Trusts are one of the most important legal documents a lawyer can make for a client in Costa Rica. It is amazing that most attorneys do not know how to create or administer them here. Most people think of trusts in the case of death and inheritance, but they can be used for many more situations.
This is a refresher for expats to remind them of the usefulness and power of making a trust to protect assets or to solve a dispute. Originally, this subject was addressed last year in “Trusts are a perfect vehicle for getting deals done.”
Many large property transactions are based on trusts. Banks use them to lend money. Developers use them to hold property until a sale and then, once payment is made for a piece of property or building, they release it from the trust to the purchaser. The later is usually done in conjunction with the lender to the developer.
Fideicomiso is the word for a trust in Costa Rica. There are five basic parts to a fideicomiso: 1) trustor or fideicomitente, 2) trustee or fiduciario, 3) beneficiary or fideicomisario, 4) trust property or bienes fideicometidos, and 5) the trust contract or contrato de fideicomiso.
The rate published in the lawyers’ fees guide to charge for a trust is .01 percent. However, this rate is not what lawyers usually charge for the document. Really the fee charge by a lawyer depends on the complexity of the trust. The going rate is more like 1 to 3 percent of the value of the trust. Usually, trustees charge a yearly administration fee as well, and it can be expensive.
The value of a trust for the average expat is to use them as a vehicle to sell or buy a piece of property or to solve a legal dispute. Here are a couple of examples:
An expat has a property to sell and he or she has found a buyer, but the buyer is another expat who cannot get credit in Costa Rica and does not have all the money. The seller can take back a mortgage and attach the property, but the danger is that the buyer may not pay. Even though the collection laws in Costa Rica have changed, foreclosures can still be complex and can get hung up in court.
What happens in many cases is a buyer who cannot pay sues the original seller in criminal court over some trumped up allegation to postpone paying. This tactic does not work as well as it use to, but it still works for awhile. If the seller in this case puts the property in a trust, it would be harder for a nonpaying buyer to wiggle around and not pay.
In this example the seller and the buyer would be trustors or fideicomitentes and they would put the property in question in a trust or fideicomiso held by a trustee or fiduciario for the term of time that it would take the buyer to pay the seller. In this case, both the seller and the buyer would be beneficiaries or fideicomisarios of the trust. The purpose and result of the trust would be that the seller would get paid in full and the buyer would get the property free and clear of any encumbrance.
This kind of legal transaction lessens the chance the buyer will pull any funny business on the seller because if he or she does, the trustee would revert the property back to the seller.
Trustees can be virtually anyone, but they usually are lawyers, title insurance companies or banks. Making a trust with a lawyer and using a lawyer as the trustee is in most cases the cheapest alternative. Title insurance companies are reasonable priced in most cases, with banks being the most expensive and more complicated when it comes to the paperwork.
Trusts work great to solve legal disputes.
Say two or more people are in a legal battle. Usually, this means fighting over money or assets. If the parties to the dispute can come to an agreement to end the matter, the terms of the arrangement can be put into a trust document to enforce the agreement.
For example, an employee of an expat leaves and sues for amounts unpaid by the employer. This is a very common occurrence in Costa Rica: Disgruntled employees suing their employers. Under the Costa Rican labor laws, there are amounts that must be paid to an employee regardless of the reasons the employee leaves or whether the employee is fired.
Employees love going to the labor ministry and in many cases to court because they believe they will win big. However, in most cases they are willing to settle out of court for a lesser amount because they know the court system in Costa Rica is slow.
The best case scenario is for the expat employer to just pay the employee off and be done with the problem. However, many expats are on a limited income because they are retired and cannot pay the full amount. In this case, a simple trust with a lawyer comes in real handy.
The trustors, the employer and the employee would go in front of a lawyer who would act as a trustee to an agreement and set out the terms of payment. The employer would make payments to the lawyer who would in turn disburse the money to the employee. In this way, an expensive legal battle in labor court would be avoided. Nine times out of ten, an employer loses in labor court, so it is a nice place to avoid.
Trusts are not magic, but they are sure a good way to solve simple or complex legal situations in Costa Rica. In many cases, they can be a less expensive alternative to financing, collection and solving legal problems.