Panamanian Private Foundations: Asking the Right Questions

In 1995 the Republic of Panama passed Law No 25 whereby Private Foundations were regulated.

The legislation contains the foundation’s main elements: a foundation is created when one or more natural persons or legal entities, called the founder(s), formalise a document called the ‘Foundation Charter’, which is recorded at the Public Registry of Panama and by virtue of which the Founders undertake to provide a donation called the ‘Foundation Assets’  of not less than the equivalent of US$10,000, which can be increased subsequently through other donations and which shall  be managed by a ‘Foundation Council’ under the supervision or not of ‘Protectors’, for the benefit of one or more ‘Beneficiaries’.  Once it is registered at the Public Registry, the Foundation Charter gives life to a new legal entity, without need for any further legal or administrative authorisation.

Although the obligation to provide donations, in cash or in kind, is not subject to time limits and there is no legal requirement to  publicly or officially report their delivery,  in accordance with the law, once  the foundation has acquired legal personality, the founder or third parties who have undertaken to donate assets to the foundation, either on their own account or at the request of any person having an interest in the foundation,  need to formalise the transfer  to the foundation of the assets they committed to. 

As to such donations, it needs to be taken into consideration that once you have made them, they could be challenged by the founder’s creditors or those of a third party, when the transfer constitutes a fraudulent  act against creditors.  However, the rights and actions of such creditors prescribe or expire three years from the contribution or transfer of the assets to the foundation.   Consequently, it is of utmost importance that the donations to the foundation be correctly documented and that they have a well defined date.

Questions to be considered regarding a private foundation include: Have you constituted a private foundation? Have you carefully reviewed its Foundation Charter?  Have you made donations and documented them?  Does your Foundation currently have valid Regulations? Does it have designated Beneficiaries?

If you are a person who, concerned about the best protection, distribution and transfer of your heritage, has opted for the creation of a private foundation, you must take into account that the document entitled ‘Foundation Regulations’ is where many of the more sensitive provisions are  set out, such as the designation of beneficiaries, the benefits and the protector, among others, always keeping in mind that the Foundation Charter is the basis and context for all of them,  together with the pertinent legal provisions.

One aspect covered by the Foundation Regulations is the beneficiary. The beneficiary or beneficiaries play an important role in Panamanian Private Foundations because the aims and objectives of the foundation are ultimately designed to favour them. 

Beneficiaries have the right to receive the profits or interest resulting from the Foundation’s Assets and to receive the Foundation Assets upon fulfillment of the conditions set out in the Foundation Regulations.
The benefits will be those envisaged by the provisions that have been issued pursuant to the provisions of the respective Foundation Charter, which are often contained in the Foundation Regulations. The Beneficiaries may access their benefits to the extent that the rules and orders adopted for these purposes have been followed. Are these rules clear in your Foundation’s Regulations? Who can change those rules? Regulations should be reviewed on a regular basis.

One of main attractions of a Panama Private Foundation, is that the law regulating such foundations specifies that in no case may Foundation assets be used for the founder’s or the beneficiaries personal  liabilities since, for all legal purposes, a foundation’s assets constitute a patrimony that is separate from the founder’s personal assets.  Because of this, the foundation’s assets may not be seized, embargoed or become the object of any precautionary action or measure, save for incurred liabilities, for damages caused in the execution of the foundation’s  aims or objectives, or for its beneficiaries’ legitimate rights.  However, the Foundation Council may approve the constitution of pledge or mortgage guarantees on the foundation’s assets, for guaranteeing its own or third party liabilities, provided this is not forbidden in the Foundation Charter.  A foundation should clearly include this regulation.

According to Law No 25 of 1995 foundations are, in principle, irrevocable.  Nevertheless, the founder may revoke the creation of a foundation or the transfers made to a foundation under certain special circumstances.   The revocability or irrevocability of a foundation is a concept that needs to be understood clearly, as well as all the elements resulting from the creation of a foundation.  It should be emphasised that the dissolution of a foundation and its revocation should not be understood to be synonymous.

Foundations may be created to take effect as from their creation or upon their founder’s death.   On this subject, if a foundation has been created to take effect upon the death of its founder, the founder shall have the exclusive and unlimited right to revoke it. His heirs may not revoke the creation of the foundation nor the transfers made, even if the Foundation Charter has not been registered at Panama’s Public Registry before the death of its founder.

Along the same lines, another interesting aspect of the Panamanian Private Foundation is the fact that the law clearly sets forth that the legal provisions on inheritance matters from the founder’s or the beneficiaries’ domicile may not be enforced against it nor do they affect its validity or prevent the achievement of its objectives as foreseen in its Foundation Charter or its Regulations, which constitutes an element allowing the use of such a foundation as a substitute for a will.

It is therefore of vital importance to bear in mind the rules contained in the Foundation Charter and the Foundation Regulations, as Law No 25 of 1995 itself allows this and other aspects to be subject to the decisions made by the various government institutions regulating the Foundation;  the wishes and will of the founder, the Foundation Council or  the Supervisory Body may also be included, as the case may be.   

The Private Foundation of the Republic of Panama is one of the most comprehensive and practical legal structures available today, sound and correct advice will allow you to fully take advantage of a wide range of benefits and prevent your Foundation Beneficiaries from inheriting serious complications.