buildings. If “derechos” could be used, then with the Napoleonic law and Roman traditions, they crafted a legal instrument to allow ¨purchases¨ by foreigners of real estate on the oceanfront.
Using a fideicomiso trust would serve well to create a legal document that would not contradict the Constitution. In the early days of the fideicomiso, they were for 15 and then 25 years. Foreigners would not have ownership but would have ¨derechos¨ to occupy, remodel, and sell the property with a transfer of the current trust or a new trust.
A Mexican bank would have a trust department that was not connected to any asset or department of the bank with their everyday banking activities. The bank would be owner of record, and the foreigners would become beneficiaries of a trust to enjoy their derechos.
This was a very successful business decision for Mexico. Now we estimate more than 75% of the country’s shoreline is in fideicomiso trusts with beneficiaries for 50 years, with another 50 renewable. These trusts are not long-term leases.
It has not been easy for foreigners to understand the different concepts of their acquiring derechos as beneficiaries. Ownership is in the name of a bank trust. To protect the beneficiaries, the trustees of the bank cannot take any actions without the legal written request of the primary beneficiaries.
A yearly administration fee is paid to the trust bank department. The fideicomiso trust has been vetted to be legally safe and provide protection from being considered unsafe or illegal. The trust is inside an escritura or deed and recorded in the government public registries. The property is on private land and is no longer ejido or communidad.
The primary beneficiaries can, in many ways, act with the derechos as if they are the “owner.” They will pay property taxes and purchase prices to other individuals or companies who may or may not be foreigners; in that case, the trust would not exist if the property were bought by a Mexican citizen.
Foreigners need to appoint secondary beneficiaries to inherit the trust upon their demise. When this occurs, the remaining primary beneficiaries will need to acquire the rights of the deceased primary beneficiary.
This means the property will not be sold without the process the notary will have to take to have the remaining primary beneficiary acquire and pay taxes and notary fees to have 100% of the legal representation of the trust.
It is wise to name secondary beneficiaries who will be named in the English law as ¨heirs.”
The important information I want to share is any foreigner with coastal residential real estate must have a Mexican trust. The persons are beneficiaries, not sole owners.
Any actions, including selling the property through the trust will be taken by beneficiaries, not ¨fee simple owners.” These fideicomiso trusts are not required outside of the restricted zone, and foreigners in Chapala, for example, or the interior, own properties without a trust required.
It is also important to understand that property in the restricted zone should be protected from violating the Mexican Constitution; when a beneficiary dies, no probate is needed. In the interior, wills leaving real estate to heirs must be probated to prove ownership. This is not the same for the beneficiaries of a trust.
Two major differences to understand as a beneficiary are: Under the current law, there is no inheritance tax. There is no right of survivorship. This means the living beneficiaries of the trust must have 100% legal representation to execute all actions required by the Mexican government.
For example, a surviving spouse with 50% primary beneficiary rights must pay taxes and notary fees for the notary to accept and record in the register that they now have 100% full legal representation of the trust.
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 own due diligence and review.
