Development and Application of Trusts in Costa Rica

Mondaq Business Briefing

January 26, 2006

The concept of trust has been put into practice in the ordinances of several Latin American countries and more and more this type of instrument, which allows an infinite number of modalities arising from inter vivos or mortis causa contracts (eg. inheritances), is being utilized. It allows greater versatility in contractual relationships.

In Costa Rica, trusts are regulated by articles 633 onward of the Commercial Code, as follows:

"Through trust agreements, the trustor gives to the fiduciary the property of assets or rights: the fiduciary is obligated to utilize them for the legal and pre-determined purposes established in the constituted act."

In order to understand this definition in its totality, it is necessary to refer to the elements that intervene in the creation of a trust, which are:

a. Trustor: Owner of the asset being placed in trust.

b . Fiduciary: Administrator of the assets held in trust.

c. Trustee: It is the determined legal purpose designated to one or several natural or legal persons.

From the foregoing, it is understood that: a trust is a legal arrangement in which the Trustor constitutes an autonomous patrimony, which is assigned to the fiduciary for the fulfilment of a specific purpose; furthermore, it is a private contract which does not take on legal life with the characteristics, attributes and obligations of a legal entity (e.g. companies and corporations). It must be registered in the Business Registry pursuant to the Commercial Code of Costa Rica.

To register the trust document or for it to take on legal life, several requirements must be met for its registration before the Public Registry, and these may be summarized as follows:

It must be in writing, through inter vivos or testamentary acts, ART. 635 of the Commercial Code.

It is important to remember that all assets or rights that fall within the area of commerce may be held in trust, the asset placed in trust must be properly registered in the respective Registry and is subject to the trust to which it belongs.

Determination of the purpose of the trust.

The designation of the natural or legal person who, as fiduciary, will be responsible for the trust. In the case of legal entities, it must be remembered that the constitutive deed should expressly empower them to receive by contract or testament the trust property.

With a clear concept of trusts and the parts that intervene in the trust agreement, it is important to understand how a trust is constituted and who may create it.

In this way, there is the Fiduciary, who may be any natural or legal person, capable of acquiring rights and assuming obligations. The legal persons should be expressly authorized to receive by contract or by testament the property named in the trust deed. A trust may be transferred, providing that it indicates the period for which the natural or legal person may perform in the capacity of fiduciary.

As administrator of the trust, the fiduciary has responsibilities in the execution of his functions, which may be summarized as follows:

Fulfil all the acts necessary for the realization of the trust.

Adequately identify the assets in trust (which may be shares, mortgages, money in the form of cash, movable or immovable property).

Execute the rights and legal actions in defence of the trust, as the law allows.

The work of the fiduciary includes the proper administration of the assets, securities or rights deposited in trust property.

In the case of the Trustee:

He may demand from the fiduciary the fulfilment of his obligations.

Pursue the assets when they have been unduly removed.

Request the removal of the fiduciary.

It is important to point out that, within the framework of the Costa Rican legislation, there exist certain prohibitions applicable to trusts, which, in accordance with article 661 of the Commercial Code, are:

The purposes of the trust must be legal, that is, they must be clear for the proper functioning of the fiduciary.

There are "numerus clausus"; all those not established within this framework are permitted.

Trusts with purposes unknown are prohibited.

Those that last more than 30 years

When a legal entity is designated as trustee, except if it is of the state, charitable, scientific, cultural, or artistic, constituted for non-lucrative purposes.

When earnings, commissions or bonuses, which are not established in the contract, are assigned to the fiduciary.

When the fiduciary and the trustor are one and the same.

Similarly, a trust is extinguished or its legal life ends in the following manner:

Whenever the fulfilment of the resulting conditions, the purpose for which it was constituted, becomes impossible, by agreement of the trustee and the trustor, the fiduciary may oppose when, in this last case, there are no guarantees remaining.

Revocation of the trustor whenever he has reserved that right. In this case, third party rights must be guaranteed.

Absence of a fiduciary. Art. 659 of the Commercial Code.

Now that we understand trusts in general terms, we will focus on the three main categories of trusts that are managed in Costa Rica; these are:

Guarantee Trust

Investment Trust

Administration Trust

Guarantee trust is created for the specific purpose of separating assets that are affected in the fulfilment of an obligation. It is constituted by a natural or legal person who is the debtor of a credit transaction, generally with one of the banks of the National Banking System of Costa Rica. The trustor gives assets to the fiduciary, designating the creditor bank as trustee. If the debtor fails to settle the debt, the trustee requests that the fiduciary sells the assets and pays him. It is applicable in all those negotiations expressed through contracts or agreements in which one or both parts surrender the trust in patrimony and this serves as a guarantee so that the third party, the fiduciary, obligates the contracting parts to comply with their commitments or obligations. The guarantee trust is, therefore, a contract through which the assets object of pledges or advances are surrendered to the fiduciary, by virtue of third party agreements so that the latter retains legal title of the same, until such time as the contractual terms or conditions of interest between the parts are fulfilled.

This type of trust offers the following benefits:

It guarantees legal title of the asset for the purpose of the fulfilment of the contracted obligation.

It avoids judicial actions in the event of default.

The investment trust has as its principal objective the generation of earnings and considerable surpluses, resulting from the placement of the assets held in trust in productive activities. Here the trustor and trustee are one and the same because it is the trustor who subsequently receives the dividends that have been generated. The goals may be general or specific, but in some cases the fiduciary entity prefers to seek the technical help necessary regarding the utilization and employment of means, so that he is considered an intermediary and is not responsible for guaranteeing the results. This modality is divided in two:

With specific distillation

Refers to those in which the investment or placement of any security or sums of money is authorized as the principal objective in accordance with precise instructions of the trustor.

The common fund

They are operated with resources obtained from the execution of fiduciary transactions in which the investment of these resources in securities within the percentages expressly indicated by the legislator and over which the fiduciary exercises collective administration, is authorized as the principal objective.

This type of trust offers the following benefits:

The beneficiary receives with certainty the product of the investment.

The investments are managed by highly qualified personnel.

Immediate availability of the assets.

The administration trust is that trust through which the client transfers to the fiduciary certain assets or funds to be administered in accordance with the specific needs for which purpose they were constituted, whether it be administration, collection or monitoring.

It applies, for example, to persons residing abroad who have assets in the country. In these cases, the trustor is at the same time the trustee.

This type of trust offers the following benefits:

Reduction of costs and workload of the trustor.

Partial and confidential administration.

In addition to the three categories mentioned above, in Costa Rica there is a wide variety of trusts to cover all the needs of the investor, and below is a list of the existing trusts which operate under the current legal normative.

In terms of the object of the trust, it may include all class of assets and rights. It has to be determined who is the owner of the assets that have been given in trust, as with this type of instrument there is a transfer of domain in favour of the fiduciary. The assets form a patrimony separated from the person who is the legal holder and non-owner, at least in a temporary and revocable manner.

The assets and the rights of the trust originate from the patrimony of the trustor, which will be placed in a situation of patrimony of affectation, the legal holder of which will be the fiduciary, who may act as legal title holder in accordance with what is indicated in the constitutive act and the appropriate law and, ultimately, the fulfilment of the determined objective.

One refers to a type of patrimony "in trust" or "trust property", and it is for this reason that it is also referred to as an "autonomous" patrimony, a fact which has been debated and criticized by experts, inasmuch as we are able to understand that the so called patrimony is distinct from other patrimonies as well as from the patrimony of the parts to which reference has been made and which conform to the concept of trust; and this refers to the fact that the patrimony of these assets formed in trust may not be assigned to any of them. The patrimony or trust property is linked to a concrete purpose and is outside of the normal situation in which the other patrimonies are found.

These assets originate from the property of the trustor to be converted to the patrimony of the trust, and as such, what the trustor has in his property, with regard to these assets are, as we say, all the rights that the law conveys to him and that he decides on as part of the trust and, of course, he reserves the right to reinvest or extinguish the trust.

It is for the aforementioned reasons that the concept of trust provides great security, because the assets, once they are no longer in the property of the trustor, may not be pursued. Furthermore, there are two other very important reasons, which are:

The assets given in trust, by virtue of them leaving the patrimony of the trustor, may not be pursued by third parties, as long as they are in trust property of the fiduciary.

Because of its versatile character, it adjusts to goals and objectives of the most diverse nature.

A trust is a broad legal act in light of the fact that its use is allowed in all types of business transactions, transfer of properties or administrative relationships. This explains its popularity in countries where such legislation exists and even in countries where its validity is recognized, even when the laws do not regulate it, as in the case of Switzerland.

Trusts are legal instruments perfectly adapted for patrimonial planning and the protection of assets. Establishing a trust account with a banking institution or through an independent fiduciary is an ideal form of conserving and giving continuity to such an account, instead of submitting oneself to a succession and testamentary judgement.

With a trust, one can achieve general objectives such as: avoid a successor judgement, reduce taxation levels, obtain professional administration of assets, confidentiality and avoid conflicts among inheritors of a patrimony, protect assets from lawsuits, etc.; and specific objectives such as to cover medical and education expenses of certain persons, leave legacies or specific assets to persons who are not obligatory inheritors, disinherit a member of the family who deserves it, maintain for life an incapacitated person, constitute a guarantee for financial or commercial transactions, etc.

A trust becomes an "autonomous patrimony", subject to the instructions established in the trust agreement.

Bio: Licda. Maritza Sanabria Mianda a lawyer and notary, she is a senior and founding partner of the LPS&C Law firm. Ms Sanabria is an expert in international asset protection and tax strategies. She specializes in wealth protection and tax minimization, international asset protection trusts and foundations, international business corporations, worldwide investing, yacht registrations, and global banking. Ms. Sanabria is a member of, ABA (American Bar Association), IBA (International Bar Association) The IFA (International Fiscal Association), AOA (The Asia Offshore Association) and The Colegio de Abogados en Costa Rica. To find out more about any offshore havens or set up a tax plan that is right for you, please call for a FREE Report "Tax Planning Guide", or drop an email to the author.

The content of this article is intended to provide a general guide to the subject matter. Speacialist advice should be sought about your specific circumstances.

Ms Maritza Sanabria Mianda
LPS&C
Suite 6508
8345 N.W. 66th Street
Miami
UNITED STATES

Tel: 8006201887
Fax: 8006201887

E-mail: jonathan@itpa.org
URL: www.redseamanagement.com

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