Taking Control of Trust Fees
Watch out for boilerplate trust agreements. Over the years, many foreigners frustrated with the fees they have to pay to the bank acting as their trustee have contacted me.
Unfortunately, I usually find that when their trust was set up they had unwittingly agreed to pay the fees the bank charges and also authorized the bank to unilaterally modify these fees. By the time they contact me, they are already so angry with their bank they want nothing further to do with them. In these cases, the only way out is to transfer the property to a new trust, which means expensive closing costs and taxes. How can you avoid this? If you already have a trust set up, you may want to renegotiate its terms. If you are just setting up your trust, then you need to watch out for boilerplate agreements.
The procedure for purchasing property in Mexico is very foreign to most Americans and Canadians, and they usually try to stay on top of what is going on so their purchase does not become one of the many horror stories they have heard. They get so wrapped up in the details of closing that they often fail to really understand the trust agreement. They’re too busy checking whether the title to the property is clear, if the property taxes, electrical, phone and water bills have been paid, if they have their finances in order to make a cash purchase, how much annual expenses will be, whether there are any structural, plumbing or electrical problems, whether title insurance can be acquired, and just basically trying to understand a foreign way of transferring title to real property. Once all of the above is in order, it’s time for closing. Documents are signed, payments made and the parties extend congratulations on the purchase and sale.
You have just closed on your new property. Congratulations! Oh, but wait, you also have just agreed to the bank’s boilerplate agreement, which was designed by some very experienced attorneys working for the bank. As you can imagine, this agreement is written extremely in favor of the bank that now holds title to your property and it sets the rules governing your relationship with them. In working with most of the banks that set up trusts for property in Mexico’s restricted zone, I have found the following stipulations in all of their boilerplate agreements.
1. The bank has the authority to modify the annual fees it charges whenever it deems necessary. These fees are either a percentage of the value of the property or a fixed dollar amount. If they are calculated as a percentage, the bank authorizes itself to re-appraise your property whenever it sees fit and adjust your annual fees accordingly.
I recommend you make sure your trust does not use the percentage method; instead, ensure it is set in dollars and that it can only increase if you are in agreement or in accordance with inflation of the USA. Often, banks will want to set the fees in dollars and then establish that they can increase in accordance with Mexican inflation. Do not let them get away with this. If dollars are being used, the inflation should be set to US inflation. If they want to use the inflation of Mexico, they should set the fees in pesos. Most banks will not want to set fees in pesos because if the pesos devaluates, which it often does, they lose.
2. The bank can charge late interest or fines for not paying your administration fees on time. I have seen agreements that charge late interest as high as 3% per month, which is 36% a year! What is worse is that the bank has no obligation to notify you when payments are due or where they should be paid. Often you go to your bank to make your payment and the teller has no idea what you want to pay or how to do it.
To avoid this, make sure the account information where you have to deposit the fees is clear. Also make sure you know the due dates. And, most importantly, make sure that the bank charges no late interest or fines unless they notify you fees are overdue and where you can deposit them.
3. The bank will set fees for signing powers of attorney and the sale of the property. These fees usually seem responsible; however, what many people don’t see is that the bank has the authority to charge more for what they consider “unusual circumstances”. From my experience, it seems that the bank finds “unusual circumstances” in just about every case. An example of this was a power of attorney a client recently needed to defend himself against a legal claim. The trust document said the bank could charge $300 USD for granting powers of attorney. The bank charged $650 USD, stating there were “unusual circumstances”. If my client did not pay the $650, the bank would not sign the power of attorney and he would lose the legal battle by default.
You need to make sure the amounts the bank can charge for signing powers of attorney or the sale of the property are clearly established.
4. The bank has the authority to determine the fees for any other types of services, such as reviewing documents, authorizing federal zone permits and authorizing mortgages.
Do not give this power to the bank. Set a fixed price for reviewing and signing documents other than powers of attorney or the sale of the property. I usually establish a charge of $300 USD.
5. The bank can refrain from signing documents if fees and fines or late interest are not paid. This type of disposition goes completely against the concept of having a fiduciary or trustee responsibility; however, it is in just about every boilerplate agreement and the bank always uses this type of policy.
This type of disposition should be allowed only regarding the sale of the property; other than that, it should be taken out of the agreement.
When you close on a property, you do so before a notary who charges fees to set up the trust and have it registered. In almost all cases, the notary will use a boilerplate agreement given to him by the bank acting as trustee and his fees do not include negotiating with the bank modifications to the agreement. To make modifications, you need to either do it yourself or hire someone to do it for you. Spending a little before you sign the agreement will save you a lot in the future. You may also want to ask the notary what extra fees he would charge to handle this negotiation (he may not even charge you). Make sure you get in writing the modifications that will be made.
If you have already signed the trust agreement before a notary and are unhappy about what the bank is charging, you need to determine whether negotiating modifications to the existing agreement is feasible. You need to either contact the bank personally or have an attorney contact the bank to determine what needs to be done to modify the agreement. You also need to determine if the cost of the negotiation and modifications will be more than they are worth in the long run. I recommend that you pay an attorney or someone familiar with trusts to determine the possibility of modifying the trust and an accurate estimate of costs to make the modifications. Make sure you get the estimate in writing and that it covers all costs and fees. Modifications to existing trusts are difficult, but not impossible. These modifications need to be dealt with on an individual basis and only after having read and understood the terms of the existing agreement.
The bank has a fiduciary responsibility with you and they charge for these services. Do not let them give you a boilerplate agreement that authorizes them to determine, at their own free will, what these fees will be. If you have already signed an agreement that does allow them to charge whatever they see fit, you may want to negotiate a modification and put a stop to increasing fees.