Substitute beneficiaries in Mexican real estate trusts
One recurring issue that comes up when non-Mexican nationals acquire real estate in Mexico through a real estate trust, often called “bank trusts” or in Spanish fideicomisos (the full name is actually fideicomisos irrevocables traslativos de dominio), and the real estate trust is not set up properly is the absence of designation of substitute beneficiaries.
Let us suppose that Joe from Seattle decides to buy real estate in Mexico. He buys a nice beach-front condo unit in a new condominium development in Los Cabos. He does so through a real estate trust since he is not a Mexican national. The real estate development company who is selling him the condo arranges for the closing through their own attorneys, including the creation of the fideicomiso. Joe puts himself and his wife Linda as the beneficiaries of the trust, just in case something happens to one of them. For many years Joe and his family enjoy the condo. One day both Joe and Linda die in a horrific automobile accident. Because Joe and Linda did some estate planning their properties in the United States are transferred without incident and outside of probate to their children. However, the real estate trust for the condo in Los Cabos did not include a substitute beneficiary clause. As a consequence, a lengthly and expensive probate proceeding in Los Cabos, Baja California Sur, Mexico is required for Joe and Linda’s heirs to take their beneficiary rights to the real estate trust in which title to the condo in Los Cabos is held. Having added a substitute beneficiary clause to their real estate trust would have prevented this from happening.
So what exactly is the substitute beneficiary clause? It is a very simple clause that should be inserted in all real estate trusts which designates who should become the “owner” to the property held through the real estate trust when the beneficiary (the “owner”) dies.
In the substitute beneficiary clause one or more individuals, and even legal entities, can be designated as the substitute beneficiaries to the real estate trust at the beneficiary’s death. Second place substitute beneficiaries can also be designated in case the substitute beneficiaries predecease the beneficiary to the real estate trust. Third place substitute beneficiaries, and so forth, can also be established in this clause.
So what is the disadvantage to having a substitute beneficiary clause? Unless having the beneficiary rights to a Mexican real estate trust be transferred outside of the regular estate planning and probate is counted is considered a such, there are no disadvantages to having a substitute beneficiary clause since it can be changed at any time through an amendment to the real estate trust.
In short, although a substitute beneficiary clause is technically optional, as a general rule it should always be included within the terms of a real estate trust in Mexico.