Panama Private Interest Foundations for Real Estate: A Guide for American Owners
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Contents
- Why You Should Want to Avoid Panamanian Probate
- A Private Interest Foundation: Nuts and Bolts
- "Can't a Trust Just Hold the Property?"
- Panama Real Estate PIF: The Steps
- Step #1: Set Up the PIF
- Step #2: Transfer the Property
- Step #3: Maintain the PIF
- Other Helpful Tips and Unhelpful Pitfalls
- Real-World Example
- When the Founder Passes Away: What Changes for Your PIF
- In Panama: The Foundation Continues
- But There Are Administrative Requirements
- On the US Side: Your Tax Situation Changes Dramatically
- The US Tax Trap Your Beneficiaries Need to Know About
- Planning Ahead Can Help
- Cost Comparison: With and Without a PIF
- FAQ
- Is a PIF Right for You?
For quite some years, we’ve worked with American clients buying, holding, and selling real estate in Panama—especially in the hot spots of Panama City, Boquete, David, and more recently, Coronado.
Some of those clients plan to hold the property for a few years. But many others want to be able to leave it to their heirs.
The problem is that probate in Panama (sucesión) is very slow and can be very expensive. More than once, we’ve seen heirs just walk away versus dealing with the hassle.
There is—of course—a better option. I’m talking about a Private Interest Foundation, also called a “Panama PIF”, “PPIF” or “Panama Foundation.”
It’s not perfect, but it can be made to work for US clients. In this article, we’ll discuss the pros and cons… and common mistakes we see Americans make when trying to fit a Private Interest Foundation into their planning.
Foundational Planning Point
Unlike almost any other country, the US taxes Americans by citizenship rather than residency or territory. In practice, that means any planning US clients do internationally has two parts: the country in which the asset is located, and Uncle Sam.
This article talks about how to hold the property to avoid Panamanian probate. But to make this work for you, you also need to do the tax and estate planning on the US side.
If this sounds complex, that’s because it is. And if you’d like help, please book a consultation with one of our Associates.
Why You Should Want to Avoid Panamanian Probate
When an American owns property in Panama and passes away—no matter whether they live there or not—that property must go through the local probate process. Here’s the problem with that:
Probate in Panama can take months or even years to complete. In our experience, two years is pretty standard.
Probate fees can eat up to 10% of the estate’s value, significantly reducing the inheritance.
There can be hassles on the US tax side.
Everything has to be done in Spanish and under a legal system that is very unfamiliar to US clients. It’s hard to do on your own.
A Private Interest Foundation—properly structured to avoid US tax hassles—will help your loved ones avoid these problems.
A Private Interest Foundation: Nuts and Bolts
At its heart, a PIF is a legal entity first introduced in 1995 that combines elements of corporations and trusts, but structured as a foundation.
PIFs provide high levels of privacy for foundation activities, management provisions, and the sensitive information of its beneficiaries. The PIF’s registered office and foundation charter must be publicly registered, which contains:
- The foundation’s name
- The founder’s name
- Initial capital
- Names and addresses of council members
- The domicile of the foundation
- Manner of appointing beneficiaries
- The purpose of the foundation
- Modification provisions
- The name and domicile of the resident agent
- The foundation’s duration
Should compelling evidence suggest that the foundation is involved in illegal activities, this privacy is forfeited.
A few other key facts about PIFs include:
- A Panama PIF is a non-profit entity but can hold and manage assets to benefit specific individuals, entities, or causes.
- Like the three primary positions in a trust (grantor, trustee, beneficiaries), there are three corresponding roles in a foundation: founder, foundation council, beneficiaries.
- A PIF also has the option to include a protector or supervisor to ensure the council is following the founder’s wishes.
- It does not have owners or shareholders, distinguishing it from corporations. Rather it operates on behalf of beneficiaries in a way similar to a trust.
- Because Panama is a territorial tax country, foundations don’t pay Panamanian income tax if the assets or income are generated outside Panama. (In practice, rental income generated from Panama real estate will pay tax. However, from a US perspective, we can claim tax credits to avoid double taxation.)
- No inheritance, gift, or estate taxes apply in Panama.
- While a PIF can generate income from passive investments, it cannot engage in direct business or commercial operations.
"Can't a Trust Just Hold the Property?"
Clients sometimes ask if they can just use a trust—either a US domestic or an offshore asset protection trust—to hold the property.
If estate planning is important to you, the answer is no. That’s because Panama uses a different legal system than the US.
In America, we follow the common law tradition inherited from Great Britain.
Panama, on the other hand, uses civil law inherited first from old Roman law and updated over the centuries. (Panama law, in particular, is based on Spanish civil law.)
Civil law contains something called “forced heirship”, which limits your choices when it comes to passing on asset if you go through probate.
More than that, under civil law, the concept of a trust doesn’t exist. That’s a common law entity.
Panama’s Little-Known Trust Law
To Avoid These Issues…
To avoid probate hassles—and ensure your wishes are respected—you need to play by the local rules in a way that works with your US planning.
Panama Real Estate PIF: The Steps
Unlike foundations in the US, Panama Private Interest Foundations are pretty straightforward and not terribly pricey. Here’s an overview in a typical real estate transaction where the owner sets up a PIF after the fact.
Step #1: Set Up the PIF
The founder creates the PIF and registers it with the Panamanian Public Registry. That includes:
- Creating the charter: This should include provisions for the transfer of the real estate to heirs. It’s broadly similar to a “trust deed” or “trust instrument” in a typical trust you’d see at home.
- Choose Beneficiaries: The founder sets the heirs in the foundation’s charter or a private letter of wishes.
- Appoint a Council: A foundation council oversees the PIF’s operations and ensures compliance with the founder’s wishes.
- Appoint a Protector (optional): A protector can also be set to ensure the council is acting according to the wishes of the founder.
We usually work with a local lawyer to help with this. Initial costs usually range from $1,500 to $2,500.
WARNING: Be very careful with the language!
You need to get language of the charter right. If not, Uncle Sam might try to classify your PIF as a “Controlled Foreign Corporation”, which is a huge headache on the US side. The best tax treatment for a PIF is as a “Foreign Trust”. You’re still going to pay your US accountants some extra coin, but it’s a lot more manageable.
Step #2: Transfer the Property
The real estate is transferred to the PIF, making the foundation the legal owner. You’ll pay a title transfer fee of 2% plus a fee to lawyers and notaries to process the paperwork.
Avoid the Transfer Tax
It’s almost always better to take title to the property after the PIF is set up. This way, you can avoid that transfer tax. For example, a client recently came to us to build an international estate plan for them. They had a comfortable apartment in Panama City worth about $400,000.
At 2%, the transfer tax came to $8,000. We could have avoided that tax entirely if they had come to us just a year earlier before they first bought the property.
Step #3: Maintain the PIF
You’ll have to pay annual fees and basic administrative requirements, usually not more than $1,000 for a typical provider plus government fees.
You’ll also have to pay for compliance and filings back in the US. How much that is depends on a number of things including how it’s taxed (CFC vs. Foreign Trust), the value of the property, and associated financial accounts (usually a foreign bank account).
Comprehensive Support
When we create and maintain these structures for clients, we handle all compliance and tax issues on both the Panamanian and US side. If you have an existing PIF or you’re interested in setting one up, please get in touch to discuss further.
Other Helpful Tips and Unhelpful Pitfalls
In the world of foreign structures, a Panama PIF is on the easier side of things. Still, though, “easier” does not mean “easy”. Here are a few things to keep in mind.
#1: Work with someone who understand the US planning side of things.
A structure is only as good as the people who put it together. Because we specialize in working with US clients, we’ve seen what happens when planning is ONLY done at the local level (in this case, Panama), without considering Uncle Sam’s agenda.
Unwrapping a poorly considered structure isn’t cheap.
#2: Don't forget about US compliance.
If you own foreign assets, you may need to do extra filing with Uncle Sam. Penalties can be steep if you don’t do it properly. So keep your US advisors in the loop about any properties you purchase overseas and be sure they understand how you’re holding those properties.
#3: Keep documents up to date.
Life happens and things change. Be sure that you keep your professionals up to date so that the structure remains in good health.
Real-World Example
A 65-year-old American retiree we’ll call Roland bought a nice beachfront property outside Panama City ten years ago. It’s now worth about $1.3 million. He started thinking about his estate plan and learned that Panamanian probate can be difficult—especially in his situation, which involved a blended family (in his case, children from two different partners).
To keep things simple and avoid the forced heirship rules, we set up a PIF for him. The foundation became the legal owner of the property, with Roland’s children from his current and past relationships designated as equal beneficiaries.
Upon Roland’s passing, the property will be sold and the proceeds pass on to his children through the PIF without legal delays or additional costs.
If it had gone through probate, at today’s prices, we estimate the cost after taxes and fees would have been about $78,000.
The PIF cost about $2,000 to set up and another $1,000 a year to maintain. If Roland lives another 20 years, that adds up to $21,000 to create and maintain the structure (the first-year maintenance is usually included in the set-up cost.)
He needed to pay the 2% transfer tax on the value of the property. At $1.3 million, that’s $26,000.
When the Founder Passes Away: What Changes for Your PIF
Setting up a Panama Private Interest Foundation gives you a structure that continues after your death. That’s one of its strengths – it’s built to last.
But what happens when the founder passes away?
When the founder passes, their PIF doesn’t automatically “distribute” like a will might. The process is driven by the foundation’s internal documents – and by how your beneficiaries are named and prepared.
If those details aren’t clear, delays and confusion can follow. And in some cases, beneficiaries may not understand their new roles – or their responsibilities under foreign law.
That’s why understanding the next steps isn’t just a technical point. It’s a key part of proper estate planning.
In Panama: The Foundation Continues
When the founder of a Panama Private Interest Foundation passes away, certain legal and administrative changes take effect. These aren’t automatic in the way a will might imply – but they’re built into the structure by design.
Under Law 25 of 1995, a foundation must follow the rules outlined in its charter and internal regulations. Those documents govern what happens next. If properly drafted, they cover succession – including who gains control and who receives benefits.
The founder can also build in added safeguards. For example, you can appoint a protector to oversee the foundation council. That person’s job is to ensure the foundation is managed according to your wishes – either while you’re alive or after your death.
Here’s the good news: your foundation doesn’t stop operating. When the conditions in the regulations are met – such as your passing, or the passing of a primary beneficiary – the rights to use or benefit from the assets transfer automatically.
Unlike a will, no probate or court intervention is required in Panama. And that’s the point. This structure was built specifically to avoid those delays – and give you more certainty about what happens next.
But There Are Administrative Requirements
Even though your Panama Private Interest Foundation keeps operating after your death, a few formal steps still need to be completed.
Any changes to the foundation council, beneficiary details, or amendments to the foundation’s statutes must be registered with the Panamanian Public Registry. That’s what keeps the foundation in good legal standing.
Failing to make these updates can lead to fines or legal issues that block access to foundation assets.
Here’s what your heirs (or their legal representatives) will likely need to do:
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Update foundation records with the Public Registry.
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Make necessary changes to the council or officers.
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File any required tax returns and stay compliant.
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Review and confirm the inventory of all foundation assets.
These tasks aren’t hard – but they do need to be handled correctly.
On the US Side: Your Tax Situation Changes Dramatically
Here’s where things change for Americans – and why advance planning matters.
During your lifetime, if your Panama Private Interest Foundation was structured correctly, the IRS likely treated it as a foreign grantor trust. That meant you reported the income on your personal US tax return. Distributions to your beneficiaries weren’t taxed again.
When you pass away, that classification ends.
Under US tax rules, the death of the grantor (if a US person) causes the trust to shift into what’s called a foreign non-grantor trust. That change creates a new tax dynamic for your heirs.
Now, the PIF is treated as a separate taxpayer. US beneficiaries may owe tax on distributions – and there are more reporting requirements involved.
This doesn’t mean the structure no longer works. But it does mean your beneficiaries need to be prepared.
The US Tax Trap Your Beneficiaries Need to Know About
Most Americans who inherit from a Panama Private Interest Foundation have no idea what they’re getting into from a US tax perspective.
The IRS has strict guidelines for foreign trusts – especially when it comes to income that’s been accumulating offshore. These rules are meant to prevent deferral of US tax, and they come into play when beneficiaries begin receiving distributions.
That’s when the real tax consequences show up. If the proper filings and documentation aren’t in place, distributions can be taxed in ways that are both complex and expensive.
The key is awareness – and making sure your heirs know what to expect before they start receiving money from the foundation.
The Foundation Disconnects from the US Tax System
A foreign grantor trust will generally become a foreign nongrantor trust upon the death of the grantor.
At this point, the PIF itself no longer pays US taxes or files US tax returns. It operates as a foreign entity outside the US tax system.
But your US beneficiaries? They’re still on the hook.
When Distributions Happen: Forms 3520 and 4970
When your beneficiaries receive money from the PIF, they must file Form 3520 with their US tax return.
In general, a Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts is required to be filed when a US person receives distributions from a foreign trust.
But here’s the nuance: if the PIF has been accumulating income over the years without distributing it, your beneficiaries face what’s called the “accumulation distribution tax” or “throwback tax.”
The Accumulation Distribution Tax Complexities
The potential confiscatory nature of the throwback tax and its interest charge makes “domesticating” a foreign grantor trust when the grantor dies an appealing, safe solution.
Here’s how this works in practice:
Let’s say your PIF earned $50,000 per year for 10 years but never distributed the money. When your beneficiaries finally receive a $500,000 distribution, the IRS doesn’t just tax them on the current year’s income.
Instead, they must file Form 4970 to calculate tax on the accumulated income from all those prior years.
They’ll also face an interest charge. Interest accumulates on the tax for the period beginning on the date that is the applicable number of years prior to the applicable date and ending on the applicable date.
What This Means in Real Terms
One very important aspect of an accumulation distribution is that the distribution will oftentimes lose its character upon distribution to the beneficiary.
For example, if it might have been long-term capital gain or qualified dividends at a lower tax rate, it is instead taxed to the beneficiary as ordinary income – which is taxed at the taxpayer’s progressive tax rate – instead of a preferred rate.
So even if your PIF earned money from long-term capital gains (normally taxed at favorable rates), your beneficiaries will pay ordinary income tax rates plus interest charges.
The reality is that most people who inherit from offshore structures don’t understand these obligations. They receive money from a Panama Private Interest Foundation and think it’s just an inheritance. They don’t realize they need to file additional forms or pay accumulation distribution taxes.
Planning Ahead Can Help
If you have a Panama Private Interest Foundation, there are ways to minimize these problems for your beneficiaries:
Make Regular Distributions: Consider making annual distributions during your lifetime to avoid large accumulations.
Time the Transition: Plan the timing of when the grantor trust status ends. We usually factor this in ahead of time when helping clients set up a PIF.
Consider Domestication: In some cases, it may make sense to convert the foreign trust to a US trust upon your death to avoid the throwback rules.
Educate Your Beneficiaries: Make sure your heirs understand their US tax obligations and have competent tax advice.
Document Everything: Keep detailed records of the PIF’s income and distributions to help your beneficiaries complete their tax filings.
The bottom line: A PIF can be an excellent estate planning tool, but your US beneficiaries need to understand what they’re inheriting from a tax perspective.
Cost Comparison: With and Without a PIF
| Using a PIF | Without a PIF | |
| Transfer Tax (on $1.3 million) | $26,000 (on setup) | 2% of market value at time of death |
| Setup Costs | $2,000 | None |
| Maintenance Costs | $19,000 ($1,000 x 19 years) | None |
| Probate Costs (assume 6% and no increase in market value over the next 20 years; includes 2% transfer tax) | None | $78,000 ($1.3 million x 6%) |
| Total Costs | $49,000 | $78,000 |
Savings with a PIF: $29,000.
Important Notes:
- We have not considered additional improvement in the value of the property. If historical figures are an indicator, that seems unlikely. If the property value increases, the transfer tax in a probate situation will be higher.
- We have not factored in the way the 2% transfer tax would be calculated. In Panama, as in many countries, there’s no uniform annual assessment of property value like there is in the US. The market value and the one registered with the authorities (“cadastral value“) can differ, sometimes substantially.
- If the children did indeed sell the property, Panama charges a capital gains tax. The amount is set depending on certain factors.
- Roland still needs to pay his US accountant to file forms to keep his Panama PIF compliant with Uncle Sam.
Frequently Asked Questions
"I already own a property in Panama. Can I convey it into a Panama Private Interest Foundation?"
Yes, you can. But you’ll pay a 2% transfer tax on the value of the property.
"I have entered into a transaction to buy a property in Panama. However, I haven't received title. Can I convey it into a Panama Private Interest Foundation?"
Yes, you can. You simply need to update the sales agreement with the developer. This will help you avoid the 2% transfer tax.
"Can assets in a Private Interest Foundation be used to meet residency requirements?"
In general, yes, assets held in a PIF can be used to meet Panama’s residency requirements under certain visa programs.
"How long does it take to set up a PIF?"
In general, it takes a few weeks to set up a Panama Private Interest Foundation. Oftentimes, any delays are caused by the legal process of conveying the assets into the PIF, not the setup of the PIF directly.
Is a PIF Right for You?
If you are an American taxpayer who owns property in Panama, are under contract to purchase a property in Panama, or you are thinking about it and want to understand how to hold it in a way that meets your needs, please get in touch.
One of our Associates will discuss the options with you and see not only if a PIF will fit your needs, but also whether we’re the right firm to help you do it.
About The Author
Need Help?
We have 40+ years experience helping Americans move, live and invest internationally…
Need Help?
We have 40+ years experience helping Americans move, live and invest internationally…
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