I – Use.

The main use of private interest foundations is as an instrument to organize the family patrimony and serve as a will, but with greater advantages in terms of planning and privacy, since in this way a long succession trial is avoided, which could end up be public knowledge.

As a family planning instrument, the foundation is similar to a trust, with the big difference that in this case it is not necessary to transfer the assets to a third party, trustor, since the person himself can establish his private foundation.

1.- The Foundation as an Instrument for Estate and Tax Planning.

Although private interest foundations are not usually involved in profit-making activities. Through these you can invest in any type of asset, you can even form part of partnerships , and control companies as shareholders . They are also used for the administration of funds, in certain companies, in certain schemes or systems of benefits for workers (this organizational structural system is frequently used by large companies with offshore operations.

The foundation is an ideal legal instrument in cases in which a successful businessman has to ensure the continuity of his company, when he does not find suitable successors. The purpose is to provide a vehicle for the continued existence of personal businesses after the death of the owner.

Usually the family foundation is constituted with the purpose of regulating the successions that occur; for the preservation of family property. It is an excellent instrument for the orderly transfer of assets and for the maintenance of family members (this item includes education and clothing expenses for relatives). The foundation can be used to carry out all these purposes for the benefit of one or several families.

FIPs are attractive as a tax planning instrument when assets that generate tax-free income can be transferred to them . They are very useful as vehicles to lower inheritance and gift taxes.

2.- Advantages obtained with the Foundation.

Prevention of inheritance disputes;
Makes it difficult for family property to disperse
Incremental preservation of family property for future generations
Special provisions are established in case of death, especially if minors remain without any protection;
Protects property from the influence and mismanagement of descendants with no experience in family businesses;
It offers a flexible regulation for descendants subject to needs, diseases, etc.;
It offers a separation in the ownership of family property and in the management of family businesses, without placing minors at a disadvantage.

II.- Characteristics.

Private foundations have the following characteristics:

1.- It is a legal person: it acquires its legal personality when the Constitutive Charter is registered without any administrative or official authorization (art.9).

Therefore, it can acquire and possess assets of any kind, as well as incur obligations. You can sue and be sued under the applicable procedural rules.

2.- It is private: it pursues eminently private objectives.

They are governed by the founding act and its regulations, by the LFIP and other applicable regulations, but they are not governed by Title II of Book I of the Civil Code, on legal persons (art.2).

3.- Non-profit nature: article 3 of the LFIP states that

Private interest foundations may not pursue profit. However , such a legal mandate is mitigated in the same excerpt that below establishes that they may carry out commercial activities in an unusual manner (they are not merchants according to articles 28 and 30 of the Commercial Code).

4.- Formal: it must be in writing (it is created by means of a public or private document) and the formalities of the LFIP must be fulfilled (the founding act must be contained in a written document that must be endorsed by the resident agent (suitable lawyer) , protocolized before a notary of the Republic then registered in the “Private Interest Foundations Section” of the Public Registry. The transfer of assets from the founder or third parties to the foundation must be done formally, as prescribed by article 10 of the LFIP).

5.- Irrevocable: They are irrevocable except in the following cases: a) when the

given the registration of the founding act; b) when by express provision of the founding charter the contrary is established; c) for any reason for revocation of donations (inter vivos).

Article 694 of the Civil Code provides that the donation will be revoked at the request of the donor when the donee has ceased to comply with any condition imposed by him. In addition, the donation may be revoked due to ingratitude if the donee commits a crime against the donor, his spouse, ascendants or descendants; when the donee imputes to the donor some crime prosecutable ex officio or by public accusation, except if the punishable act had been committed against the same donee or his family; and if food is improperly denied (art. 965 CC).

6.- Variable capital: its initial capital must not be less than $10,000.00 or its equivalent currency (art. 5 numeral 2). The initial equity can be increased by the founder or by any other person.

7.- Separate Patrimonial Regime: for the creation of a private interest foundation, the allocation of patrimony is required to be used exclusively in the achievement of the purposes or objectives of the foundation expressly contemplated in the founding charter (art. 1).

The patrimony can originate from any lawful legal transaction and be made up of all kinds of assets, present or future, and by periodic sums of money or other assets (art. 16).

A very important characteristic of the private foundation is that the assets of the foundation are distinct and separate from the personal assets of the founder. Indeed, article 11 of the LFIP states:

“ Article 11 : For all legal purposes, the assets of the foundation will constitute a patrimony separate from the personal assets of the founder. Therefore, they may not be kidnapped, seized or subject to action or precautionary measure, except for obligations incurred, or for damages caused by the execution of the aims or objectives of the foundation, or by legitimate rights of its beneficiaries. In no case will they be liable for the personal obligations of the founder or the beneficiaries” (emphasis added).

It should be noted that some maintain that since the assets transferred to the foundation constitute its patrimony and cease to belong to the founder, if the latter reserves, in the Foundation Act, certain rights or faculties (for example, the revocation of the foundation, the right to reform the Statutes or Regulations and other rights concerning the administration of the foundation), it is possible that the Foundation will not be recognized.

In Panama, the founder has, by law, the right to belong to the Foundation Council; exclusive and unlimited right to revoke the constitution of the foundation when it has been created to take effect post mortem; right to appoint an oversight body (eg the “protector “); right to remove the members of the Foundation Council and request their judicial removal, as well as appoint new members.

8.- It has a specific purpose: the object or purpose of the foundation must be expressed in the founding charter (arts. 1, 5, numeral 6) and it must not be of a lucrative nature (art.3.).

9. Prolonged existence: the founding charter must establish the duration of the foundation (See section b.5 “Constitution”). Since the purposes of the foundation are not fulfilled at once, it is necessary for it to operate for an indefinite or prolonged period. However, the existence of the foundation will depend on the fact that the purposes of the foundation have been fully fulfilled or if they have become impossible in their realization.

In this regard, it has been stated that one of the advantages of creating a legal person is the continuity and legal security that it provides, since in many cases its duration exceeds the life of the natural persons that originally constitute it.

III.- Subjects involved in the Foundation.

There are different people involved in private interest foundations.

Next, we proceed to its study.

1.- The Founder.

This is the “creator” of the foundation. If there is no manifestation of their will regarding the constitution of the foundation, it will not have legal life.

The founder can be made up of one or more natural or legal persons, which constitutes a great novelty in Panamanian legislation, since, for example, in the matter of corporations, the subscribers (grantors) can only be natural persons (article 1 of the LSA states “Two or more persons of legal age…”). It should be noted that in practice, FIPs are constituted with a founder (usually a corporation), in such a way that the client’s confidentiality is preserved ( beneficial founder ).

It has the following attributions and rights and duties:

Create the foundation (art.1);
it can increase the patrimony of the foundation (art. 1);
belong to the Foundation Council (art. 5, numeral 3);
he must formalize the transfer of assets that he was obliged to contribute to the foundation (art. 10);
and unlimited right to revoke the constitution of the foundation when it has been created to take effect post mortem ( art. 13);
designate an oversight body (eg the <<protector>>) if it deems it appropriate (art. 19);
right to remove the members of the Foundation Council, as well as appoint new members (art. 21);
request the judicial removal – via summary process – of the members of the Foundation Council (art. 23);
if he is a beneficiary of the foundation, he can challenge the acts of the same that violate his rights (art. 26);
designates the beneficiaries of the foundation.

2. The Foundation Council.

It is the governing body of the foundation, which is mainly in charge of the administration of the entity.

to. Designation . The appointment of the Council must be established, completely and clearly, in the Foundation Act (art. 5, numeral 3). As noted in previous paragraphs, the founder is the one who initially designates the Foundation Council.

The protector or other supervisory body may designate new members of the Council if so provided by the founding act or the regulations (art. 24 numeral 4).

b. Conformation. The number of members must not be less than three (3), except in the case of a legal entity and the founder may belong to said council as stated, the LFIP contemplates a novelty in this matter: that the administrative body of the foundation (the Foundation Council) may be constituted by a legal person.

In effect, any founder can establish that a certain limited company (or other type of legal entity) is in charge of the administration of the foundation. Said corporation would act, of course, through natural or legal persons duly authorized in the articles of incorporation, by agreement or by law.

The founder can also establish that the Council must be made up of natural and legal persons at the same time and it is not required that the members of the Council be residents of the Republic of Panama.

c. General obligations . The powers of the Foundation Council are established in the foundation charter and in the regulations.

Mainly, according to the provisions of article 18 of the LFIP, it is in charge of fulfilling the purposes of the foundation and the following general obligations and duties:

1. administer the assets of the foundation;

2. Enter into any legal (lawful) business convenient for the fulfillment of the objectives of the foundation, as long as the law is not violated, morality, good customs and public order are harmed;

3.inform the financial situation of the foundation to the beneficiaries;

4. deliver to the beneficiaries the assets that correspond to them according to the founding act or the regulations;

5. carry out any act or contract that the LFIP or any other applicable regulatory body allows the foundation.

If the founding charter so provides, the Foundation Council will exercise its functions under the authorization of a supervisory body designated by the founder or majority of founders.

d. Responsibility of the Council. The council must render an account of its management to the beneficiaries or to the inspection body that is established. Said rendering of accounts will be annual, unless expressly provided in the founding act or the regulations.

If the rendering of accounts is approved according to the terms indicated in article 20 of the LFIP, the members of the council will not be responsible for its management, unless they have not acted with the diligence of a good father of a family (they will then be responsible for slight fault). However, the approval of the account that the Council has presented does not exempt it from claims from the beneficiaries or third parties with an interest in the foundation, for damages and losses caused by gross negligence or fraud in the administration of the foundation.

and. Removal of members . Article 21 of the LFPI establishes the founder’s right to reserve, for himself or third parties, the removal of Board members.

If the founding act or the regulations are silent in this regard, the members of the Council may be removed for the causes that are listed below:

1.- For having interests incompatible with those of the founder or the beneficiaries

2.- If in the exercise of their position they do not demonstrate the diligence of a good father of a family;

3.- For having been convicted of crimes against property or public faith (while the criminal process is taking place, the suspension of the position of council member may proceed);

4.- Due to incapacity or impossibility to comply with the purposes of the foundation;

5.- due to insolvency, bankruptcy or bankruptcy.

The removal is judicial – via summary process – and can be requested by the founder and the beneficiaries. The court of the case has the legal power to designate, in the sentence that decrees the removal, new members of the Council, who must be people with sufficient capacity, suitability and recognized moral solvency to administer the assets of the foundation in accordance with the purposes thereof.

3. Oversight Bodies.

The LFIP allows the constitution of inspection bodies, which may be made up of natural or legal persons. Among these we can find auditors, protectors of the foundation, advisory boards, organizations representing the interests of the beneficiaries or other similar.

Its attributions must be contemplated in the founding act or the regulations. These bodies may have among their functions the following:

ensure that the management of the Foundation Council is in accordance with the purposes of the foundation;
look after the interests of the beneficiaries;
modify the objectives of the foundation, when these are onerous to carry out or impossible to carry out;
designate, appoint members of the Foundation Council and increase the number of these;
endorse the acts of the Foundation Council established by the founding act or the regulations;
guard the assets of the foundation;
exclude or add beneficiaries of the foundation, as provided in the founding charter or the regulations.

The LFIP is silent regarding the grounds for removal of those who are part of the control agencies. It is recommended that clear provisions be established in the founding charter (or in the regulations) to fill this gap, in the event that the creation of an oversight body is contemplated.

4.- The Beneficiaries.

They are those people, natural or legal, favored by the foundation in accordance with the provisions of the founder in the founding act or in the regulations. They acquire a present or future right over the assets or income of the foundation.

By having said patrimonial benefit, they also acquire related or correlative rights, such as, for example, the right to be informed of the management of the foundation, the right to have the Foundation Council render an account of its management, the right to request the removal of the members of the Foundation Council and challenge the acts of the foundation that infringe their rights conferred by it.

The wording of the regulations is very important in order to clearly indicate the designation of benefits. We recommend that the regulations be drawn up with the utmost care, that the beneficiaries be adequately described, that the terms and conditions be well defined, and that the way in which the benefits are to be received or their method of payment be clearly indicated.

5.- The Resident Agent.

The founder must designate, in the founding act, the resident agent of the foundation. The same must be a lawyer (suitable) or law firm, which must endorse the founding charter before its registration in the Public Registry.

Article 34 of the LFIP makes Executive Decree No. 468 of 1994 applicable to foundations, which regulates the obligations or responsibilities of the registered or resident agent of corporations to combat money laundering resulting from drug trafficking.

This regulation of the LFIP seeks to extend the scope of application of the regulations on resident agents to private interest foundations, so that in accordance with the policy << Know Your Client>> – prevent misuse of our offshore financial center in illegal operations.

6. – The Legal Representative.

The Panamanian Private Foundations Law does not contemplate the figure of the legal representative, which is established in the Liechtenstein legislation. In the Principality, the possibility is contemplated that the legal representative of the foundation is a natural person or a legal entity, which is designated in the regulations or by resolution of the Foundation Council. The same, which is generally a lawyer or forensic firm, is empowered to receive notifications in administrative and judicial processes in which the foundation is involved.

Regarding the representation of legal entities, the Civil Code provides in its article 73 (Title II, Book I) that legal persons may be represented (judicially and extrajudicially) by natural persons established by law, or the respective statutes, regulations or articles of incorporation and, in the absence of determination, by the persons designated in accordance with an agreement of the community, corporation or association in question. But this norm, which would fill the gap of the LFIP, is not applicable by virtue of article 2 of said excerpt that establishes that <<The precepts of Title II of Book I of the Civil Code will not be applied to these foundations>>.

However, given that article 5 of the LFIP, in its numeral 11, allows the founder to establish any lawful clause that he deems appropriate, it is recommended that he clearly indicate in the articles of incorporation who will exercise the legal representation of the foundation or the way to establish said representation.

It should be added that this “legal opening clause” also allows the designation of dignitaries ( officers ) of the foundation, who may be members of the Foundation Council or any other person (resident or not in Panama).