Private interest foundations offer a range of advantages that complement corporations and trusts as estate planning instruments.
Limitations of Corporations and Trusts in Estate Planning
Using a holding corporation as an estate planning vehicle generally requires one of two options for transferring wealth to future generations: (i) drafting a will to pass on corporate shares or (ii) endorsing the shares in life and storing them in a safety deposit box. Both options present challenges. In the first case, when the owner passes away, heirs must initiate probate, a public and costly process with the risk of third-party intervention. In the second case, a blank endorsement of shares is insecure and complicates reliable access to the estate after the owner’s death.
While trusts allow for secure transfer of assets to future generations, they require a full transfer of assets to a third party, a condition that many find restrictive or uncomfortable.
Advantages of Private Interest Foundations
- Structure and Flexibility: Foundations are established as legal entities without shareholders but with beneficiaries, allowing the founder to be the beneficiary during their lifetime. Foundations are managed by a Foundation Council, which may include the founder and can be composed of individuals, legal entities, or a combination of both.
- Diversified Assets: The foundation’s assets can include all types of property, present or future, such as real estate, bank accounts, and shares or interests in profit-driven businesses. The range of assets that can be included is virtually unlimited.
- Asset Separation and Protection: Legally, the foundation’s assets are separate from the founder’s personal estate and cannot be subject to seizure, attachment, or precautionary measures, except for the foundation’s own debts or the legitimate rights of its beneficiaries. This protection extends to the founder’s personal liabilities, the Foundation Council members, and the beneficiaries.
- Tax Benefits: Foundations enjoy the same tax benefits as corporations and trusts in Panama, under the territorial taxation principle. Acts of constitution, modification, or dissolution, as well as asset transfers and income generated by these assets, are exempt from taxes, provided the assets are located or generate income outside Panama, consist of bank deposits in any jurisdiction, or are shares and securities from companies with tax-exempt income in Panama.
- Private and Quick Inheritance: If the foundation is created to take effect post-mortem, the founder retains exclusive rights to revoke it during their lifetime. Upon the founder’s death, heirs can access the assets almost immediately, eliminating the need for probate. The inheritance is transferred privately, without judicial involvement, ensuring a discreet and rapid asset transfer.
Conclusion
By establishing a private interest foundation, the founder achieves two key objectives: asset protection during their lifetime and a distribution of assets aligned with their wishes after death, free from the need for probate. This makes private interest foundations a reliable and effective tool for long-term estate planning.
