When it comes to asset management and protection, two notable structures are Panamanian trusts and private interest foundations. While both are designed to preserve property, they differ significantly in terms of legal requirements, structure, and benefits.
Below, we describe the differences between a foundation and a trust, as well as the advantages of each financial tool, to help you determine the most suitable option for your needs.
Understanding Panamanian Trusts
Panamanian trusts are financial tools designed for asset protection and estate planning. These trusts separate invested funds from the settlor’s property, benefiting foreign beneficiaries or addressing patrimony distribution needs.
This clear separation provides an advantage in tax planning, succession processes in the country of origin and custody from legal claims directed to the founder of the Panamanian trust.
Roles in a Trust
- Settlor: The person or entity that creates a trust in Panama transfers assets or rights to a trustee, who manages them according to the instructions provided.
- Trustees: Individuals or institutions to whom the administration of the Panamanian trust is entrusted, with the purpose of fulfilling a purpose determined by the settlor. He acts as manager of the assets, but not as their owner.
- Beneficiary: The person or entity entitled to the economic benefits or to enjoy the assets or rights of the Panamanian trust, in line with the provisions established in the constitutive act.
A Key Feature of Panama’s Trust Law
Law No. 1 of 1984 stipulates de legal requirements and regulates Panamanian trusts as contracts through which a settlor transfers assets or rights to a trustee for administration, distribution to the beneficiaries or to fulfill a specific purpose. Key aspects of this law include provisions for asset protection, tax planning, and flexible estate management:
- Asset Separation: As mentioned above, the funds transferred to the trust in Panama are separated from the property of the trustee. This means that, in case of legal problems or personal debts, the trust assets cannot be seized or affected.
- Confidentiality and Flexibility: The law allows for a confidential structure, where details about the settlor, beneficiaries and funds are not public. In addition, Panamanian trusts can be adapted to different needs, such as estate planning, asset protection or fulfillment of specific objectives, which allows establishing conditions for the administration of your patrimony.
- Tax Planning: Trusts in Panama have tax incentives, especially when the assets are outside the country or are destined for specific purposes, such as investment or protection of family estate.
- Duration and Transfer of Benefits: The law enables the creation of trusts for an indefinite period of time, in this way long-term structures can be settled up. In addition, conditions can be established to transfer the benefits to future generations, allowing for a well-structured succession planning.
These features of Panamanian trusts benefit different audiences, but particularly high net worth individuals looking to preserve their financial information while protecting their wealth.
Understanding Panamanian Private Interest Foundations
A private interest foundation operates similarly to a trust in terms of asset protection, but differs in structure and operation. Established by Law 25 of 1995, Panama foundations are a tool for non-commercial purposes, mainly oriented to estate and family planning. As an independent legal entity that owns its assets directly, it gives the founders more control over how it is managed.
Roles in a Foundation
- Founder: A natural or legal person who establishes a private interest foundation, defines its objectives and transfers the initial funds. This may issue a non-binding letter of wishes to guide the administrators.
- Foundation Board: In charge of managing the foundation’s assets in accordance with the purposes set by the founder. It acts for the benefit of the beneficiaries without owning the funds.
- Beneficiaries: Persons or entities that receive the benefits of the foundation, according to the provisions established by the founder. They are the final recipients of the goods or services provided by the structure.
The Differences Between Trusts and Foundations in Panama
The difference between foundation and trust in Panama lies in their approaches to governance, control and asset management. The main distinctions are presented below:
| Aspect | Panamanian Trust | Private Interest Foundation |
|---|---|---|
| Manager | Trustees manage assets for beneficiaries, bound by fiduciary duties. | Council manages the foundation’s assets. It functions as a board of directors that oversees and makes decisions. |
| Asset Ownership | Funds are held by trustees, this provides protection to the assets within the Panamanian trust. | The foundation owns its assets directly, providing independence from the founder’s personal property. |
| Purpose and Flexibility | Used for asset planning, such as customized distributions and specific provisions (e.g., minors as beneficiaries). | Typically established for consistent purposes, like family asset preservation or philanthropic goals. |
| Legal Requirements and Oversight | Requires designated trustees with specific qualifications and duties. | Operated by a council that may include beneficiaries, this simplifies management and allows for a more hands-on approach. |
| Confidentiality and Reporting | High confidentiality, with no public disclosure of beneficiaries or founders. | Similar confidentiality, with no public disclosure of founder or beneficiary identities. |
The choice between trust vs. foundation in Panama depends on key factors such as governance, ownership of funds, purpose, and confidentiality, each offering unique benefits to individuals and families seeking effective wealth protection and asset management solutions.
Reasons to Establish a Trust
Creating a trust in Panama can be beneficial for individuals focused on asset protection and estate tax planning, mostly those with foreign beneficiaries. Some additional advantages granted by the law are:
- Beneficiary Arrangements: Panamanian trusts enable for unique estate distribution plans, ideal for those with foreign beneficiaries who have different patrimonial planning needs. For example, a trust can be structured to release assets gradually or under specific conditions, so that the founder’s provisions are followed precisely.
- Recognition of Foreign Laws: Panamanian trust law allows individuals to decide if the trust will follow only Panama’s rules or include parts of foreign laws as outlined in the trust agreement. This characteristic makes Panama an important jurisdiction for individuals with international interests, since it facilitates the adaptation to different legislations and particular needs.
- Protection from Forced Heirship: Trusts in Panama can be used as a mechanism to handle succession planning, especially in those cases where forced inheritance laws of other countries require that a specific portion of the estate be earmarked for certain heirs and limit how assets can be distributed. However, it is essential to have specialized legal advice to evaluate the viability of this strategy, considering the particularities of each jurisdiction and the specifics of each country.
Reasons to Establish a Private Interest Foundation
Panama private interest foundations offer a customized approach to asset planning and provide distinct benefits for individuals with specific wealth protection needs:
- Defined Objectives: A Panama foundation operates according to the founder’s stated goals for managing funds over the long term, which may include preserving wealth or supporting charitable initiatives.
- Preservation for Future Generations: Private interest foundations are suitable for families who wish to hold assets for the benefit of future generations, particularly when there are foreign beneficiaries in the plan.
- Estate Planning with Autonomy: In a Panama foundation, the council manages the funds and acts in accordance with the guidelines established by the founder in the articles of incorporation and any charters. This structure allows the board to have direct control over the property.
- Asset Protection and Privacy: They guarantee a high level of confidentiality, which means that the identity of the founder and beneficiaries is kept private. It also offers a solid protection of the assets against possible claims or changes in the legal status.
Expert Assistance for Establishing Legal Entities in Panama
Patrimonial and asset planning is an important process that requires analysis and evaluation of the legal and estate tax details that apply in each jurisdiction. Both foundations and trusts in Panama offer benefits to protect your goods and your legacy, but their incorporation implies legal requirements and specialized knowledge. By relying on an experienced team, you can move confidently through Panamanian law.
Kraemer & Kraemer offers you the security and expertise you need to protect your wealth. Our attorneys will assist you in choosing the most appropriate structure for your situation. Contact us today for a personalized consultation.
