How to best structure Mexican family estate planning?

by | Jul 28, 2014

This article describes certain good ways to structure the estate of a Mexican family.

There are several ways available under Mexican law to organize family estate planning. A family head wishing to distribute the family wealth is able to choose the tool that best suits his or her needs during the life time and even to organize the manner in which personal assets and real estate should be transferred upon death. Moreover, and provided the appropriate usage and/or combination of the alternatives listed below are followed, real estate and personal assets could be organized in the best interests of the family and its members.

Organising Mexican Family Estate Planning

  • Gifts: In Mexico, this is a contract whereby some or all current assets are transferred without consideration. It can be effective from the date of execution, or it can be conditional upon the fulfillment of future events, and generally speaking, it can only be annulled in specific cases set forth in the law. Gifts of real estate and other goods (including cash) exceeding $400 dollars (roughly) must be formalized before a notary public. As for tax effects, donations among close relatives (parents, children and grandparents) are not subject to tax regardless of the amount and tax residency (certain formal requirements have to be fulfilled).
  • Usufruct: This gives the right to use and enjoy someone else´s real estate or shares in a company. It includes the right to give the use of any proceeds from the property to an individual or a group of individuals, simultaneously or successively. It can be granted by contract or by will and for a fixed period of time or during one´s lifetime. It is effective from when it is granted or it may be conditional as well. In some cases, donors keep for themselves the usufruct for life in order to use the property despite the fact that legal title has been transferred. As for the tax effects, granting a usufruct over real estate or over shares is considered as a transfer of property and thus it is taxed unless the usufruct is granted by a gift among close relatives (as previously defined). A usufruct of real estate has a positive tax impact in some circumstances, such as for purposes of the real estate transfer tax in some states in Mexico and the Federal District, in which the consolidation of the property (when the usufruct is extinguished and the property is fully acquired) would not lead to the payment of further taxes.
  • Life annuity: By means of this, the obligor agrees to periodically pay a pension during the life of one or more specific persons in exchange for either the payment of a sum of money or the transfer of personal or real property whose title is forthwith transferred to the obligor. It can be granted during a lifetime and by will. As for the tax effects, a life annuity has the advantage of not being taxed in the recipient hands if received as alimony.
  • Homestead (also known as a family estate): This is intended to provide economic protection to the family. A dwelling occupied by its owner and his or her family is exempt by law from seizure or attachment for debt. Title is transferred to the members of the family who must use it for living in. Under Mexican law a homestead can only be created over assets of a certain value and once it is created, no other homestead can be established. As for the tax effects, a homestead has no tax effects unless the real estate in question is effectively transferred to a relative and even in that case, a tax exemption (as a gift among close relatives) may apply.
  • Fideicomiso (in civil law this is similar to a Trust): Under a fideicomiso, the settlor (fideicomitente) transfers certain assets to a fiduciary or trustee (in Mexico only banks or financial institutions are authorized to act as trustees) to be used or managed for a particular lawful purpose for the benefit of one or more beneficiaries (fideicomisarios). Title is transferred to the trustee who must act according to the instructions of the settlor and even of the beneficiaries. As for the tax effects, the transfer of property to a fideicomiso have no tax effects unless it is irrevocable. Generally, fideicomisos constituted for estate planning purposes are revocable, thus no tax effect is triggered initially. A testamentary trust can be constituted by will. Also, it is possible to use foreign Trust for estate planning purposes, which are commonly used for asset protection and confidentiality.
  • Will (also known as testament): By a will a person establishes the way his or her assets are to be distributed upon death and appoints the individual in charge of managing them until transfer to beneficiaries. In general terms, the testator is entitled to distribute his or her assets as a whole (in which case the beneficiaries are called heirs), by way of specific gifts (in which case the beneficiaries are called legatees or devisees), or using both (heirs and legatees or devisees). Either way, the testator appoints those who will receive the personal and real property as well as proportions and is allowed to establish conditions to be met by the beneficiaries as well as encumbrances and charges over assets. Mexico follows the testamentary freedom doctrine and thus there is no requirement that a testator must leave his or her estate or a portion of it in any particular way. A will can be revoked by its author or substituted by a new testament and can be made regardless of the family situation that may prevail after death. However, exceptions to its validity are clearly stated by law and must be observed in order to minimize the risk of its being challenging. As for the tax effects, property is transferred tax free among Mexican tax residents provided that certain formal requirements are met (i.e. filing a tax return) but foreign residents for tax purposes [[As a general rule, Mexican citizens who change their dwelling in Mexico to abroad are no longer considered as residents in Mexico for tax purposes. Conversely, foreigners moving their dwelling from abroad into Mexico become tax residents for tax purposes.] (even if they are Mexican citizens) are subject to tax of 25% on the gross amount.
  • International wills: Although Mexico has not made any international treaty regarding wills granted outside of Mexico (international wills), such documents would be effective in Mexico whenever granted in accordance with the law of the country where it is made. Consistently, Mexican domestic legislation recognizes legal situations created in another country if valid under the law in force therein. Furthermore, civil and procedural laws provide specific rules for foreign documents to be enforced in Mexico and several conventions related to international assistance in legal proceedings are currently in use. As for tax effects, international wills are taken into account for purposes of the tax exemption on inheritance by Mexican residents for tax purposes.

A family head wishing to leave his business to certain family member(s) can use or combine the aforementioned tools to achieve that purpose. Thus the shares of the company can be included in his will, may also be given as a gift during lifetime, grant the usufruct over the economic rights of the shares (right to receive only dividends) or even transfer the shares to a Trust or Fideicomiso for its management and disposition upon death. Usually Fideicomisos for controlling shares (Fideicomisos de control accionario) are used by families for keeping the control of the shares within the family and set up rules for its disposal.