Trust vs Foundations in Panama

Rebeca Muñoz, Attorney at Law, LLM.

The term "fideicomiso" (Panamanian Trust) deriving from Latin, refers in Roman law to the principle of honoring one's word in fulfilling obligations undertaken towards another person through a mandate. In Anglo-Saxon law, this concept translates to "trust." Historically, the trust in English law originated from "uses," which revolved around transferring a property to a third party with certain obligations, benefiting the transferor or the beneficiary. The "Use" evolved into what we now know as the modern "trust."

In Latin America, Panama is noted for being the first country to propose a project to regulate trusts in 1925. The legislation defined this figure as an irrevocable mandate, through which assets are transferred to a trustee, who must manage them according to the instructions of the trustor and for the benefit of a third party known as the beneficiary. Over the years, Panamanian regulations have undergone various modifications. In 1984, the requirement to obtain a trustee license was introduced, positioning the Superintendency of Banks of Panama as the regulatory and supervisory body for trusts in the country. This intervention ensures that only authorized entities can act as trustees, thus protecting the integrity of the fiduciary system.

Concept

The Panamanian Trust is considered a contract between the trustor, who transfers one or more assets to an independent trustee, and the beneficiary, who benefits from the management of those assets. In this context, the trust is set up as a contract whose primary objective is to isolate assets to fulfill a specific purpose. Its regulation in Panama is stipulated in Law 9 of 1925 and Law 01 of 1984, with significant amendments in 2017. These laws establish Trust as a legal act and the need to meet requirements such as object, consent, and cause.

Subjects

The involved parties are divided into three fundamental roles: the trustor, the trustee, and the beneficiary. An optional fourth role, called the Protector or Protection Committee, may also be included:

• Trustor: The person who transfers the assets that will form the subject of the trust. This can be either an individual or a legal entity, as long as they have the legal capacity to dispose of those assets.

• Trustee: The party responsible for receiving the assets and has the responsibility to administer or dispose of them in accordance with the stipulations of the contract.

• Beneficiary: Refers to the person, individual or legal entity, who has the legal capacity to receive the benefits derived from the trust. This party may also assign their interest, wholly or partially.

• Protector or Protection Committee: Optionally appointed to supervise and protect the trust, must be duly mentioned in the contract.

Perfection of the Trust

The Trust is perfected with consent, object, and cause, requiring notarized authentication of signatures. If it involves real estate, it affects third parties from the registration of the transfer in the Public Registry of Panama.

Property

The fiduciary property is defined as the set of assets transferred by the trustor to the trustee. This property consists of two types of elements: real, which involves the actual transfer of assets or rights; and personal, which refers to the limitations and obligations agreed upon in the contract.

Capacity

For a trust to be valid, the parties must have the necessary capacity to contract, and the agreement must be formalized in writing and registered in the Public Registry of Panama. The subject of the trust can encompass all or part of a property, allowing a wide array of assets, rights, and obligations, with no restrictions regarding their nature.

Cause

The cause of the trust refers to the purpose or benefit for which it was established. Similarly, the trust is perfected by fulfilling the requirements of consent, object, and cause, with the need to authenticate the involved signatures. For real estate, effects against third parties occur once the transfer is registered in the Public Registry of Panama.

Types of Trusts in Panama

• Guarantee Trust: This type of trust is used in both complex and simple transactions. It is a contract through which the debtor transfers assets to a fiduciary entity with the purpose of guaranteeing the fulfillment of a principal obligation in favor of a third party. In the event of default, the fiduciary entity is empowered to liquidate the fiduciary property and allocate the resources obtained to settle the debt. The essence of the guarantee trust lies in creating a separate and independent estate specifically designed to secure the fulfillment of the credit rights agreed upon in favor of the beneficiary. In Panama, for the guarantee trust contract to be valid, it must include the grounds of default and the procedure for the execution and sale of the asset constituting the guarantee. It must also stipulate the trustor's right to oppose execution, proving compliance with the obligation or remedying any default within an agreed period.

·        Trust for Patrimonial Purposes: This type of trust focuses on estate planning, asset protection, and testamentary aspects. In this case, the trustor establishes, in the contract, the conditions under which beneficiaries may access the assets or benefits provided. This trust is tailored to the specific needs of each trustor and can be used to ensure the transfer of wealth and protection of family interests.

Private Interest Foundations

On the other hand, Private Interest Foundations are regulated by Law 25 of 1995. These legal entities allow the founder to transfer assets to the foundation and provide instructions to the Council on how to manage the assets. Foundations can be established so that the Council takes control once the founder has passed away, thereby ensuring the continuity of asset management according to the founder's established guidelines.

In comparison to trusts, a private interest foundation also offers a framework for asset management but is characterized by its distinct legal nature and mode of operation. While a trust is based on a contract between parties to achieve a specific objective, a foundation is configured as an autonomous entity that acts in the interest of its beneficiaries, following the founder's instructions.

Both trusts and foundations are valuable tools in estate planning, each with its specific features and advantages that can be utilized according to the needs of the trustor or founder.

Comparative overview of Panamanian Trusts (Fideicomisos) and Private Interest Foundations:

Topic	Panamanian Trust (Fideicomiso)	Private Interest Foundation
Legal Basis	Contractual arrangement based on laws established in 1925 and 1984 and 2017	Established under Law 25 of 1995.
Purpose	Isolates assets to fulfill a specific goal, such as estate planning.	Manages and administer assets, often with succession management in mind.
Parties Involved	Trustor, Trustee, Beneficiary, optionally Protector.	Founder, Council, Beneficiaries.
Nature	Contract between two or more parties.	Autonomous legal entity.
Control and Management	Managed by the trustee according to the trust agreement.	Managed by a Council following the founder’s instructions.
Flexibility	Highly customizable to meet specific needs and goals of the trustor.	Provides structured governance with flexibility in administrative roles.
Asset Segregation	Assets are isolated for the purpose of the trust.	Assets belong to the foundation, segregated from the founder's estate.
Succession	Ensures specific distribution of assets according to the trust agreement.	Can ensure continuity of management after the founder's death.
Regulatory Supervision	Subject to regulatory oversight by appropriate authority.	Operated under the regulatory framework established by law.
Uses	Estate planning, asset protection, charitable purposes.	Estate planning, asset management, succession planning.

References

Krienert, Maria Fernanda. Fundamentos del Fideicomiso. Historia, nociones jurídicas y normativa. 2024.

Panamanian Civil Code

Law 9 1925

Law 25 1995

Law 21 2017