Building wealth takes years. Deciding how it will be managed, who may benefit from it and what will happen when its creator is no longer there deserves the same attention.
A private interest foundation allows certain assets to be held within an independent legal entity, with rules governing their management and purpose. For families seeking to preserve assets and plan for succession, it can provide continuity and reduce uncertainty over future decisions.
Its usefulness depends on a structure suited to the assets involved, the beneficiaries’ needs and the founder’s objectives.
What is a private interest foundation?
It is a legal entity that manages assets dedicated to the purposes set out in its founding documents. In Panama, this structure is governed by Law 25 of June 12, 1995.
Unlike a company, it has no shares or ownership interests. Contributed assets belong to the foundation and form an estate separate from the founder’s personal assets.
Although it cannot pursue profit-making purposes, the law allows it to hold interests in companies and undertake commercial activities on a non-habitual basis, applying the proceeds to the foundation’s purposes.
Continuity for family wealth
When family assets are held separately or without clear instructions, disagreements may arise over their use, sale or distribution. These difficulties often become more apparent when the person who made the decisions dies.
A foundation makes it possible to establish in advance how assets will be managed and the conditions under which benefits will be granted. Its regulations may, for example, provide for educational funding, regular financial support or criteria for retaining particular assets.
It may also be useful when the intention is to keep wealth under management across several generations rather than distribute it in full at a single point in time.
These arrangements require specific instructions: who decides, what they may approve and how they must account for their actions.
Who is involved and what does each person do?
The founder
The founder establishes the foundation and defines its initial rules. Depending on the structure adopted, the founder may reserve certain powers, such as participating in the appointment of those who manage it.
The Foundation Council
The Foundation Council manages the assets and carries out the foundation’s purposes in accordance with its charter and regulations. Its members should be selected with regard to trust, management ability and continuity in office.
The beneficiaries
Beneficiaries are the persons who may receive the benefits provided for in the founding documents. This status does not make them direct owners of the assets. Their rights depend on the rules established and the applicable law.
Being a beneficiary does not entitle a person to demand any distribution at will. However, beneficiaries may challenge actions that infringe the rights the foundation grants them.
The protector
The protector, where this role is included, oversees certain actions of the Council. The protector’s powers may include approving significant decisions or monitoring compliance with the foundation’s purposes.
Charter and regulations: rules that must work
The documents must accurately reflect what the structure is intended to achieve.
The foundation charter
The foundation charter contains its essential elements, such as its name, registered address, purposes, initial assets, duration, Foundation Council and resident agent. It is registered with Panama’s Public Registry and is a public document.
The foundation regulations
The foundation regulations set out the internal rules. They may identify beneficiaries, establish conditions for receiving benefits and define management and oversight arrangements, including provisions that will apply after the founder’s death.
Ambiguous wording can bring family disagreements into the foundation’s operations. It is therefore advisable to address situations such as replacing administrators, a beneficiary’s exceptional needs or the conditions for selling an asset.
Foundations and wills: how they complement each other
A will expresses how a person wishes their assets to pass after death. Implementing it may require succession proceedings, with the corresponding formalities, time and costs.
A foundation allows assets validly contributed to it to remain under the ownership of the same legal entity. The founder’s death does not, in itself, require those assets to be transferred to beneficiaries or distributed immediately. Their management continues under the foundation’s rules.
The key is the effective contribution of the assets. Establishing a foundation or mentioning an asset in its documents does not replace the formalities required to transfer it.
The two tools can complement each other. A will may remain relevant for assets held in a person’s own name. Where assets or individuals have connections to other countries, planning must also take those jurisdictions into account.
Separation of assets and its limits
Separating assets can help preserve property dedicated to the foundation’s purposes. Its scope nevertheless has limits.
The law provides exceptions relating to the foundation’s own obligations and the legitimate rights of its beneficiaries. It also allows contributions or transfers made in fraud of creditors to be challenged.
Responsible planning requires reviewing the origin of the assets, existing obligations and the terms of each transfer before implementing the structure.
The relationship with the family protocol
The foundation organizes the ownership and intended use of certain assets. Business families often need additional agreements on participation in the business and the resolution of disagreements.
A family protocol may govern family members’ entry into the company, each person’s responsibilities, dividend policies and leadership succession.
Coordinating the two instruments helps align wealth arrangements and business decisions with compatible objectives. This is particularly important when several generations or branches of a family are involved.
When to consider a holding company
If the assets include several businesses, it may be worth considering a structure in which the foundation holds shares in a holding company, which in turn owns the operating companies.
A holding company may facilitate the organization of business ownership, dividend management and future reorganizations. Its suitability depends on the group’s size and management needs.
For accounting purposes, consolidation under IFRS 10 depends on the existence of control and the standard’s requirements and exceptions. Creating a holding company does not, by itself, determine the accounting treatment.
The assessment should also consider how risks are allocated and which obligations each entity assumes.
Decisions before establishing the foundation
The first step is to clarify the decisions the structure will need to implement:
- Which assets will be contributed and for what purpose.
- Who the beneficiaries will be and which conditions will govern their benefits.
- Which powers the founder will retain.
- Who will manage the assets and how that person or body will be replaced.
- Which oversight and accountability mechanisms will be established.
- How the foundation will coordinate with the businesses and family agreements.
- Which legal, tax and compliance effects need to be assessed.
A well-designed foundation turns these decisions into rules that can continue to function over time. Its value lies in providing continuity for a wealth plan through clear management aligned with the family’s needs.
Frequently asked questions
Does a foundation always replace a will?
No. It can complement a will: assets remaining in a person’s own name may require additional succession planning. The jurisdictions connected to the assets and family must also be reviewed.
Is establishing the foundation enough to contribute the assets?
No. Each contribution must be formalized according to the type of asset. Mentioning it in the charter or regulations does not replace an effective transfer.
Do beneficiaries own the assets?
Not directly. Ownership belongs to the foundation; each person’s benefits and rights depend on the foundation’s rules and the law.
Can it hold shares in companies?
Yes. It may exercise the rights attached to the interests forming part of its assets, applying the proceeds to its purposes. It should not be confused with a company that regularly conducts commercial activities.
Does asset separation protect against every claim?
No. Limits include the foundation’s own obligations, beneficiaries’ legitimate rights and the possibility of challenging fraudulent transfers.
References
- Law 25 of June 12, 1995: private interest foundations. Judicial Branch of Panama. Articles 3, 10, 11, 15 and 26: permitted activities, contributions, asset separation and beneficiaries’ rights.
- IFRS 10: Consolidated Financial Statements. IFRS Foundation. Technical reference for assessing control and accounting consolidation.
