Estate Planning When You Own Mexican Property
When clients have property in Mexico, many advisors want to encourage their clients to think about a Will for that property. Common questions include: is a B.C. Will enough to deal with it? What happens when my client dies? Who will inherit it, and should my client be doing anything else now, to minimize the costs and headaches?
Here are some answers, for your clients:
Land in the “restricted zone”, and the Fideicomiso
Under the Mexican constitution, real estate located within 50 km of the ocean or within 100 km of the national border cannot be owned by foreigners. Since the most popular vacation home locations fall within the restricted zone, the way around these prohibitions is the use of the fideicomiso.
A fideicomiso is a form of Mexican trust agreement where the property is legally owned by a Mexican bank or financial entity (the “Bank Trustee”) as trustee for the foreigner, who is the foreign beneficial owner (the “Beneficiary”).
Why is that significant for estate planning? Because under the fideicomiso structure, on the death of the Beneficiary the property transfers to the next-in-line designated beneficiaries, without going through probate or any formal court process.
To ensure this outcome, the primary Beneficiary must designate one or more alternate (or substitute) beneficiaries – and this can be changed at any time with proper written direction to the Bank Trustee. An individual alternate beneficiary must be alive or conceived at the time death of the Beneficiary, but the alternates can also be corporations.
When the Beneficiary dies, the alternate beneficiaries provide the Bank Trustee with an “apostilled” Spanish translation of the death certificate. The beneficial interest in the land is then transferred directly to them without passing through probate.
However, there have been a few known instances where a Bank Trustee has either failed or refused to complete the beneficial transfer and alternate beneficiaries had to pursue a claim through the probate courts. Thus it is a good idea for the Beneficiary to mirror the alternate beneficiary designations in a Will, just in case.
Plan Ahead with a Mexican Will in your Estate Plan
The fideicomiso only applies to real estate that a foreigner cannot own outright. If you own any non-land assets in Mexico (such as vehicles, watercraft, or bank accounts), or own any Mexican real estate outside of the restricted zone, those assets will pass through your estate.
If you rely on a Canadian Will alone, your estate essentially needs to go through a double-probate process. Although it may be legally valid in Mexico, a Canadian Will still needs to be officially recognized and acknowledged by the Mexican courts. Only after your Will has been probated and legally recognized in Canada can your heirs can start the Mexican recognition process, which is expensive and can take upwards of 6 to 9 months, all in addition to the time and expense of the Canadian probate process.
To streamline the process after your death, we advise you to also prepare a Mexican Will, which deals only with your Mexican assets. The two Wills must be coordinated, to ensure that the Mexican Will does not revoke the Canadian Will, and vice versa.
Note: if you die intestate, with no Will (Canadian or Mexican), your estate will pass to your legal heirs. In Mexico, this does not include a common-law spouse, which comes as a surprise to many.
Let’s Talk Taxes and Estate Planning
In Mexico, real estate transferred on death is exempt from capital gains, but an acquisition tax applies, and is payable by your heirs. The acquisition tax ranges from 1% to 4% of the property’s value at time of death, depending on the State in which it is located.
For more information about the fideicomisos or Mexican inheritance law:
- Mexlaw, “Details of a Bank Trust for Property Purchased in the Restricted Zone (Fideicomiso en Zona Restringida”
- Mexlaw, “Mexican Property Tax Facts for Expats”
- Mexlaw, “Who Will Inherit Your Property In Mexico?”
- International Bar Association, “Mexico International Estate Planning Guide”
- Jorge A. Garcia, “The Mexican Trust (fideicomsio)”