What is a Fiduciary or Trust Fund?
Some call them fiduciary funds or other trusts but in reality we are speaking of the same financial tool. This term, nothing easy to pronounce, references a contract made between two figures, (the trustor and the fiduciary entity) through which it gives the management and administration of certain properties in exchange for a series of advantages and economic and financial benefits.
Do you want to know what types and what uses and advantages are provided by fiduciary funds? We detail it throughout this article.
What are the parties involved in a Trust or Fiduciary Fund?
In order to better understand the role of each party in this tool, we will give a brief description of the parties involved:
Settlor or Trustor:
The Settlor or Trustor is the person that voluntarily yields his material or monetary property or his rights to the fiduciary entity. This person or, in his absence, the beneficiaries that he has designated, will receive an amount in the form of payment by the entity according to the conditions that they have agreed on.
The fiduciary entity can be either a natural or legal person and it will be in charge of the administration and management of the property yielded by the trustor.
What are the main uses of a Trust or Fiduciary Fund?
There are several possible reasons for the decision to carry out this type of engagement. The most common are:
Inability of administration by the trustor
One usually resorts to a trust when the trustor suffers from some type of inability to perform the labor of administration and management of his own property, or also when there is a lack of knowledge and skills on the part of the owner when carrying out this work on his own.
A trust is sometimes used as a means to avoid paying inheritance taxes. By creating a trust before the death of the owner of the property, that property will pass to be managed by the fiduciary entity, avoiding, a posteriori, the personal allocation of these taxes since the property does not pass immediately to the heirs, but instead will be mediated from this type of entity.
To guarantee property in the case of minors
In the case of inheritances directed in whole or in part to minor beneficiaries, the trust fund allows the assets to be kept in a fund managed and monitored by the fiduciary entity until the person(s) reaches the age of majority or acquires the legal capacity to manage their own assets.
To optimize the use of assets and benefits
There are people that have large estates and do not have the sufficient time or capability to get the greatest benefits out of it, so the fiduciary fund becomes a good financial management alternative. The fiduciary entity will manage and administer the property following the instructions and preferences of the trustor. The trustor will be able to assign a beneficiary that receives the usufruct of the property or to assign a specific use for them.
What types of trusts exist?
In the case of a person that has incurred a debt, a guarantee trust is a way to guarantee the obligations of the person towards a third party placing the fiduciary owner as support of the financial operations that generate these obligations. Once the payment has been satisfied, this property will return to the original estate. The guarantee trust is generated through a contract that transmits to the fiduciary entity the ownership of the property, supporting this form to the creditor in the incurred obligations by the original owner of the trust.
Trust for the protection of property in the case of multiple owners
We imagine a material property or include a business model to name two or more people. If a simple buy-sell contract is made that granted 50% ownership or any other percent, in the event of bankruptcy of any of the members or holders, the creditors will be able to request the seizure of one of the parts. However, if they opt for a trust, they can separate the property of one or another, thus protecting the other party from those circumstances.
Maintenance of control in business shareholders
We suppose in this case that two brothers acquire between them more than 50% of the assets of a company. In this situation, their union will maintain control of the property. After a while, one of them will decide to retire the investment and get rid of their part, the other will be affected since he will lose control over the organization, additionally suffering a reduction in the value of his assets.
On the contrary, both people can decide to transfer their assets to trust under certain rules, in a way that neither of the brothers can sell their stock independent of the other. Like this, the assets will maintain a high value because whoever buys them will be a majority owner of the company.
What is the relation between fiduciary funds or trusts and Real Estate Crowdfunding?
The relationship is very close, as is explained below.
Como ya comentamos en otras ocasiones, el mercado financiero y concretamente la corriente Crowdfunding que no es más que financiación colectiva, permite que muchas personas que no cuenten con una alta capacidad adquisitiva, puedan invertir en proyectos inmobiliarios de gran magnitud a nivel nacional e internacional, a través de la figura del fideicomiso y los derechos fiduciarios asociados a la misma.
As we have already commented on other occasions, the financial market and specifically the flow of Crowdfunding (collective financing) allows small and medium-sized investors to invest in large real estate projects as well, on both a national and international level, through the figure of a trust and the fiduciary rights associated with it.
How does the relationship between Real Estate Crowdfunding and the Trust work?
1️⃣ The Real Estate Crowdfunding platform, through its advisors, will select various projects after analyzing their constructive, financial, and commercial risk.
2️⃣ Afterwards a fiduciary fund will create the legal structure (a trust) that will allow access to the investors.
3️⃣ The investors will be attended to through the platform by the advisors and will be able to manage all their alternative investments online.
4️⃣ The platform will coordinate the interaction between the clients and the trust until the need for the fiduciary fund is complete.
5️⃣ The fiduciary that is external to the company will administer all the funds received as a guaranty of transparent management.
6️⃣ Once the subscription period for the investment has been completed, the asset will be acquired in the name of the fiduciary. The fiduciary will be in charge of the administration of the asset and will distribute the profits periodically between the investors.
The function of a fiduciary fund for a Real Estate Crowdfunding project
All real estate investments made by investor clients offer a legal as well as economic security since they are acquiring stock in the trust which has the real estate assets that are the object of purchase as a part of its estate.
The Scheme in a simplified form would be the following:
• The investor clients access the Real Estate Crowdfunding platforms.
• They make contributions to the trust for the materialization of a specific project.
• The trust acquires the property.
• The property is rented to promote its development.
• The distribution of the income between the investors proceeds.
• The moment in time where the value of the property has appreciated the most is chosen.
• The sale of the property proceeds.
• The obtained benefits are then distributed.
How do fiduciary rights work?
The fiduciary rights are participations in a trust that will allow an investor to become the owner of a fraction within a real estate project. The original investment usually ranges between 10% and 20% of the total value.
On the other hand, the investor will have to make monthly payments during the duration of the construction of the property (project). Once this has been completed, the stage of exploitation of the property owned by the trust begins, proceeding to the distribution of the rent among the holders of fiduciary rights. Each one will receive benefits based on their contribution.
Investors will not have to worry about these arrangements as they will be handled by the trust.
Advantages and Disadvantages of this investment model
Like any business model, this also includes a series of risks and advantages:
• If the conditions for carrying out the projects are not met, the participants will receive their resources together with the returns generated by the investment.
• It is very convenient for investments abroad since, due to its simple operation, it does not imply any type of concern for the invaders regarding the payment of taxes, public services, eco, which will be paid directly by the trust.
• This way of investing saves a lot of paperwork, taxes and registrations that usually arise when transferring real estate.
• By accepting the possibility of an investment portfolio, if a property is eventually vacated, it will be compensated by the occupation of another, so that risk diversification is assured.
As you can see, the trust is a tool that is not only effective in isolating the risk by creating an autonomous patrimony, but can also be very useful as an alternative tool to loans. If the interest rate is associated with risk, the lower the risk, the lower the rate. This means that it will be possible to obtain cheaper loans if our assets are in a trust.