Frequent Questions & Answers about Succession in Panama
1. What property constitutes an individual's estate for succession purposes?
Any assets located in Panama, registered or non-registered, under the ownership or possession, included or not, on a person will, are subject to be inherited through a succession process.
2. To what extent do individuals have freedom of disposition over their estate during their lifetime?
During lifetime, an adult person, is entitled to dispose of their assets, as long as they have complete control over them, in any way they find suitable for their conditions, without any boundaries that might limit their will.
3. To what extent do individuals have freedom of disposition over their estate on death? (Forced heirship rules or other restrictions on testamentary freedom should be set out here.)
As long as a person prepares a will in time and through the valid means recognized by the Law, in principle, the freedom of disposition over a person’s estate is total in Panama.
Nonetheless, there are some variables that can limit their will to secure some interests. A person may be limited in disposing a part of the estate in those cases where the testator has an underage child or an adult son or daughter who is under 25 and is still completing education, or an adult son or daughter who is incapable of sustaining him or herself owing to a medical condition, in order to provide them enough funds to cover financial support or their needs.
In any of the previously mentioned cases, the will can be approved, although if a person appears before a judge after the death of the testator claiming support for a child under these conditions, the judge will limit the estate of the deceased and ensure the provision of sufficient funds from the estate to cover the child’s support. On the other hand, if the deceased does do not leave a will, a judge, after submitting a motion, will dispose of the deceased’s estate in favor of his or her legally recognized married partner and recognized sons or daughters.
4. Are there forced inheritance laws in Panama? Are Panama foundations subject to foreign forced heirship rules?
The existence of legal provisions regarding inheritance at the place of domicile of the founder or of the beneficiaries shall not affect the foundation or its validity and shall not prevent the attainment of its purposes in the manner provided in the foundation charter or its regulations. This provision is vital from the point of view of asset protection and protects the founder and beneficiaries from forced heirship rules contrary to the wishes of the founder.
Within reasonable possibilities, all foundation assets should be transferred to the jurisdiction of the foundation or to a country without forced heirship legislation. It is important to express, however, that this Panamanian provision will govern only if the rules of the Panama foundation are enforced. However, if there are any assets consisting of real estate property or other fixed assets located in a foreign jurisdiction which accepts forced heirship, and a lawsuit is brought in this foreign country, most probably the court of the foreign country will rule enforcing the forced heirship rules. Careful attention and planning should be given to this aspect and our experience in providing solutions should be of interest.
Panama does not have forced inheritance laws. Therefore, there is complete freedom to assign the inheritance through a last will and testament or through estate planning vehicles such as private interest foundations.
5. If an individual die in your jurisdiction without leaving valid instructions for the disposition of the estate, to whom does the estate pass and in what shares?
If an individual dies in Panama without leaving valid instructions for the disposition of the estate, after the submitting of a motion a judge will dispose of the deceased’s estate in favor of the deceased’s legally recognized married partner and recognized sons or daughters in equal parts. If there is no wife or sons, it will go to their closest ascendants. If there are no ascendants alive, the estate will go to the closest relative. If there are no relatives, the assets will be transferred to the government.
6. In relation to the disposition of an individual's estate, are adopted or illegitimate children treated the same as natural legitimate children and, if not, how may they inherit?
If an individual dies without leaving valid instructions for the disposition of the estate. Properly registered adopted children will always be treated as a natural legitimate child. Properly registered adopted children will always be treated equally as a natural legitimate child. But if the individual did not prepare a valid will, the law will not recognize the rights of an illegitimate or unrecognized son.
7. What law (eg, lex situs or lex domicilii) governs the distribution of an individual's estate and does this depend on the type of property within it?
The Civil Code of Panama is the statute that governs the distribution of an individual’s estate regardless of the type of property within it. Nonetheless, the location of the assets determines the applicable law, therefore lex situs governs all matters in Panama relative to the estate.
8. What formalities are required for an individual to make a valid will in your jurisdiction?
There are three types of will valid in Panama. The simplest one is a handwritten sheet of paper signed by the individual. The only formality required for this type of will is that it must be written and signed by a person of legal age, and it has to include the date on which it was signed.
The most commonly used type of will is a deed of a will drafted by a Panamanian lawyer, properly notarized by a Panamanian notary.
9. Are foreign wills recognised in your jurisdiction and how is this achieved?
Foreign notarized wills are recognized under Panamanian law. As long as the will complies with the formalities established by the law of the country in which it was rendered and the document is legalized by apostille under the Hague Convention or by a legalization process at the Consulate of Panama, the document will be valid and executable in Panama.
10. Who has the right to administer an estate?
According to Panama law, the testator has the authority to designate a person to administer the estate. If there is no determination on the will, the Court will appoint an administrator of the estate.
The only limitation, according to our Law, is that the administrator must be a person of age, capable of undertake legal obligations.
11. How does title to a deceased's assets pass to the heirs and successors? What are the rules for administration of the estate?
The only way to pass title over the deceased’s assets is through a judicial process before a Panama court.
Depending on the successor’s age and conditions, commonly there are no administrators, unless there are under aged child or persons with limited capabilities that might not be able to freely dispose of their assets.
Normally, the assets remain on the same condition, while heirs go through the process before the Court until the Judge renders a judgement recognizing their rights as successors.
12. Is there a procedure for disappointed heirs and/or beneficiaries to make a claim against an estate?
Within the required judicial process, there is a phase, in which disappointed heirs, beneficiaries or even creditors can show up before the Court and submit a motion supporting their claimed right. This phase begins with a public announcement, of the deceased succession process been open, rendered by the Court, and published on a national journal by the heirs, for 5 consecutive days.
13. Does Panama recognize trusts? (In the briefest terms, give details of the most salient points of the trust regime in your jurisdiction, and whether trusts governed by the laws of another jurisdiction are recognised.)
Trusts are regulated by Law 1 of 1984, Law 21 of 2017 and amendments. Panama law caters for all the main types of trust normally found in traditional common law jurisdictions such as:
One of the basic features of taxation of trusts in Panama is that, unlike in many other Latin American countries, where in the case of trusts with settlors as beneficiaries, the taxpayer is the settlor-beneficiary himself, in Panama trusts in all cases the taxpayer is deemed to be the trustee in his capacity as such, an obligation being limited to the tax liability generated by the trust fund and to the extent of the trust fund itself, in accordance with the principle that the trust is a separate patrimony from that of the trustee.
The territorial tax system immediately assures the settlor that foreign source income is not taxable in Panama. Panama law expressly provides that, once a beneficiary has received trust property from a trust intended to have effect after the death of the settlor, all income deriving from such transfer is income tax exempt in Panama, making an excellent case for looking into suitable residence arrangements either in Panama itself, or in a country where foreign source income is only taxed on remittances.
We should remark that there is no Estate tax, Succession tax, nor any kind of forced heirship legislation in Panama or recognition of foreign forced heirship rulings. Once an individual has transferred property into a Panama trust structure during his lifetime, no one can claim any rights over that property by way of right of inheritance unless they are named beneficiaries of the trust.
Panama’s trust law also allows settlors to establish trusts governed by a foreign law, and foreign trusts are fully recognized. Panama is a signatory to the Treaty of Bustamante. Panama is not a party to the Hague Convention on the Law Applicable to Trusts and on their Recognition, however, the Trust Law complies with the trust concepts expressed therein. Panama law ensures that rules such as the forced heirship do not apply. A properly executed foreign trust will be recognized and enforced in Panama, provided that the settlor and the trustee agree to abide by the formalities and requirements of Panama law. The trustee individually can make this statement, if so authorised by the trust deed. Accordingly, foreign investors seeking to use the Panama trust to streamline their assets or organize their estate need not be concerned about the Panama public policy rules.
14. Does Panama recognize private foundations? (In the briefest terms, give details of the most salient points of the regime for private foundations in your jurisdiction, and whether trusts governed by the laws of another jurisdiction are recognised.)
Panama Private Foundations are regulated by Law 25 of 1995 and can fully own the assets contributed to them and are managed by a foundation board or council. The founder of the foundation (the person establishing the foundation) normally establishes the foundation for a particular purpose.
The organs of the foundation are strictly bound to this purpose. The founder decides the beneficiaries of the Foundation, and to which benefits the beneficiaries are entitled. All the intentions of the founder are written down in the by-laws or regulation (letter of wishes in trusts) of the foundation. The foundation board is entitled to distribute assets to the beneficiaries of the Foundation, based on the by-laws or regulations of the Foundation. The founder can also appoint a protector or guardian to exercise functions of supervision and control.
Significant advantages are offered by the Panama Private Interest Foundation. The following are some highlights:
15. Historically, why has the Panama private foundation been so popular?
The Panama private foundation structure has traditionally been the most flexible and useful means of establishing an estate plan for Continental Europeans and Latin Americans, while more and more it is becoming the vehicle of choice globally. Estate planning is generally defined as the process of planning the accumulation, protection and distribution of an estate. Foundation planning enables the owner of assets to efficiently and effectively achieve personal objectives, as well as minimize the imposition of taxation. It enables the founder to establish management responsibility for assets and to secure investment advice.
A foundation arrangement allows the founder to be assured that the right assets will go to the right persons at the right time. An estate plan utilizing a foundation is the fundamental international mechanism for enabling the intergenerational transfer of wealth efficiently, effectively and securely.
16. How are foundation assets protected from creditors?
The assets of the Panama foundation shall constitute an estate separate from the founder’s personal assets for all legal purposes and may not be seized or attached or be subject to any precautionary action or measure, except in case of obligations incurred, or damages caused by virtue of actions taken fulfilling the purposes or objectives of the foundation, or of legitimate rights of the beneficiaries of the foundation. In no case shall such assets be affected or used to respond for the personal obligations of the founder or the beneficiaries.
This does not mean that a foundation is not subject to litigation. It does mean that if there is litigation, it will have to be brought in that specific jurisdiction and will have to meet the legal requirements of the causes of action which are recognized in that jurisdiction. In some cases, even where a cause of action could be brought, the specific jurisdiction may restrict the time period during which this can happen. Once that statute of limitation period has elapsed, the right to bring a legal action is legally extinguished.
17. Is it important for families with multiple nationalities or assets in different countries to engage advisors in international planning?
Greater connectivity and improved communications have resulted in greater mobility on the part of family members. It is now common for a family to have children with multiple nationalities or residences, either by birth or due to their work or studies. These circumstances sometimes entail obligations, taxes or otherwise, that may affect the family, without the family knowing it.
In today´s world of double taxation treaties and exchange of information between tax authorities will have serious repercussions if these issues remain unaddressed.
Therefore, when assessing the situation of any family with an international component in its estate planning (for example, assets located abroad or members with multiple nationalities), it is of utmost importance to obtain the advice and opinion of qualified professionals in the relevant jurisdictions, to avoid any conflict of laws and unintended tax consequences.
18. What to do in case of patrimonial controversy arises? (Is it important for families with multiple nationalities or assets in different countries to engage advisors in international planning?)
Recently, we noted a trend both in Panama and abroad in succession disputes involving Panamanian private interest foundations and corporations, where foundation council members and/or protectors and/or beneficiaries have acted in contravention of Panamanian law and/or the regulations governing private interest foundations.
Arbitration clauses are common. It is normal for disputes to be resolved in Panama-based arbitrations (under the rules of Panama Law or the International Arbitration Rules of the International Chamber of Commerce), without prejudice to any elements foreign to the dispute that may exist (such as the location of the assets and/or the nationality of board members and/or beneficiaries).
Most property disputes involving Panamanian vehicles, such as private interest foundations and corporations, involve claimants seeking both declaratory and/or compensatory relief. In this regard, examples of claims in disputes involving acts allegedly committed illegally against the interests of a private interest foundation include claims for restitution by claimants as beneficiaries, claims alleging that a foundation board member was illegally appointed, or claims in which claimants assert the illegality of newly adopted regulations or amendments to the foundation's bylaws. Although these claims may involve economic damages, arbitrators are primarily asked to revert a foundation's situation to how it was before an alleged breach of its bylaws or regulations.
Where arbitration is not included as the dispute resolution mechanism of choice in a private interest foundation's charter (for example, based on Panama's Foundations Law), beneficiaries may also request reports/information on the asset management of the bodies in charge of managing a foundation by filing claims with Panamanian courts. In this regard, if justified, Panamanian courts will order the management of a foundation to be accountable to the beneficiaries of said foundation.
Juan Francisco Pardini, LLM, TEP
Pardini & Asociados
Phone +507.223.7222
US & Canada Toll Free +1.888.880.8947
Email: pardini@padela.com
Web: www.PardiniLaw.com
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