PANAMANIAN FOUNDATIONS AND TRUSTS DEMYSTIFIED – PART 2

By Peter Macfarlane for Q Wealth

Editor’s Note: we have just uploaded the latest version of our Panamanian Foundations Demystified Report to the members’ area of our website.

QWealth Members can login to the members area here to download and read the full report

If you are not a member, and would like to read the report in full, along with all the latest Q Wealth Reports and Special Reports, then you can enrol now here:

panama-trusts-and-foundations-demystifiedThe Panamanian Foundation offers some of the best benefits of both the trust structure and offshore corporation or IBC rolled into one. But in order to understand the idea and benefits of the foundation structure, you first need to be clear on the difference between a trust and a corporation.

It is also important to note the difference between English speaking countries that use Common law (like the USA, UK, Canada, Australia etc) and many non-English speaking countries that use Civil Law or Napoleonic Code (for example France, Spain, Germany… and Panama).

I think most people understand the idea behind a corporation and how it work. Corporations are more commonly referred to as ‘Companies’ in British English, but it’s the same thing. Corporations are used everywhere in the world and operate along broadly similar lines. They are designed for doing business (not so much for holding assets, though they can also be structured for that purpose.)

The principal idea behind a corporation is that it is a separate legal entity, different from its owners or managers. The corporation typically has its own tax identification number.

It is what can be termed a juridical or legal person.

Although of course it is not a human being, it has all of the rights and responsibilities of a natural person under the law. It can, for example, sue or be sued in its own name. It can sign contracts or take on debts in its own name, without creating a liability for its owners. The liability of the owners is limited to what they have agreed to put up as share capital.

That is the key point that we are interested in here: the assets and liabilities of the corporation are separate and distinct from those of the shareholders. Basically no court in the world can argue with that.

The trust, however, is a different kind of vehicle. The history of the trust is an interesting one and dates back to the period in England when wealthy noblemen and knights were called to fight in the crusades.

In order to protect inheritance rights and of course family assets, lands and holdings were placed “in trust” and were managed by a well regarded friend or family member known as the ‘trustee’. The trust was, and still is, a safe haven – with the trustee as the guardian of that safe haven.

Trusts, therefore, are not designed to engage in business activities. They are designed for holding assets in safe keeping for a designated person or group of persons. The trust does not have a separate legal personality – instead the assets are registered in the name of the trustee.

Common law recognizes, however, that the trustee is holding those assets for someone else. For example, if the trustee goes bankrupt, the assets he holds as trustee will not be involved in the bankruptcy proceedings. They will be kept separate.

There are two major problems with trusts:

1) Problem number one is that as the Trust is a Common Law concept that does not exist in Civil Law, there can be conflicts of legal systems. If a country where assets are located interprets trust law differently from the country of residence of the person who created the trust, for example, you don’t need a wild imagination to see that the results could be catastrophic.

With more and more people choosing to live, invest, retire and do business in more than one country, this problem is becoming more prevalent.

2) The second problem is that trusts have also been attacked from all sides in recent years, even in Common Law countries. You may have heard about this in the news. Recent court cases in the USA, for example, have proven in my opinion that US judges either do not understand the essence of what a trust is meant to be or – more likely have simply chosen to disregard the centuries-old trust law altogether in favor of public policy decisions like supporting the government, IRS, or greedy ex-spouses.

For this latter reason (in my humble opinion), any trust structure that is a domiciled in the US and some other common law countries is really not worth the paper it is written on. This is not to say that the laws in these countries are always poor regarding these structures. The laws are good.

The problem is one of interpretation and of courts not respecting the law. When your opponents don’t play by the rules, serious preparations are required. All in all, trusts are not the great asset protection vehicle they once were.

That is not to say there is necessarily anything wrong with offshore trusts. On the contrary, they are an ideal vehicle for tax and inheritance planning in some circumstances. But with the number of jurisdictions in the world offering trusts, and all having tailored their laws and jurisprudence in slightly different manners, I will not enter into a comparison of good and bad types of trust here.

Suffice to repeat that the main difference between trusts and corporations is that trusts are designed for holding and preserving assets, while corporations are designed for doing business.

 

Editor’s Note: we have just uploaded the latest version of our Panamanian Foundations Demystified Report to the members’ area of our website.

QWealth Members can login to the members area here to download and read the full report

If you are not a member, and would like to read the report in full, along with all the latest Q Wealth Reports and Special Reports, then you can enrol now here:

 

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