The Panamanian Private Foundation is a valuable legal instrument, useful for the protection of assets, but of particular application in estate planning and to overcome hereditary disposition of assets.

A private foundation is an independent juridical entity similar to a corporation, which acts like a trust, but functions like a company.

The law prevents the assets or patrimony of a foundation from being sequestered, embargoed or otherwise inhibited against the discharge of obligations undertaken by the founder(s) or beneficiary(ies).

It also stipulates that hereditary laws (favored heirship) in the domicile of the founder(s) or the beneficary(ies) cannot be forced upon the foundation, nor can they challenge the foundation's validity or inhibit the fulfillment of the foundation's objectives.

Another important regulation protecting assets transferred to a Private Foundation is contained in the provisions of Article 60 of the new Banking Law, stipulating the following on a free translation: "Assets transferred or deposited in banks, be it as a deposit or under a mandate or trust, or under any other title (foundations), shall be entirely subjected to the laws and under the jurisdiction of the Republic of Panama, unless the instruments by which the transfer is effected provide otherwise.

As a principle of public order and public policy, it is established that the assets of foreign aliens (as they are defined in the sole proviso of this Article) are fully subjected to the principles of free will and to the free disposition of assets, even if the laws of succession (heirship) or the matrimonial regimen of the country of nationality or domicile of the title-holder, the grantor (settlor), founder or beneficiary provides otherwise.

PROVISO: Assets of foreign aliens, shall be considered for the purpose of this Article, the assets of title-holders, grantors, or beneficiaries of persons who are not Panamanians, nor residents in the Republic of Panama, at the time the transfer of assets is effected".

Although private foundations may not be constituted to engage in profitable businesses,

they may conduct non-habitual transactions necessary to pursue the purposes and objectives of the foundation and its beneficiary(ies), including holding an investment portfolio.

As in the case of trusts, the Private Foundation provides the option of appointing "Protectors", auditors or any other supervisory body, to act as custodian of the assets, to oversee the functions of the Foundation Council and to make sure that the objects and purpose(s) of the foundation are fulfilled. The Protector may be a natural person or a juridical entity.

Two distinct advantages of foundations over trusts are:

  • less costly to form and to maintain,
  • offer greater confidentiality than an all-inclusive trust agreement which is compelled to contain full details regarding beneficiaries and the manner of asset distribution.

Other advantages offered by foundations are:

1. Complete legal segregation of the assets of the foundation from those of the founder.

2. Assets endowed to the foundation by the founder or other contributors, may not be contested by creditors after three (3) years from the date of transfer.

3. The founder may be the sole beneficiary or one of the beneficiaries and may also be a member of the foundation council.

4. No license of any kind is required for the foundation to operate, even if part of the assets are located in Panama.

5. All transactions of the foundation made outside of Panama are non-taxable. This is also includes interest earned on funds deposited in local banks.

6. The foundation, as well as its assets, may be transferred or become subject to the laws and jurisdiction of another country at any time. Transfer of domicile of foundations from another jurisdiction to Panama is also allowed.

The documents of a foundation comprise a "Foundation Charter" and a private document called "Regulations".

The "Foundation Charter" is protocolized through a Public Deed and must be registered at the Public Registry, in order to bestow legal validity to the act of constitution. The "Regulations" is a separate private document, which may be drawn either simultaneously with the Foundation Charter or at a later date, and need not be registered with the Public Registry or anywhere else.

It is within the Regulations that most of the confidential information regarding beneficiaries and manner of distribution is normally included, thus providing an excellent vehicle for anonymity.

One or more natural or juridical persons, by themselves or through third parties, may constitute a private foundation. Also the Foundation Council (which is the administrative or governing body of the foundation) may be either a juridical person or no less than 3 individuals. In the latter case, although not stipulated in the law, we recommend their appointment as president, secretary and treasurer.

Once the foundation is constituted, the only annual fees payable (including first year) would be the US$150.00 tax due to the Panama government to keep the foundation legally active, and the fees due to the attorney acting as statutory Resident Agent, another requirement of the law.

One of the practical applications of a private foundation is for it to be used in lieu of a will, using the following approach:

1. Founder and members of the Foundation Council are nominees in the Foundation Charter. The Foundation Charter provides for the appointment of a "Protector", empowered to veto and invalidate any action taken by the Foundation Council, without his/her prior authorization.

2. The Protector may be appointed by the nominee Founder in a separate private document, at the time that the Foundation Charter is registered. The protector may be in fact the real, but anonymous, founder. The document appointing the Protector stipulates that such appointment will be an integral part of the Regulations and will also designate a substitute Protector (the equivalent of the executor in a will) upon the death of the primary Protector, or will authorize someone (may be the Protector himself) to make such designation, later on.

3. Regulations are drawn, designating the real founder as primary beneficiary until his demise, and the secondary beneficiary, that will become the primary beneficiary upon such event.

4. The Regulations will also indicate that during his lifetime, the primary beneficiary will benefit of the entire endowment at his sole discretion and will indicate in what manner the secondary beneficiary will benefit from the remaining patrimony, upon the death of the primary beneficiary; or to this effect, the secondary Protector (executor) may have complete discretional authority to decide in what manner to distribute the patrimony to the secondary beneficiary.

An alternative would be that the entire patrimony will be available to the secondary beneficiary to be distributed at his or her full discretion upon the first beneficiary's demise.

In another instance a specific annuity may be stipulated for the duration of the lifetime of the secondary beneficiary; the remaining patrimony may be for the benefit of grandchildren with manner of distribution.

As can be appreciated, Private Foundations can be effectively used in lieu of a will, since in the Regulations all pertinent details can be spelled out, just like in a will. Also, if desired, there can be a revocation clause in the Foundation Charter, requiring approval from the Protector and/or the primary beneficiary.

Similar stipulations could be included regarding amendments to the Regulations.

It would appear that Panamanian foundations could circumvent the difficulties related to the hereditary disposition of assets. However, to our knowledge, such dispositions have not yet been tested in a court of law.

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