Understanding Trust Companies (“Fiduciaria / Fideicomiso”) & Escrow in Real Estate: What You Need to Know?

When it comes to real estate transactions, especially large investments, managing and protecting assets is essential. One way to ensure security and proper administration is through trust companies. Both these companies and the general public can access valuable information regarding trusts and housing bonds to better understand how they function in the real estate market.

Escrow: Mainly Used in Temporary Transactions
An escrow is a financial arrangement where a third party temporarily holds funds or assets until certain conditions are met. It is primarily used in real estate transactions to protect both the buyer and seller. The escrow agent, as a neutral third party, ensures that all conditions of a transaction, such as property sale terms, are fulfilled before releasing the funds or documents.

Key Characteristics of Escrow:

• Definition: Neutral third party holding funds or assets during a transaction.
• Function: Ensures that conditions of the deal are met before the exchange of funds or documents.
• Application: Common in real estate deals.
• Duration: Temporary and ends when the conditions of the transaction are fulfilled.

What Are Trust Companies (“Fiduciaria / Fideicomiso”)?
Trust companies, on the other hand, are legal entities created by law with a specific purpose: to act as administrators of assets or rights provided by a trustor. The key objective of these companies is to establish a separate estate for the trust, ensuring that the assets are distinct from any other accounts or responsibilities the trustee may have.

Key Responsibilities of a Trustee (“Fiduciaria / Fideicomiso”):

• Managing and separating assets: The trustee must keep the assets of the trust distinct from their personal assets and any other trusts they manage.
• Providing accountability: Trustees must report on the state of the trust to the trustor or the beneficiary, as outlined in the agreement.
•  Prudent administration: Trustees are required to manage the assets with care, prudence, and diligence.
•  Following the contract: Trustees must adhere strictly to the terms of the trust contract.
•  Transferring assets: Trustees are responsible for ensuring assets are transferred to the appropriate party at the designated time.
•  Defending trust assets: Protecting the assets from risks or threats is part of their duty.
•  Not guaranteeing results: Trustees cannot promise specific returns or outcomes.
•  Prohibition of personal benefit: Trustees cannot benefit personally from the trust, ensuring full transparency and ethical management.

Legal Requirements for Trust Companies (“Fiduciaria / Fideicomiso”)

Trust companies must register with the General Directorate of Internal Taxes (DGII) and inform them when they begin operations. Depending on the type of trust company, they may fall under different categories and supervision:

1. Multiple Banks, Savings and Loan Associations, and financial intermediation entities authorized by the Monetary Board. These companies are supervised by the Superintendency of Banks to ensure they follow regulations in their fiduciary duties.
2. Exclusive-use trust companies that do not belong to a financial group. These are directly supervised by the DGII.

Summary of Key Differences Between Escrow and Trust (“Fiduciaria / Fideicomiso”):

•  Escrow agent: A neutral third party that temporarily holds and manages funds or assets in a transaction until specific conditions are met. It is commonly used in real estate transactions and ends when the transaction is completed.
•   Trust (“Fiduciaria / Fideicomiso”): A long-term legal arrangement in which a trustee manages assets on behalf of a beneficiary. Trusts are more common in estate planning and long-term asset management.

Both serve to protect the parties involved, but escrow is focused on ensuring safe and transparent transactions in the short term, while trusts (“Fiduciaria / Fideicomiso”) are meant for long-term asset management and protection.