100 Years of the Panamanian Trust

A Journey Through Its Legal Evolution

By: Luis Chalhoub

Panama celebrates a century since the enactment of its first Trust Law, Law No. 9 of January 6, 1925, marking the beginning of a historical journey filled with legal innovation and adaptation. This article examines the four phases that defined its evolution, analyzing its significance within the Panamanian financial and legal context.

History as Analysis and Context

History is more than just a recounting of events; it is a tool to analyze and understand the changes that have shaped our present. In the case of the trust in Panama, this analysis reveals how this legal figure, introduced a century ago, has undergone significant transformations divided into four key phases:

1. Introducing the Anglo-Saxon trust (1925).
2. Redefining the trust (1984).
3. Regulatory deepening (2017).
4. Risk to the trust’s integrity (2023).

Introducing the Anglo-Saxon Trust in Panama (1925)

Law 9 of 1925, the brainchild of Dr. Ricardo J. Alfaro, introduced the concept of a trust inspired by the Anglo-Saxon trust into Panama. Alfaro aimed to adapt this instrument, common in common law systems, to meet the specific needs of banking, commerce, and civil life in Panama that other legal frameworks could not address.

Despite similarities with the Roman fideicommissum, the Anglo-Saxon trust developed unique principles, such as the separation of rights between trustees and beneficiaries. However, to align with the Panamanian legal system, Alfaro introduced key restrictions, such as prohibiting perpetual trusts and making irrevocability a requirement. This law laid the foundation for the development of trusts in Panama, though its limited use in subsequent decades highlighted the need for further adjustments.

Redefining the Trust (1984)

Law 1 of 1984 marked a turning point by redefining the trust as a “legal act” instead of an “irrevocable mandate.” This reform, spearheaded by Dr. José Ángel Noriega and international experts, introduced innovative concepts such as the autonomous estate, eliminating restrictions that previously limited the flexibility and utility of trusts.

Key changes included:

• Removing the prohibition on successive and perpetual trusts.
• Allowing the designation of beneficiaries not yet born.
• Introducing tax exemptions to encourage trust creation.
• Oversight and regulation by the National Banking Commission, now the Superintendency of Banks.

This redefinition spurred the growth of the trust as a financial and legal tool, solidifying its relevance in Panama.

Regulatory Deepening (2017)

Panamanian trusts faced new challenges in the international arena. Panama’s inclusion on the Financial Action Task Force (FATF) gray list in 2014 and the fallout from the so-called “Panama Papers” in 2016 prompted the need to strengthen financial sector regulations. Law 21 of 2017 introduced measures to ensure transparency and compliance with international standards, including:

1. Requiring fiduciary licenses for all trustees.
2. Enhancing regulation and supervision of fiduciary activities.
3. Protecting users of fiduciary services.
4. Implementing specific tax rules applicable to trusts.

These measures aimed to restore international confidence in Panama’s financial center and strengthen the trust’s position as a reliable instrument.

Risk to the Trust’s Integrity (2023)

In recent years, judicial decisions have posed significant challenges to the Panamanian trust. Some courts have broadly interpreted the concept of a “consumer relationship,” assigning joint and several liability not only to trust assets but also to the personal assets of trustees. This threatens fundamental principles, such as the autonomy of trust estates, which are essential to the integrity of the trust.

While these rulings are under review, their potential implications create uncertainty about the future of this legal institution.

Final Thoughts

1. Identity and Evolution: The Panamanian trust has evolved from its Anglo-Saxon inspiration to develop unique characteristics.
2. Adaptability: Its integration into a civil law system has allowed it to meet the changing needs of the financial environment.
3. Regulation and Confidence: Rigorous oversight has been key to maintaining its relevance in a demanding global context.
4. Current Challenges: Protecting the fundamental principles of the trust is essential amid recent judicial interpretations.

Over the past 100 years, the trust has proven to be a versatile and vital tool for Panama’s financial and legal development. Its future will depend on its ability to adapt to new challenges while preserving its essence.

For more information on Panama Trusts, contact us at [email protected].