Panama Foundation vs Nevis Trust: Which Fits Your Asset Protection Goals?

The Panama Private Interest Foundation is a highly effective way for families to create a separate legal entity to manage their assets and to pass them on from generation to generation. On the other hand, the Nevis Asset Protection Trust is often used to protect assets against future creditors.

All of these structures can be used as part of a long-term wealth strategy. Key considerations in evaluating an alternative structure include the assets to be transferred, tax implications, the level of control desired, and ongoing costs to maintain the structure. Each structure has limitations on the protection it affords and the reporting required.

Key Takeaways

• The main differences between a Panama Foundation and a Nevis Trust are how assets are managed within each structure. A Panama Foundation is a settled fund, meaning it holds its assets directly. A Nevis Trust is a vehicle that holds assets, and it is managed by one or more trustees in accordance with the trust deed.
• Both structures offer excellent asset protection and efficient ways to transfer wealth from one generation to the next. However, setting up the right structure for a particular client’s needs requires careful planning. Once a structure is in place, it functions very efficiently.
• It does not guarantee the protection of your assets, and, most importantly, any assets introduced to the new structure after its establishment will not be protected by its provisions. So timing the transfer of assets to the new structure is crucial.
• References to the privacy afforded by a Panamanian Foundation or Nevis Trust are, in most cases, misleading, as such structures are not anonymous, and in most jurisdictions, disclosure of all parties involved to banks, solicitors, other agents, and regulatory bodies is required.
• Even if local taxes are waived in a particular jurisdiction, there are always global tax implications to consider with respect to any contributions, income, or distributions by an owner. All of these should be fully considered in detail by a client’s tax advisors.
• Importantly, ongoing annual fees to comprehensively maintain an asset-owning structure are typically greater than the initial establishment costs. Reference here is made to the ongoing annual fees.

Panama Foundation vs Nevis Trust at a Glance

The following comparison identifies the questions to explore before choosing either structure.

Panama’s Law 25 and the Nevis International Exempt Trust Ordinance provide the respective legal frameworks.

How the Two Structures Work

Before discussing the protection and costs of each structure, it is important to outline the basic framework of a private interest foundation in Panama, including how its assets are distributed among beneficiaries and who manages its funds and makes key decisions.

Panama Private Interest Foundation

A Panama Private Interest Foundation gains legal status upon registration. The Council of a Panama Foundation manages the Foundation’s assets within the limits set forth in the Foundation’s Charter and by-laws and in accordance with its purpose. Unlike other legal entities, the founders of a Panama Private Interest Foundation are not shareholders.

The Panama Private Interest Foundation is a very suitable structure for families and single individuals to establish a permanent vehicle for wealth management. It enables the creation of a long-lasting structure to distribute assets to beneficiaries in the best possible way.

• Who is going to approve payments to beneficiaries?
• What is the procedure for replacing decision-makers?
• What alternative option(s) might other family members want to consider?
• How are the founder’s wishes to be continued after he or she has passed away?

It is important to address these critical provisions when drafting the Directive, but including them in the registration of the Foundation does not give rise to a complete succession plan for the founder. 

Nevis Asset Protection Trust

For the purpose of this discussion, a trust shall refer to a Nevis trust that includes a settlor (the trust’s grantor) that funds the trust with assets, a trustee (or trustees) that manages the trust assets, and a beneficiary or beneficiaries for whom the trustee distributes trust assets or otherwise receives benefits from the trust, in accordance with the trust agreement. A protector and/or alternate forms of trusts (such as a spendthrift trust) may also be included as part of a trust arrangement.

Also important is the relationship between the settlor and the trustee with respect to the investment of assets and making distributions. A clear procedure for removal and replacement of a trustee is also important.

We go into more detail about Nevis trusts in this Nevis trust guide. 

How Their Asset Protection Rules Differ

When considering asset protection, it is imperative to realize that transferring funds to another person’s name is not enough. In order to complete a satisfactory asset protection plan, a thorough review of the relevant laws must be conducted in conjunction with the planned asset transfers, as well as the administration of the assets transferred to the new structure.

Creditor Challenges and Transfer Timing

Pursuant to Panama’s Law 25, in order for asset protection to be effective, special qualifications must be met for the separation of assets and the contribution of funds to the structure. Article 15 spells out the specific time frame within which a creditor has to challenge the founder or any other individual who has contributed to the asset protection structure as a fraudulent contributor. That time frame is within a three-year period in which the contributor or transfer has taken place.

Specifically, Nevis deals with attempts by creditors to defeat an asset protection arrangement based on a fraudulent conveyance and makes a distinction between the date a creditor’s cause of action arises versus the date an asset is placed into the protected arrangement (including the date an asset is transferred into the protected arrangement) and the date a statute will preclude any challenges from creditors. 

Many of our clients want us to provide a timeline for when they should establish their asset protection arrangement and transfer assets into it before those assets are protected. 

• When did any liability or claim arise? 
• When was the asset protection arrangement established? 
• When were assets actually settled into the new arrangement? 
• What are the relevant dates and applicable laws?

Therefore, establishing an asset protection arrangement and funding it are two distinct actions. Solely relying on the date of registration may fail to consider other important aspects of an asset transfer that need to be thoroughly analyzed. 

Foreign Judgments and Assets Held Abroad

In Nevis, a foreign judgment would have no effect on an international trust and would be dealt with in new proceedings in a court in Saint Kitts and Nevis to recover trust assets. The Nevis Financial Services Regulatory Commission assesses this matter.

It will be beneficial to determine if another court could hear the same case as yours and what the ramifications are for you and your proposed arrangement/structure.

Additionally, it is important to study the laws of foreign countries regarding international assets (e.g., real estate) and compare their pros/cons to those of other countries and/or holding such assets in an offshore structure.

Control, Revocability and Administration

“Maintaining control” of a designated investment is more than just approving the purchase of that investment and then removing all of the assets from the arrangement at some point in the future. Please consider a written explanation of the following:

• Appoint or remove administrators.
• Approve investments.
• Authorize distributions.
• Change beneficiaries.
• Amend or revoke the arrangement.
• Review the authorities you have to accomplish your protection goals and objectives in relation to effective tax planning.

The new family structure must be managed with as much care as the rest of the family grows. All decisions and related approvals should be documented systematically and on an ongoing basis to address each request as it arises.

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Which Structure Fits Your Planning Goals?

The examples provided below are for illustrative purposes only and should not be considered examples of events that will or will not occur in the future. Numerous issues and questions must be addressed when planning for a client’s needs, just as with any issue an attorney plans for. 

Planning for Future Business or Professional Risks

An entrepreneur has recently established himself and is currently developing multiple side ventures in which he has invested significant amounts of money. 

He wants to protect his assets from potential liabilities associated with his business activities. A Nevis Asset Protection Trust can be used as a form of debt to develop a sophisticated liability structure (e.g., for future creditors). The assessment should determine:

• Which assets can be placed into the trust? 
• What assets will remain outside of the trust? 
• How much access does the settlor require? 
• Does the trustee arrangement meet expectations?
• What tax and reporting requirements may exist?

Additionally, measures would need to address the increased cost and restrictions on the business owner’s operations.

Organising Family Wealth and Succession

The Panama Foundation was created by the investor family being studied as a way to document why they transferred some of their assets to their children and/or grandchildren. It is important that the intentions of the transferring family member(s) (regardless of whether those intentions were based on love) are documented in writing, including all of the details about the asset(s) involved and the reason(s) why the asset(s) are being transferred.

In addition, all conditions regarding how the assets will be distributed to the children and/or grandchildren must be included in this documentation. A Nevis trust can be used to administer the family’s assets. Each family should have a unique succession plan that meets their individual needs.

When Neither Structure Is the Right Starting Point

The annual structural costs associated with holding small amounts of assets in an offshore jurisdiction can often exceed the income generated by those same assets.

In addition to considering the laws of the country in which you live regarding transfers of assets, your current level of insurance coverage, and how you manage any current business liabilities; it would be prudent to obtain legal counsel regarding establishing a new structure while a claim of uncertain merit is being litigated.

Taxes, Privacy and Reporting

While you may have adequate protection for your assets, there are other factors that should be considered when selecting an asset management vehicle.

Local Tax Treatment Is Only Part of the Answer

Local tax treatment is only one element of the puzzle. While determining if any exemptions (with respect to national or foreign assets and/or transactions) provided for in Article 27 of Law 25/2007 in Panama will be affected by the tax regime of the country(ies) where the founder(s) and/or beneficiary(ies) of a trust reside is also essential. 

It is strongly suggested that you seek legal counsel during each stage of establishing any type of structure.

Reporting a trust created outside of the U.S., on behalf of U.S. residents, including certain transactions, and reporting all reportable foreign ownership interests would require filing IRS Forms 3520 and 3520-A. All distributions made to current beneficiaries during the year must be fully disclosed.

In addition, there may be links between the taxation of trusts in this jurisdiction and the non-resident trusts. If a trust is administered in the UK or created by a settlor (or beneficiary) who is a UK resident for the benefit of that settlor (or beneficiary) or another UK resident settlor (or beneficiary), then the trust will be taxed in the UK as if it were a UK resident trust. Tax implications need to be determined for the settlor(s) and/or all the beneficiaries within this jurisdiction.

Privacy: Who Can Access Your Information?

The word “confidentiality” and the difference between confidentiality and concealing an identity for illegal reasons. Most of us know that there is a lot of information available to everyone; however, some information is private and is only shared according to the law.

The information that is listed in these articles will become part of the public record for a Panama foundation. All other private information that is held by the foundation will be shared by the foundation or a third party who has this private information confidentially based upon the law.

Again, confidentiality is not anonymity, and your registered agent will require documentation to open a bank account or to get a safe deposit box.

Knowing what information will be part of the public record versus what private information your agent and financial institution will have access to and can refer to or share confidentially is crucial to understanding your client’s expectation of privacy when creating structures versus creating anonymous entities.

Costs, Banking and Ongoing Administration

The cost of forming a Panama Foundation or Nevis Trust consists of both an initial setup fee and ongoing annual administrative fees. It is important to find out exactly what is included in the quote when you request one from a potential service provider. A low-cost quote for forming a foundation or trust may not include legal advice or government fees. Other unexpected costs may arise later.

Compare the Full Cost

Ask for a detailed list of first-year setup costs and expected annual ongoing fees, as well as any additional fees for items such as distribution, document amendment, and change to the council or to the foundation’s trustees. A complete listing of the first-year setup costs and then the annual ongoing administration fees for the Nevis Trust can be found in our Nevis Trust cost guide. This will include all of the governmental fees and charges and then those of your solicitors in Nevis, Q Wealth.

Although the Panama entity is not subject to income tax in Panama, its resident agent keeps complete, up-to-date accounting records for the entity. These records are kept in accordance with Law 254 of 2021 and Executive Decree 177 of 2024.

Assess Banking Before Formation

Assess banking before forming. Before you meet with your wealth planner, it is very important that you determine the answers to several questions so that you can decide whether to form a Panama Foundation or a Nevis Trust as part of your life plan. Some of the major factors that will help you make this decision include: 

1. What is the primary reason for creating an inheritance structure? How do you want to protect your business? How do you want to create a family investment structure? What is the main reason for establishing this structure? Do you want to establish an inheritance plan? Do you want to protect your business(es) from going bankrupt? Or do you want to start building a family investment vehicle? 
2. A complete list of all assets that you plan to transfer globally, including any limitations on transferring certain types of assets, and how the assets are currently owned. 
3. Who are the beneficiaries? Where do they live? And what are the legal and tax consequences of establishing a Panama Foundation and/or a Nevis Trust for them?
4. What are your liabilities/claims? It is important for your wealth planner to know about your liabilities and any claims that are currently being made against you before you transfer any assets into the structure. Will you need to make ongoing payments from the structure? Will you need to make decisions on behalf of the structure on an ongoing basis? Can some decisions be delegated to another person? 
5. What are the tax implications of a Panama Foundation for you and other beneficiaries? Will there be good banking options available to you through your new Foundation structure? 
6. Create a budget for the entire structure, including the initial setup costs and the annual fees and other expenses that will be incurred later. This article provides extensive information about offshore structures in Panama and specifically about Panamanian Foundations. 

What to Assess Before Choosing

A comprehensive planning brief would also help define a set of fixed positions on capital and decision-making.

• Please set out your ‘opening positions’ with respect to capital and decision-making, including anticipated annual value and optimal target within a time frame of your choice.
• Create a list of all current global assets together with proof of ownership and any restrictions that may prevent transfer.
• Identify all pertinent jurisdictions (e.g., founder/settlor, beneficiaries).
• Clarify the limitations and liabilities of the proposer that will be transferred to the individual designated to execute the proposed transactions.
• It would be good to spell out the capital and decision-making structure too.
• Tax implications as well as alternative banking options need to be looked into as well.
• Clearly set out your ‘fixed positions’ in relation to capital and decision-making, i.e. estimated annual value and optimal target within a time frame of your choice.

Conclusion

Whether you need to organize family wealth and the transfer of it from one generation to the next, or you are worried about the possibility of a creditor claim, you will need to decide whether a Panama Foundation or a Nevis Trust is more suitable. In either case there are a number of important details that need to be considered, including who manages the arrangement, how distributions are to be made to beneficiaries, and the cost to maintain the structure.

Q Wealth will assist you in comparing Panama and Nevis offerings relative to your objectives and circumstances, as well as assist in understanding the ‘fine print’ in each scenario in order to help you understand the commitments required of you. 

Frequently Asked Questions