What is an Escrow Agreement (Escrow)?

Simply defined, an Escrow is the deposit of funds with an Escrow Agent. Such deposit of funds is submitted to: a) A main transaction to occur in the future and; b) Predetermined conditions to release the funds. The release of funds to a third party is subject to accurate compliance of a condition precedent. Escrow Agreements can be a useful tool in securing an investment, by providing a safe, optimum and efficient completion of a variety of transactions. The Escrow Agent holds the assets in custody, invests the funds as per the client´s instructions and allocates the funds once the conditions precedents and agreements set forth by the parties priory, are met. The Escrow Agent accomplishes the aforementioned services through: • Security • Efficiency in the managing of funds. • Acting as an impartial party to the transaction, being the custodian or depository of documents and funds. • Keeping all the involved parties informed regarding the progress of the Escrow Agreement. • Keeping accounting reports on incoming and outgoing funds from the Escrow Account.

Why Do I Need an Escrow?

Whether you are the buyer, seller, lender, or borrower, you want to assure that no funds or property will be transferred until ALL of the instructions in the transaction have been followed. The Escrow Agent has the obligation to keep in custody the funds and/or documents while they are under his control and to disburse funds and/or convey title only when all provisions of the Escrow Agreement have been complied.

Be certain to designate an independent licensed Escrow Agent who is impartial, licensed by SUGEF (in Spanish, Superintendencia General Entidades Financieras), requiring strict adherence to the standards in the industry and whose core business is providing escrow services.

Escrow – How Does it Work?

The main parties to the Escrow – buyer, seller, lender and/or borrower – will set forth the escrow instructions, usually in writing, to be created, signed and delivered to the Escrow Agent. The Escrow Agent will process the file, in accordance with the escrow instructions. Once all precedent conditions required in the Escrow Agreement have been met, the Escrow Agent will execute the instructions to release the funds and/or documentation in custody. Subsequently, the escrow will be terminated.

Who Chooses the Escrow Agent?

The selection of the Escrow Agent is normally done by agreement between the main parties. If a real estate broker is involved in the transaction, the broker may recommend an Escrow Agent. However, it is the right of the main parties to designate an Escrow Agent who is competent and who is well experienced in handling this kind of transactions. What Do I Have to Do While in Escrow? The key for the success of an important transaction such as a sale or purchase of a real estate, is to READ and understand your escrow instructions. If you do not understand the instructions, you should ask your Escrow Agent to explain them to you. Escrow instructions and provisions may differ from one case to another. Review the instructions and provisions with your Escrow Agent to avoid last minute delays or misunderstandings.

What is a Closing Statement?

A closing statement is a written and detailed description prepared by your legal counsel who sets forth the amounts that shall be credited or debited from your account. The most common items shown on the statement are: the purchase price, the funds deposited or credited to your account, payoffs on existing encumbrances and/or liens, the costs for all services and determination of the funds you are entitled to at the closing, among others. When you receive your closing papers, review the closing statement; it should come itemized and reflecting the financial aspects of YOUR transaction. If you do not understand any item included in your account, please feel free to ask your Escrow Agent for the corresponding description. Once you read your closing papers, please read and examine them all.

What Fees and Costs Will Be Charged?

Escrow fees are usually calculated based on a percentage from the amount to be placed in escrow. Your Escrow Agent, upon request, can present you an estimation of the escrow fees and costs, as well as fees charged by other involved parties, provided such information is available.

What about Cancellations?

No escrow is opened with the intention to be cancelled. However, there are cases when a condition precedent cannot be met, or when the parties did not come into an agreement during the period that the escrow is operating. Ordinarily an Escrow Agent will take the position that no funds on deposit can be refunded until the Escrow Agent receives a mutual cancellation written instructions signed by the principals. The Escrow Agent does not determine who is the beneficiary party due to a dispute among them. The Escrow Agent is neither a judge, a mediator nor an arbitrator. In case the parties do not reach a mutual agreement regarding the cancellation of the Escrow Agreement and the disbursement of funds, then the Escrow Agent will hold on to the funds until a competent authority (i.e. judge, a mediator or arbitrator) indicates how the funds should or must be released. The aforementioned description is usually how these matters are solved. However, each case is different and it will depend on the terms and conditions negotiated by the parties.

Trustco renders a broad scope of services regarding personal trust estate, managing of funds, services to meet the needs for corporations, individuals, or even their families. A trust is an excellent financial planning tool that includes the ongoing involvement of an advisor, offering access to a wide range of investment management opportunities, and administration by an experienced Trustee, regulated by the General Financial Entities Superintendence (SUGEF), the Costa Rican governmental regulatory institution. Clients are provided with specialized personal attention to assist them to achieve a long-term estate planning or financial goals. When it comes to matters concerning to your trust, we believe it is of the utmost importance that you receive individualized support and specialized counsel on a continuous basis. That is why we place so much value on your relationship with your advisor. Unlike other financial institutions, we offer one comprehensive relationship contact, your advisor, who is the local point of contact. Thus, your trust will receive the same hands-on, uninterrupted attention you expect.


The trust is a commercial contract and it is very useful and an adequate tool for the administration of goods, assets, rights, and others (all marketable assets or rights can be held in trust). It is a legal agreement through which grantor constitutes an autonomous asset, which is assigned to the trustee for the fulfillment of a particular purpose. In a trust, the patrimony is managed according to the terms of the trust agreement. It is key to clearly determine the purpose of the trust and the rights and obligations of the trustee. Moreover, it is important to understand the parties that constitute a trust agreement, which are: 1. Grantor or Trustor: Owner of the asset or right to be transferred once the the trust agreement is executed. The grantor establishes the terms, instructions and conditions of the trust agreement. 2. Trustee: Owner in trust property and administrator of the asset or right held in trust. In the execution of his duties, the Trustee has different responsibilities, such as: • Fulfill the necessary acts to accomplish the purpose of the trust. • Execute the rights and legal actions allowed by law in defense of the trust. • A proper administration of the assets or rights held in trust property. 3. Patrimony: Or trust property. This estate is autonomous from any other patrimony of the parties who constitute the trust agreement. It is restricted to the particular purpose of the trust and it is out of reach of any judicial action that may affect the other patrimonies.

It is understood that any of the parties in a trust agreement can be an individual and/or corporations.

In Costa Rica, trusts are regulated mainly by the Code of Commerce of Costa Rica (from articles 633 to 662). Article 633 establishes the trust as follows: “Through trust agreements, the grantor transfers to the trustee the property of assets or rights; the trustee is obligated to use them for the legal and pre-determined purposes established in the trust agreement”.

In accordance with article number 636 of the Code of Commerce, , the entrusted assets subject of registration must be recorded in the Public Registry. In order to enact a trust agreement, there are some requirements that have to be fulfilled. These requirements are:

• The trust agreement must be in writing, through an inter vivos act or through a testamentary act. (Code of Commerce, Art. 635) • To determine the purpose of the trust. • The designation of the trustee that will be responsible for the trust. The trustee shall be capable of acquiring rights and assuming obligations. In the case of legal entities (e.g. corporations), the articles of incorporation of the company must specifically authorizes the company to receive by contract or by last will the trust property. (Code of Commerce, Art. 637)

Benefits of the trust:

• Separates the transferred assets to an independent patrimony. • The guarantee trust offers more security and efficiency over other traditional options, such as mortgage, mortgage certificates, promissory note, etc. • In case of breach of contract, the trustee or any other binding party will submit the difference before a predetermined conflict alternate resolution process. • It may imply financial advantages. However, it is also very important to clarify that if a trust generates income, it may be subject to taxation. • Reduces the cost of indebtedness as long as the level of risk improves (Investment Trust).

Although the Costa Rican legislation does not classify trusts, the common practice allows us to identify at least three different categories, which can be determined as follows:

1. Management Trust: The grantor transfers to the trustee certain asset or funds to be administered in accordance with the particular purpose by which the trust was constituted. The benefit of this trust is given by the security and protection requested by the grantor in favor of himself or to third parties such as beneficiaries. There are several kinds of trusts, which can be established under this category, such as testamentary, management of funds, trusts based on life or accident insurance policies, education, among others. 2. Investment Trust: The grantor gives to the trustee certain amount of assets to be invested in stocks in order to deliver the profits to the trustee designated in the contract. The objective of this trust is to facilitate the participation of individual investors in larger investments with more attractive profits, counting with the assistance of a professional in that field (portfolio). The goal can be general or specific, however the main purpose is the generation of earnings and surpluses resulting from the placement of the assets held in trust in productive activities. 3. Guarantee Trust: The trustee receives certain rights or asset in guarantee and holds title over the asset in fiduciary property for a certain period of time; meanwhile the debtor (grantor) fulfills his obligation. In this case, the creditor becomes the main beneficiary. Once the debt has been settled, the trustee returns the ownership of the asset to the grantor. If the debtor fails to settle the debt, the creditor requests the trustee to sell the asset through an auction procedure to pay the unsettled amount. This trust is applicable in contracts or agreements in which one or both parties surrender the patrimony in trust and this serves as a guarantee, so the trust agreement serves as a guarantee to compel the contracting parties to comply with their commitments and obligations of the credit relation. Besides, it grants the advantage of avoiding judicial actions in the event of default of payment by the debtor.

So, as you can see, a trust is a broad legal and useful instrument in all types of business transactions, transfer of properties or management relationships. In Costa Rica, trusts can be used as a guarantee for the fulfillment of financial obligations, to assure the fulfillment of shareholders agreements, to avoid or neutralize risks during transition stages, such as the purchase of a company, or a real estate, or as a guarantee in real estate developments.

In real estate developments, for example, the fiduciary holds the ownership of the property and guarantees to investors and financial entities, that the funds will be properly invested and that the development will be successfully finished.