Panama Private Foundation Part 5 – Main Differences between Private Foundations and Trusts

There is a certain similarity between Private Foundations and Trusts, as the Foundation Council holds great powers of decision and control over the Foundation’s assets since the latter has no owner. This fact requires much trust between the client and the Foundation Council, which is a basic requirement in the trust a client must have in his trustee company. Aside from the similarities, we would like to point out certain differences between Panamanian Private Foundations and Trusts:

(1) A Trust is a juridical act by virtue of which a person known as the Settlor transfers assets to a person called the Trustee in order for the latter to manage or dispose of same in favour of a beneficiary who may be the Settlor himself. The Trustee is generally a company that holds a trustee license and engages professionally and habitually in the business of managing properties, investing liquid assets and disposing of assets that are juridically under the legitimate ownership of such trustee but subject to the provisions of a trust instrument. Trusts are not registered at the Public Registry of Panama unless they concern real estate located in Panama and do not create a new legal entity.


(2) In contrast, the registration of the Foundation Charter at the Public Registry vests the Foundation with juridical personality and the Foundation may therefore acquire and own assets of any kind and incur obligations. The Foundation, unlike a Trust, is the owner of its own assets, which are managed by the Foundation Council, the latter having the function of complying with the aims and objectives of the Foundation.


(3) The idea of making use of a Foundation as a vehicle to be the owner of any movable or immovable good in order to indirectly transfer such assets by means of the transmission of ownership of such Foundation is not also applicable to Trusts, as Trusts do not in themselves constitute legal entities separate from the Trustees. To transmit the authority or control that the Settlor has over the Trustee and, consequently, over the assets that are managed by the latter, another juridical act must be formalized following the same formalities as those required upon the transfer of assets to the Trustee by the Settlor.


(4) A Trust that is to produce effects after the death of the Settlor must be constituted following the formalities of a will save in cases where the Trustee holds a license for practicing the business of Trusts.


(5) In cases where a Foundation is created, whether through a public or private document, to take effect after the Founder’s death, the formalities envisaged for making a will are not required.


(6) Trust agreements may have a name, but this is solely for reference purposes, as a Trust is not in itself a legal entity.


(7) In the case of a Foundation, same must have a name expressed in any language which includes the word “Foundation”


(8) Trust agreements shall have effect in respect of third parties as from the authentication of the signatures of the Settlor and of the Trustee or of their attorneys in fact by a Notary Public or a Panamanian Consul.


(9) A Private Foundation shall have effect in respect of third parties as from the registration of the Foundation Charter at the Public Registry save for the exceptions envisaged by the law on inheritance matters.


(10) Trust agreements are created by the signatures of the Settlor and the Trustee or Trustees. In contrast, a Foundation is constituted solely with the signature of the Founder (who may be a Trustee).


(11) The Foundation law provides for the figure of a Protector for supervising and safeguarding the assets at the disposal of the Foundation Council. The Trust law in no way forbids the appointment of “Protectors” or any supervisory body, but it does not specifically create such a figure.


(12) The control and administration of the assets given in trust falls on the Trustee. This corresponds to the Foundation Council in Foundations.


(13) The law governing Trusts includes no provisions regarding the applicability of foreign laws in the matter of successions. In the case of Foundations, there are specific regulations protecting the Founder’s wishes, as inheritance provisions of the Founder’s domicile are not opposable to the creation of a Foundation, nor to the transfers made to a Foundation. That is, legal heirs do not have right to revoke the creation of a Foundation nor its transfers to the prejudice of the Foundation’s beneficiaries.


(14) In a Trust, the Trustee may appoint one or more trustees with no limitations as to minimum or maximum numbers. On the other hand, the Foundation Council requires a minimum of three members if same is constituted by natural persons.


(15) A Trust’s aims are any objects of a business nature. In contrast, a Foundation’s range of action is limited to activities for which a Business License, Industrial License or Professional Qualification is not required to carry them out, that is, being the owner of securities, real estate and bank accounts, as well as entering into contracts of any kind that do not imply the practice of a commercial sale business. The law governing Private Foundations provides that, despite the fact Foundations that same may not have profit objectives, they may carry out mercantile activities in a non-habitual manner or exercise the rights deriving from the titles representing the capital of mercantile companies that make up the Foundation’s assets, provided that the financial result or product of such activities is assigned exclusively to the Foundation’s aims.


(16) A Trust has no asset protection regulations vis-vis future claims by creditors. The Foundation law has very clear regulations restricting claims against the Founder.


(17) No reserve Trusts are sold. In the case of Foundations, it is juridically and commercially feasible to do so, and is in fact a regular legal practice.


(18) A Paulian or revocatory action opposing the contribution or transfer of assets in favour of the Trustee by virtue of a Trust Agreement entered into has no specific prescription date. In contrast, such actions in the Foundation law prescribe three years after the transfers have been made.


(19) The transfers of assets to a Trustee are generally made in order to replace a will and to carry out commercial transactions, the most common of which are: the purchase of immovable property, the opening of bank accounts, the accrual of capital in mutual funds and the signing of international contracts in order to facilitate exchanges and avoid taxes. Foundations, on the other hand, although a discreet mechanism for opening bank accounts, or purchasing immovable property are basically constituted for inheritance purposes, and are created to manage the distribution of family money and properties, to act as charitable or church institutions, and to convert them into holding companies that act as the owners of corporations.


(20) A Trust is terminated where the office of sole beneficiary and that of sole trustee fall on one person. A Foundation is not terminated where the office of sole beneficiary and that of sole member of the Foundation Council fall on one person.