California Probate Code Section 10810 provides that "for ordinary services
the attorney for the personal representative shall receive compensation based on
the value of the estate accounted for by the personal representative." The law
sets out a schedule for these fees (at right). In addition to the statutory fee,
a probate attorney can request additional fees for "extraordinary services,"
which would include assistance with the sale of real property or the preparation
or review of an estate tax return.

Thus, the statutory probate fee on a $100,000 estate would be $3,150, the fee on
a $500,000 estate would be $11,150, and the probate attorney’s fee on a $1
million estate would be $21,150. In my opinion, these statutory probate fees are
usually adequate for small estates, and generous for "moderate" estates. For
larger estates, I believe these fees are unconscionably high. In theory,
excessive fees from large estates are "balanced" with smaller fees in small
estates — but estates under $100,000 normally need not be probated, and many
attorneys refuse to accept small probate cases.

But although the law uses the word "shall," the courts have construed the
statutory probate fee schedule only as a maximum fee for ordinary probate
services, and routinely authorize fees in lower amounts if negotiated by the
executor.

In most cases, the executor and attorney agree that the attorney’s fee will
be based on the number of hours spent on the proceeding by the attorney,
multiplied by the attorney’s regular hourly rate, with the statutory fee serving
only as a "maximum fee" for "ordinary services." In some cases, the executor may
simply negotiate a lower percentage fee — for example, asking the attorney to
accept 50% or 75% of the statutory fee.

My practice is to always work on probate administration matters on an hourly-fee
basis, at my standard rate of $160 per hour, with the statutory fee serving as a
maximum fee for ordinary services. (To date, my total fees have always been
substantially less than the "statutory fee for ordinary services," except in one
contentious probate in which the estate was valued at less than $75,000).

If you have been named as executor in someone’s will, or if you will seek
appointment as administrator of a deceased person’s estate, you should interview
several probate attorneys before hiring one. Make sure that you are comfortable
with the probate attorney you hire, and demand a written fee agreement.

$625,000 Exemption Equivalent: Technically, the estate tax is imposed on all
estates, but each taxpayer has a huge tax credit (the "unified credit"); this
credit will correspond to the estate tax on bequests and gifts of $625,000 (as
of 1998). The practical result is that there is no estate tax if a deceased
person leaves less than $625,000 worth of property.

The "Taxpayer Relief Act of 1997" pledges to increase the exempt amount by an
additional $25,000 in 1999, 2000, and 2002, and then by larger amounts starting
in 2004. See separate newsletter article about the Estate & Gift Tax Law Changes
in the 1997 Budget Act.

No Estate Tax for Bequests to Spouse or Charity: There is no estate tax on any
property left to a surviving spouse or to a qualified charity. Wealthy married
persons can leave $600,000 to their children and the balance of their estates to
a surviving spouse (or charity), completely avoiding any estate taxes.

Property left to a surviving spouse will be subject to estate taxes at the time
of the survivor’s death, if it is not left to charity (or to a new surviving
spouse).

Forbes magazine wrote in October 1993 that Warren Buffett was then the richest
man in America, with more than $8 billion in assets. According to Forbes,
Buffett and his wife plan to leave their entire estate to private charitable
foundations after they die — avoiding $4.4 billion in estate taxes.

Tax Rates: The estate tax is computed based upon the total value of all property
transferred due to the deceased person’s death (excluding bequests to a
surviving spouse or to charity). Usually, the value for estate tax purposes will
be larger than the "probate estate," which usually does not include life
insurance, retirement accounts, or joint tenancy property.

As of January 1998, the estate tax starts at a marginal rate of 37% at $625,000,
rising gradually to 55% for estates of $3 million or more. (A 5% tax surcharge
applies to estates from $10 million to about $21 million. This marginal 60%
estate tax bracket "phases out" the "unified credit" and lower estate tax
brackets, so that a full 55% estate tax is collected on estates above $21
million.)
Value of Estate at Death Estate Tax Owed
$625,000 $0
$750,000 $46,250
$1 million $143,750
$1.5 million $353,750
$2 million $578,750
$3 million $1,073,750
$5 million $2,173,750

Unfortunately, after the friend died in early 1996, his wife failed to transfer
the $75,000 proceeds of a life insurance policy into the name of the trust;
instead, she left them in an money-market account with the life insurance
company. The wife then died in mid-1996.

The successor trustee was now faced with a difficult problem: all the couple’s
assets were held in their revocable living trust, except for the $75,000
insurance proceeds. But under California law in effect at that time, formal
probate was required for estates above $60,000. California Probate Code Sections
13100-13116.

Fortunately, in 1996, the California legislature revised the law, increasing the
"small estate" amount from $60,000 to $100,000, effective January 1, 1997. I
told the trustee to schedule an appointment with me on January 2, and he then
came to my office to sign an affidavit (similar to the one below) allowing the
transfer of the $75,000 insurance proceeds to the trust, without formal probate.
A few weeks later, the insurance company sent the trustee a check, and he was
able to distribute the proceeds to the beneficiaries without delay, and without
spending a portion on probate fees.

The legislature also increased the value of real property that can be
transferred by affidavit, from $10,000 to $20,000. California Probate Code
Sections 13200-13210. However, it is extraordinarily rare for any parcel of real
property in California to have such a low value. (A "small estate petition"
proceeding is available for estates which include both real and personal
property with a total value under $100,000, avoiding formal probate but still
requiring a court hearing and formal notice to certain persons. California
Probate Code secton 13150.)

Important: keep in mind that when property is transferred using the affidavit
procedure, there is a risk of later adverse claims, and it is advisible to
consult with an attorney before making use of this procedure to collect a
decedent’s assets. In addition, since this law was changed so recently, you may
encounter out-of-state insurance companies and financial institutions whose
books and records have not yet been updated to reflect the new law; be patient
and explain that this is a recent change in the law, and ask the institution to
consult immediately with its legal department to obtain approval for transfers
of more than $60,000. You must also recognize that the $100,000 limit applies to
the total value of all property which would otherwise be subject to probate; you
cannot use two affidavits to transfer two $75,000 accounts!

Although there is a special form for the affidavit for transfer of real property
under Probate Code Section 13200 (Judicial Council Form DE-305), and for seeking
court confirmation of transfers of estates under $100,000 that include real
property under Probate Code Section 13150 (Judicial Council Forms DE-310 and
DE-315), there are no "approved forms" for an affidavit to transfer property
under Section 13100, although the requirements are spelled out in Section 13101.
Here is a sample form affidavit:
Declaration for Collection of Property Without Probate
(California Probate Code section 13100 et seq.)

HEIR1 and HEIR2 declare:
DECEDENT_NAME (the decedent) died on DATE_OF_DEATH in his/her residence at
DECEDENT_ADDRESS , in the city of CITY_NAME , County of COUNTY_NAME, State of
California. California Probate Code section 13101(a)(1-2).
At least 40 days have elapsed since the death of the decedent, as shown in a
certified copy of the decedent’s death certificate attached to this affidavit or
declaration. California Probate Code section 13101(a)(3).
No proceeding is now being or has been conducted in California for
administration of the decedent’s estate. California Probate Code section
13101(a)(4).
The current gross fair market value of the decedent’s real and personal property
in California, excluding the property described in Section 13050 of the
California Probate Code, does not exceed One Hundred Thousand Dollars
($100,000). California Probate Code section 13101(a)(5).
The property of the decedent that is to be paid, transferred, or delivered to
the declarant is as follows: {LIST THE PROPERTY, INCLUDING ACCOUNT NUMBERS FOR
FINANCIAL ACCOUNTS, AND V.I.N. AND LICENSE NUMBERS FOR AUTOMOBILES.}
We are HEIR1 and HEIR2, and we are the successors of the decedent as provided in
California Probate Code section 13006(a) and 13101(a)(7).
The declarants are the successors of the decedent (as defined in California
Probate Code section 13006) to the decedent’s interest in the described
property. California Probate Code section 13101(a)(8)(B). The decedent died
intestate, leaving no surviving spouse, and the declarants are all of the
children of the decedent. or: The declarants are all of the beneficiaries
entitled to receive property under the decedent’s Will, a copy of which is
attached.
No person has a superior right to the interest of the decedent in the described
property. California Probate Code section 13101(a)(9).
The declarants request that the described property be paid, delivered, or
transferred to the declarants. California Probate Code section 13101(a)(10).
We declare under penalty of perjury under the laws of the State of California
that the foregoing is true and correct, and that this declaration was executed
on ________________, 1997 at ______________, California. California Probate Code
section 13101(a)(11).

_______________________________
HEIR1

_______________________________
HEIR2

Notary Acknowledgment (California Probate Code section 13104(e))

STATE OF CALIFORNIA
COUNTY OF _____________

On ______________, 1997, before me, the undersigned notary public, personally
appeared HEIR1 and HEIR2, personally known to me (or proved to me on the basis
of satisfactory evidence) to be the persons whose names are subscribed to the
within instrument and acknowledged to me that they executed the same in their
authorized capacities, and that by their signatures on the instrument the
persons (or the entity on behalf of which the persons acted) executed the
instrument. WITNESS my hand and official seal.

_______________________________
Notary Public

Attachments: Death Certificate of DECEDENT_NAME; copy of last will and testament

The "con" started with a phone call: a telemarketer called, asking if the
clients might be interested in a revocable living trust. (In California and most
states, it is illegal for an attorney or law firm to use telemarketing.) A
salesman from the "Alliance for Mature Americans" called and scheduled an
appointment on an evening when only the two seniors would be present. During
this meeting, the salesman misrepresented the benefits of living trusts, and
convinced the clients that they needed a trust, and he collected payment of
$1,250. A few weeks later, a different salesman arrived with the trust
documents, and assisted the clients in signing the documents.

Then came the "hook" — at this second meeting, the new salesman claimed that in
order for their trust to be valid, the clients needed to "fund" it by rolling
over some retirement assets into an annuity with a company called "Fremont
Life." The salesman claimed the annuity was safe and would pay more interest
than the investment being liquidated. Of course, the salesman was lying: Fremont
Life is an unrated, unstable insurance company, the annuity paid less interest
than the old investment, and the salesman failed to disclose to the clients that
they would pay a huge surrender charge for withdrawing their money from their
prior investment.

Several months later, long after the clients’ money had been transferred, the
"Alliance for Mature Americans" refused to respond to inquries and "Fremont
Life" claimed it had no record of the transfer.

The clients retained me, and within two weeks, their investment money had been
returned, their "living trust fee" refunded, and they hired me (for a lower fee)
to prepare a proper revocable living trust.

My clients were the lucky ones: thousands of other California seniors lost
millions of dollars to this illegal scam.

Legal Action: In July 1996, the State Bar of California and the Attorney General
of California jointly filed suit against the "Alliance for Mature Americans" and
a number of its attorneys and salespeople. The lawsuit alleged:
sales agents (who are not attorneys) provided legal advice in the course of
selling and preparing living trusts.
sales representatives used scare tactics to convince seniors to buy living
trusts
sales agents passed along confidential information to sell annuities
Agents received a 30 percent commission on living trust packages allegedly
prepared by attorneys (it is illegal in California for an attorney to share fees
with a non-attorney)
Agents received an additional 10 percent commission from each annuity they sold.
seniors were not informed about early withdrawal penalties and capital gains
taxes from liquidating IRAs, some bank accounts and stocks.
The average age of the "Alliance for Mature Americans" clients is 73, according
to the suit, with some clients suffering from Alzheimer’s and Parkinson’s
diseases.

The lawsuit sought an injuction against Alliance for Mature Americans and asks
for more than $200 million in restitution and $3 million in civil penalities.
The suit alleged that the company engaged in unfair and deceptive business
practices and the unauthorized practice of law.

Attorney General and State Bar Reach Settlement with Alliance for Mature
Americans: In early 1997, the Attorney General’s office announced that a
settlement was reached with the Alliance for Mature Americans, which agreed to
reimburse its clients $1 million in fees to prepare living trusts, and to also
pay a $100,000 civil penalty. The company also agreed to stop selling and
preparing living trusts for individuals, and to make other major changes in the
way it conducts its business. (The State Bar’s pending disciplinary actions
against the attorneys who worked with the Alliance for Mature Americans have not
yet been resolved.)

For More Information:
Attorney General’s press release announcing settlement (undated)
State Bar Journal news article, August 1996
Ellen Adler, who is "consumer adviser" for KCBS Radio and writes the "Consumer
Crusader" column for the Contra Costa Times newspaper, wrote about the Alliance
for Mature Americans in her September 2, 1996 Times column.
You can call the State Bar of California at 1-800-445-4LAW to report additional
problems with the Alliance for Mature Americans.
Nebraska’s Attorney General cracked down on 35 "living trust mills" in 1990.

Currently, federal estate taxes are imposed on the estate of any person who dies
leaving assets worth more than $600,000 (excluding bequests to a suriviving
spouse or charity). In some cases, a married couple can leave $1.2 million to
their heirs tax-free, but only if a special "exemption" or "bypass" trust is
created pursuant to a will or living trust at the time of the first spouse’s
death. Only about 8% of estates owe any estate taxes; estate taxes generate
about 1% of federal tax revenue.


In 1994, the Republican "Contract With America" pledged to increase the amount
of the "unified credit" to $750,000 over a three-year period, and to increase it
annually thereafter based on the inflation rate. That promise was one of the
first to be abandoned — probably because "dead people don’t vote."

Bills have been introduced in Congress every year, seeking to increase the
"unified credit" for estate and gift taxes (or in some cases to repeal the tax
entirely), but the bills have historically died in committees because no one
could suggest ways to offset the lost tax revenue. More than 50 bills to alter
estate and gift taxes have been introduced in the current 105th Congress.

In early May, the Clinton administration and Congressional leaders reached a
budget agreement "in principal" which reportedly includes an increase in the
"unified credit" that would exempt estates of up to $1.2 million from federal
estate taxes. By mid-June, this eroded to a strangely-staggered increase to $1
million over a ten-year period (see the June 16 "Action Release" from House Ways
and Means Committee for details). This proposal might be cut back further or
abandoned in favor of other budget priorities.

It’s important to recognize that although this proposal to double the "unified
credit" would serve to substantially reduce the number of estates subject to
federal estate taxes, the bulk of federal estate taxes are collected on the
largest 1% of estates.

In addition, it’s important to recognize that changes in the amount of the
"unified credit" should not result in any fundamental changes in estate planning
techniques. Most existing estate plans that include tax planning (including many
Wills and "living trusts") will automatically adjust to the larger exemption.
(But note that most Wills and "living trusts" do not include any tax-planning
provisions.)

Keep in mind, too, that Congress is famous for breaking its promises: the tax
law contained provisions for nearly a decade promising to reduce the top estate
tax bracket from 55% to 50%, but that provision was delayed each year and
eventually abandoned. Thus, if Congress adopts a budget that promises to
increase the unified credit incrementally over several years, you should not be
surprised if increases are "delayed" each year in favor of deficit reduction or
other budget constraints. (Indeed, the June 16 proposal from Congress proposes a
very strange "staggered" increase in the estate tax exemption amount, which
seems unlikely to survive budget pressures in the years when larger increases
are scheduled.)

Background:
Since 1987, federal estate taxes have been imposed on the estate of any person
who dies leaving assets worth more than $600,000 (excluding bequests to a
suriviving spouse or charity). In some cases, a married couple can leave $1.2
million to their heirs tax-free, but only if a special "exemption" or "bypass"
trust is created pursuant to a will or living trust at the time of the first
spouse’s death. Only about 8% of estates owe any estate taxes; estate taxes
generate about 1% of federal tax revenue.

In 1994, the Republican "Contract With America" pledged to increase the amount
of the "unified credit" to $750,000 over a three-year period, and to increase it
annually thereafter based on the inflation rate. That promise was one of the
first to be abandoned — probably because "dead people don’t vote."

Bills have been introduced in Congress every year, seeking to increase the
"unified credit" for estate and gift taxes (or in some cases to repeal the tax
entirely), but the bills have historically died in committees because no one
could suggest ways to offset the lost tax revenue. More than 50 bills to alter
estate and gift taxes have been introduced in the current 105th Congress.

In early May, the Clinton administration and Congressional leaders reached a
budget agreement "in principal" which promised an immediate increase in the
"unified credit" that would exempt estates of up to $1.2 million from federal
estate taxes. By mid-June, this eroded to a strangely-staggered increase to $1
million over a ten-year period (see the June 16 "Action Release" from House Ways
and Means Committee for details).

The New Law
As of August 1, it appears that President Clinton was preparing to sign two
bills passed by Congress, comprising the 1997 budget law, which would make a
number of changes to the estate and gift tax laws. Although some of these
changes will result in substantial tax savings for many Americans, almost all of
these changes will increase the complexity of the law. Nearly every provision
seems to have a different effective date; some are retroactive to various dates
in 1997, while some are effective on the date of enactment, and others won’t be
effective until future years (assuming they are not modified or repealed in the
interim as new budget deals are struck). This article discusses ONLY changes in
the law affecting estate and gift taxes.1997: $600,000
1998: $625,000
1999: $650,000
2000-01: $675,000
2002-03: $700,000
2004: $850,000
2005: $950,000
2006 + $1,000,000

Increase in "Unified Credit" and corresponding "Exemption Equivalent": The
estate tax rates and unified credit are not changed for decedents dying in 1997.
Under Section 501 of TRA ‘97, the amount of the "unified credit" is scheduled to
be increased in subsequent years, so that the "exemption equivalent" will be as
indicted in the table at right.

Note that the increases are tiny in the first 7 years of the table, when the
numbers are being used to project a balanced budget, and then accelerate in the
last 3 years. You should expect that future budgets will defer or erode those
increases. (Congress is famous for breaking its promises: the tax law contained
provisions for nearly a decade promising to reduce the top estate tax bracket
from 55% to 50%, but that provision was delayed each year and eventually
abandoned.)

It’s also important to recognize that although this increase in the "unified
credit" will substantially reduce the number of estates subject to federal
estate taxes, the bulk of federal estate taxes are collected on the largest 1%
of estates, and in the largest estates (above $21 to $25 million), the entire
"unified credit" and all of the under-55% estate tax brackets are rescinded, so
that the estate tax is unchanged for large estates, even under the new law.

In addition, it’s important to recognize that changes in the amount of the
"unified credit" should not result in any fundamental changes in estate planning
techniques. Most existing estate plans that include tax planning (including many
Wills and "living trusts") will automatically adjust to the larger exemption.
(But note that most Wills and "living trusts" do not include any tax-planning
provisions.)

Cost-of-Living Increases for Annual Gift Tax Exclusion Amount (and GSTs):
The first $10,000 of gifts are excluded from gift taxes under current law;
starting in 1999, that amount will be increased based on the cost of living.
However, the increases will only be made in $1,000 increments, so that no
increase is likely until the year 2001. The $1 million exemption from
generation-skipping transfer (GST) taxes would also be increased starting in
1999, rounded to the nearest $10,000 increment (other provisions exempt some
additional transfers from GST taxes). I can find no language in TRA ‘97 that
would extend a similar cost-of-living increase to the estate tax "exemption
equivalent" after it reaches $1 million in the year 2006.

Family-Owned Business Exclusion: Owners of "qualified family-owned
businesses" will receive an additional exemption so that their estates may
exclude up to $1.3 million from estate taxes. (Section 502 of TRA ‘97.) In
contrast to the long deferral of the increase in regular estate tax exemption,
this $1.3 million exemption (for these generous, mostly-Republican, campaign
contributors) is effective for all decedents dying after December 31, 1997. (To
qualify, the decedent (or members of her family) must have owned and materially
participated in the business for at least 5 of the 8 years immediately preceding
death; the exemption may be "recaptured" if the heirs sell the business within
10 years after the date of death. Many other technical requirements also apply.)
This exemption, which gives business owners more than twice the exemption of
non-business owners dying in 1998, does not contain language that would index
the $1.3 million amount for inflation.

Gift Tax Returns Binding on IRS: Section 506 of TRA ‘97 contains a
provision that will give relief to many tax advisors: it provides that the IRS
may not attempt to revalue gifts made in years before death, if gift tax returns
were filed and the statute of limitations has expired on those returns. This
solves the problem of having the IRS assert, at the time an estate tax return is
filed, that the decedent’s unified credit was eroded or gift taxes are owed for
gifts made many years (or decades) earlier. It will impose an extra burden on
the IRS to review and audit gift-tax returns for which no tax is due, if there
is any possibility that the value of the gifted property has been understated
(for example, when valuing limited family partnership interests which are
subject to "valuation adjustments" or "discounts" for various reasons). While
the law will probably increase the audit rate for gift tax returns, it will
provide more certainty to taxpayers and their advisors.

Capital-Gains Exemption of $500,000 from Sale of Residence: As widely
reported, the new law contains provisions that will exempt the first $250,000
(single) or $500,000 (married couple) of profits from the sale of property used
as the principal residence (for 2 of the past 5 years) from capital gains taxes.
While this provision does not directly affect the estate or gift tax laws, it
will alter the computation of benefits from certain estate planning techniques,
and it may dramatically change behaviors and thus impact estate planning. Many
taxpayers have remained in homes much larger than they need because they wanted
to avoid capital gains taxes that would be incurred if they "moved down" to a
smaller and less expensive home. The new law is much more expansive than the
former one-time $125,000 exclusion for persons over 55.

Repeal of Excess Distribution and Excess Retirement Accumulation Tax:
Section 1073 of TRA ‘97 repeals (retroactive to 1/97) Internal Revenue Code
section 4980A, which imposed a 15% penalty on portions of certain large
withdrawals ("excess distributions") and on the balance of "over-funded"
("excess accumulation") retirement accounts at death. This came as a surprise,
since last year’s budget act had partially suspended the "excess distribution"
provisions of section 4980A for lifetime distributions, for three years only, in
an effort to induce some taxpayers to accelerate distributions (and thus
ordinary income tax payments). By also repealing the excess accumulation
provisions, Congress has eliminated an incentive to accelerate lifetime
distributions. (With the growth of IRA and 401(k) plans, these taxes complicated
retirement planning for millions of Americans, so their repeal is welcome.)

Charitable Remainder Trusts: In a move that surprised the charitable and
legal communities, Congress included section 1089, which disqualifies any
charitable deduction for any "charitable remainder trust" for which the computed
charitable remainder interest is less than ten percent. As a practical matter,
this completely precludes the use of these trusts (and the resulting charitable
gifts) by persons younger than 35, and precludes the use of such trusts with
reasonable annuity rates for persons under age 50. (See http://members.aol.com/VWHenry/crt-law.html
for a table showing the ages and interest levels now disallowed.) No hearings
were held and no public comment was ever sought for these provisions, which were
simply inserted by committee staff in the final days of budget negotiations.

Funeral Trust: Certain estate tax provisions would not apply to
contributions of up to $7,000 to a "qualified funeral trust," which can only be
administered by "a person engaged in the trade or business of providing funeral
or burial services or property necessary to provide such services." By excluding
third-party trust arrangements from this favorable tax treatment, this provision
appears to be special-interest legislation rewarding an industry with a long
history of abuse of such "prepaid funeral trusts".

The Court split 2-1 on whether the three remaining policies should be invalidated. The majority opinion, authored by Judge Ervin and joined by Judge Davis, held that the policies should be invalidated. Judge Benton dissented. The majority opinion essentially argued that the three stipulated policies that were not only applicable in certain circumstances were on their face” rules” as that term is defined in Section 120.52(15), Florida Statutes, since they were “agency statements of general applicability that prescribe the Department’s procedure or practice requirements pertaining to officers under investigation.” Finding that these three unpromulgated policies met the definition of a rule in the act, the Court turned to the issue of whether the policies fit within the internal management memorandum exception to the requirement of rulemaking. The majority found that, since the private interests of the state troopers were affected by these policies, the exception was unavailable.

The dissent did not take issue with the inapplicability of the exception,3 it challenged the decision that the policies were rules. The dissent argued that the threshold question is “whether any of the policies at issue found expression as agency statements (attributable to appellant’s collegial head [Section] 20.24(1), Fla. Stat. (1995), or some duly authorized delegate) intended to have the preclusive effect of law.” “Absent other proof of comprehensive dissemination, the failure to formulate the challenged policies in writing (before the prehearing stipulation was drafted) requires the conclusion that these policies were not agency statements intended to have the force and effect of law.”

The majority responded to the dissent’s argument by noting on the that the case law has not specifically required policy to be in writing in order to be considered a rule. It further concluded that requiring a writing would be contrary to the legislative history of the act, citing the Reporter’s Comments, the initial legislative history of the act, and quoting from them at some length. The Court also noted that the case law relied on by the dissent was part of a discarded judicial gloss on Chapter 120. The majority acknowledged that the 1991 amendments had rejected case law that had given agencies discretion to develop policy through adjudication or rulemaking, and that the Legislature had done so” in no uncertain terms.” The majority went so far as to state that “[b]y enacting section 120.535, Florida Statutes, the legislature clearly disapproved the judiciary’s interpretation of the Act, which had indicated that rulemaking was primarily a matter of agency discretion.” This is an important pronouncement, and this case marks and important milestone in the history of required rulemaking in Florida.

On the policy level, Schluter evidences the continuation of an old and fundamental debate in administrative law. The dissent’s implicit concern is perhaps best expressed by Justice Felix Frankfurter in 1927:

In administrative law we are dealing pre-eminently with law in the making; with fluid tendencies and tentative traditions. Here we must be especially wary against the danger of premature synthesis, of sterile generalizations unnourished by the realities of ‘law in action.’

Felix Frankfurter, The Task of Administrative Law, 75 U.Pa.L.Rev. 614 (1927). The federal courts have created a system that places higher emphasis on these values than on the benefits of rulemaking. While the federal Administrative Procedure Act is silent on the subject, the United States Supreme Court has decided to allow agencies broad discretion to develop their policies through either rulemaking or adjudication. NLRB v. Bell Aerospace Co., Division of Textron, Inc., 416 U.S. 267 (1974). In Florida, the Legislature has chosen the opposite course. In 1991, it amended the Florida APA to add Section 120.535, now renumbered and dispersed through the act but still in force. The 1991 amendments require rulemaking unless the agency can prove that it is not “feasible” or “practicable”4 to adopts its policies as rules. Thus, the Legislature has chosen to value the benefits of rulemaking over concerns about premature policy synthesis.

The reason that it is possible to say that the majority is “correct” in its resolution of this case is because that policy choice, for good or ill, 5 has been made by the Legislature. As the majority correctly points out, the Legislature has rejected the judicial decisions that have allowed agencies to prefer incremental policy development to rulemaking. This was done despite the courts’ expressed view that rulemaking without such development is “folly.” McDonald at 580.6

The law now requires that all agency policy be adopted, through the rule adoption procedures set out in the act, as written, published rules. The only exceptions are narrowly drafted, and apply only to cases where the agency can prove that rule promulgation is not feasible or practicable. I read the 1991 amendments as a rejection of the McDonald philosophy and an attempt to overrule the judicially created doctrine of incipient policy because the statute on its face does not permit the kind of refinement of policy over repeated adjudication that the incipient policy case law describes.7 In any such adjudication, a party can file a Schluter-like challenge raising the failure to promulgate the policy being developed as a rule, and unless rulemaking is begun before the petitioner prevails, the policy will not be allowed to be applied. Thus, I believe that the old “incipient policy” exception to required rulemaking, announced in McDonald and followed for years after that, no longer exists. It has been superseded by the statute.

I recognize that the cases may not be in complete agreement with this conclusion. In Christo v. State, Department of Banking and Finance, 649 So.2d 318, 320 (Fla. 1st DCA 1995), the Court continued to use the phrase “incipient policy” years after the 1991 amendments, explaining that:

policy is incipient or evolving when an agency has not yet solidified its position on policy in a particular area, and instead seeks to exercise its authority on a case-by-case basis until it has focused on a common scheme of inquiry derived through experience gained from adversary proceedings. Florida League of Cities, Inc, v. Admin. Comm’n, 586 So.2d 397, 406 (Fla. 1st DCA 1991). In providing for defenses to rulemaking in section 120.535(1)(a), Florida Statutes, the Legislature appears to have recognized that true incipient policy should be exempt from rulemaking, and therefore, not subject to challenge under section 120.535.

The problem that I see with this analysis is that I read the “not feasible or practicable” exceptions as intended to be much narrower than the description of incipient policy given in Christo. I do not believe that the statute describes “true incipient policy” if that means the “exercise its authority on a case-by-case basis until it has focused on a common scheme of inquiry derived through experience gained from adversary proceedings.” I believe that the statute replaces the McDonald vision of evolving policy that matures into rules with a requirement that rules be adopted without waiting for policy to mature, because the benefits of rulemaking outweigh the benefits of waiting.8 The incipient policy exception of the past is dead.9

I see the dissent’s proposed requirements, if adopted, as creating a successor to the now deceased “incipient policy” exception. The purpose of the “incipient policy” exception was to insulate policy from required promulgation in order to “allow agencies to ‘structure their discretion progressively by vague standards, then definite standards, then broad principles, then rules.’” McDonald at 580. The dissent’s proposed test, which I will characterize as the “unrecognized policy” exception, has a purpose similar to the “incipient policy” exception: to permit agencies more flexibility to develop their policies free of the strictures of rulemaking. The difference is that the “unrecognized policy” exception focuses, not on the degree of policy development that has occurred, because that is flatly precluded, but on the degree to which policy is recognized by the agency as its official policy. The exception, as explained in the dissent, would require a Section 120.56(4) challenger to prove 1) that the policy came from the agency head or a delegate, 2) that the policy was intended to have the preclusive effect of law, rather than serve as a guideline for decision making and 3) that the policy was comprehensively disseminated or, in the alternative, that it was written down. The dissent finds these requirements implicit within the definition of a “rule.” If the policy does not meet these three requirements, then, the dissent concludes, it is not an “agency statement of general applicability that implements, interprets or applies law or policy.” Section 120.52(15). The dissent suggests that, since the definition of a rule was not changed in 1991, this interpretation of the act is not precluded by the 1991 amendments.

The dissent’s argument seems contrary to the functional approach to rule definition in the act. The Section 120.52(15) definition of a rule, an “agency statement of general applicability that implements, interprets or applies law or policy,” puts function over form, and finds rules not only in statements that the agency identifies as rules, but also in statements that have the effect of rules.10 The statute suggests that agency actions will be allowed to speak louder than agency words where decisions about what is a rule are concerned. This seems inconsistent with the argument that, for something to be considered a rule, the agency must be shown to have “authorized, intended and communicated” the policy, because those requirements seems to put form over function. It also seems contrary to the dissent’s argument that agency actions may not be considered in determining what agency rules are.

The dissent contends that “‘unstated policy implicit in agency action does not amount to an administrative rule just because it has been consistently applied. Home Health Professional Services, Inc. v. Department of Health and Rehabilitative Services, 463 So.2d 345 (Fla. 1st DCA 1985).’ Hill v. State, Dep’t of Natural Resources, 7 F.A.L.R. 5236, 5241-42 (Fla. Div. of Admin. Hearings 1985).” Home Health and Hill were cases decided under the now abandoned case law that allowed agencies to prefer rulemaking if they could show “record foundation” for their policies when those policies were applied. See, e.g., Florida Cities Water Company v. Public Service Commission, 384 So.2d 1280 (Fla. 1980). There is no doubt that the presidential value of such cases has been swept away by the 1991 amendments, which now only allow adjudication instead of rulemaking where and agency can prove that rulemaking is not feasible or practicable. In addition, Home Health did not hold that unstated policy implicit in agency action does not amount to an administrative rule just because it has been consistently applied. In Home Health, the agency was trying to “prove up” its policy to meet the record foundation requirement. The Court found that the agency had proven record foundation for its policy through testimony to the effect that HRS consistently interpreted the statute and acted in a consistent manner, even in the absence of an adopted rule. If it stands for anything, Home Health should stand for the proposition that proof of practice shows policy. Testimony that the agency always acted the same way when faced with the same factual situation showed that it had what was, under the old case law, a proper substitute for a rule. The same proof should be allowed to prove, under present law, that an unpromulgated rule exists. The other cases cited by the dissent for the proposition that unstated policy implicit in agency action does not amount to an administrative rule just because it has been consistently applied are not District Court of Appeal decisions and are cases from the bygone era when proof of record foundation was a substitute for rule adoption. As the majority notes, case law “largely motivated by the court’s expressed preference for adjudicative processes over rulemaking,” is a judicial gloss that has been rejected by the Legislature in “no uncertain terms.”

The effect of the combination of this pronouncement and application the “authorized, intended and communicated” test would be to give the agency more control over what can be challenged as an unpromulgated rule. This approach emphasizes the probative value of what the agency says its rules are, and it de-emphasizes the probative value of what the agency is actually doing. There is a substantial question whether, even if the law supported the dissent’s position, the course it proposes would be a good one to follow. The 1991 amendments were necessary because the exception to required rulemaking created in McDonald soon “swallowed the rule.” Patricia Ann Dore, Florida Limits Policy Development Through Administrative Adjudication and Requires Indexing and Availability of Agency Orders, 19 Fla.St.U.L. Rev. 437 (1991). The exception became “a license for agencies to avoid rulemaking by exercising their unbridled discretion….” Id. at 448. Accord Johnny C. Burris, The Failure of the Florida Judicial Review Process to Provide Effective Incentives For the Rule Making Process Under the Administrative Procedure Act, 18 Fla.St.U.L.Rev. 662 (1991). In light of the history of abuse that characterized the use of the prior exception, the creation of a new exception, even if it were warranted, would not seem wise.

The dissent’s attempt to divide policy into policy and pre-policy and to make the later immune from rulemaking requirements does raise the interesting question: Is there anything before “policy” under the act. If policy, unlike the universe, is not infinite, what lies outside its boundaries? If policy is not preceded by “incipient policy” or “unrecognized policy” or some yet to be created category of pre-policy, is everything the agency does “policy” that must be adopted as a rule? I believe that the answer to this question is that everything the agency says and does is policy, but no judicially created “rulemaking free zone” needs to be created to protect agencies from this fact. Section 120.56(4)(e) provides the agency confronted with a challenge to its unpromulgated policy with statutory protection: it can adopt policies challenged pursuant to Section 120.56(4) as rules in response to such a challenge, and thus avoid the statutory consequences of its failure to adopt them as rules.

Schluter is an unusual case because it was decided on a stipulation where the agency admitted to what the dissent categorizes as a “virtually unstated” policy. The majority found “given the form of the evidence” that “the Department has an established policy that had been systematically communicated to the agency personnel with the intention that it be implemented with the force of law.” This was not proven, it was “manifest in the language” that the department “‘has a policy.’” In other words, if an agency has a policy, we can assume that it has been systematically communicated to the agency personnel with the intention that it be implemented with the force of law, because that is what having a policy means. “The word ‘policy,’… is not a term of art. It has a commonly understood meaning. It is defined [in Webster’s Dictionary] as ‘a principle, plan, or course of action, as pursued by a government, organization or individual, etc.’”

Agencies may find a simple three word rule in the Schluter case: “do not stipulate.” Challengers may be encouraged by the fact that the First District, in Schluter, has finally clearly acknowledged the primacy of the 1991 amendments over its old case law in this area. But challengers are left with the question of how they can prove that what they are challenging is indeed a policy, assuming that from now on it will be difficult to obtain a stipulation. The problem of proving a policy, that is the existence of “a principle, plan or course of action,” and not the requirements proposed in the dissent, is not insurmountable. However, proof of what an agency has in fact been doing seems important to any such case. If such an inquiry is limited or not permitted, the usefulness of the Section 120.56(4) remedy will be impaired.

Steps Involved in a Real Estate Transaction

• Preliminary Steps: Real estate purchases in the Dominican Republic do not usually follow the North American pattern of a written offer tendered by the buyer to the seller, followed by the seller’s written acceptance. Instead, after verbal agreement is reached by the buyer and seller on the price, a binding Promise of Sale is prepared by an attorney (solicitor) or notary public which is signed by both parties. (Notaries in the Dominican Republic are required to have a law degree.)

Because of certain peculiarities of Dominican Real Estate Law, it is recommended that the prospective buyer retain a real estate attorney (solicitor) before signing any documents or making a deposit. Depending on the wishes of the parties, the attorney (solicitor) may proceed with the due diligence first, before preparing the Promise of Sale, or alternatively, prepare the Promise of Sale first, conditioning the purchase to the results of the due diligence to be done in a specified term.

• Promise of Sale: This is a formal document, binding on both parties, and signed by them in the presence of a Notary Public. From a practical point of view, it is more important than the Deed of Sale, since it generally contains a complete and detailed description of the entire transaction up to the time when the purchase price has been paid in full and the property is ready to be conveyed to the buyer. A well-drafted Promise of Sale should contain at least the following provisions:

(a) Full name and particulars of the parties. If the seller is married, the spouse must also sign.
(b) Legal description of the property to be purchased.
(c) Purchase price and payment terms.
(d) Default clause.
(e) Date of delivery of the property.
(f) Due diligence required or done.
(g) Representations by the seller and remedies in case of misrepresentation.
(h) Obligation by seller of signing the Deed of Sale upon receipt of final payment.

Many attorneys (solicitors) and notaries in the Dominican Republic do not protect the buyer adequately in the Promise of Sale. Among the most common deficiencies are the following:

(a) The buyer is allowed to pay a large percentage of the price of sale without any security or direct interest over the property. In case of misuse of these funds, the buyer’s remedies may be limited to suing the seller personally. Many condo buyers in Santo Domingo have suffered through this experience in the last few years. Generally, the developer uses the buyers’ funds, along with a bank loan, to finance the construction. The bank collaterizes the loan with a mortgage on the property. If the developer runs into financial difficulties or misappropriates the funds, the bank forecloses and the buyers lose both their money and their property.

(b) Payments are not conditioned on the availability of clear title or the adequate progress of construction. Sellers, therefore, may demand payment or place the buyer in default without performing their own basic obligations.

(c) Escrow agents are rarely used. The seller, therefore, has control over the funds as they are paid.

• Deed of Sale (”Contrato de Venta”): This is also a formal document binding on both parties, and signed by them in the presence of a Notary Public. It is used primarily for the purpose of conveying the property from the seller to the buyer.

In case of a cash purchase, it is simpler and cheaper to go directly from verbal negotiations to the signing of a “Contrato de Venta”, instead of taking the preliminary step of signing a Promise of Sale.

• Determination and Payment of Transfer and Registry Taxes: The authenticated Deed of Sale is taken to the nearest Internal Revenue Office where a request is made for the appraisal of the property. The Internal Revenue Office checks if the seller is in compliance with his tax obligations and selects an inspector to do the appraisal. The determination of the amount of taxes to be paid may take a few days or weeks, depending on the availability of the property inspector.

• Filing at the Registry of Title: Once the property has been appraised and taxes paid, the Deed of Sale and the Certificate of Title of the seller are deposited, along with the documentation provided by Internal Revenue, at the Title Registry Office for the jurisdiction where the property is located.

• Certificate of Title: At the Title Registry Office, the sale is recorded and a new Certificate of Title is issued in the name of the buyer. The property belongs to the buyer from the time the sale is recorded at the Registry. The time for the issuance of the new Certificate of Title may vary from a few days to a few months depending on the Title Registry Office where the sale was recorded.

Due Diligence

Many attorneys (solicitors) in the Dominican Republic do not perform the required due diligence on real estate transactions, limiting themselves in many cases to obtaining a certification on the status of the property from the Title Registry Office. It often happens that the real estate agent and/or the seller pressure the buyer into a hurried closing despite the advice of legal counsel.

To start the due diligence, the seller should provide the buyer or the attorney with the following documents:

• Copy of the Certificate of Title to the property.

• Copy of the official survey to the property or plat plan. Under the new Property Registry Law, the sale of properties without a government-approved plot (”deslinde”) cannot be recorded at the Registry, except in the following cases: (1) Sales executed before April 4, 2007, which may be recorded during a two-year period ending on April 4, 2009, and (2) Sales of the entire property executed after April 4, 2007 (sales of portions are not allowed), for just one time.

• Copy of his or her identification card (”Cedula”) or Passport and that of the spouse, if married.

• Copy of the receipt showing the last property tax payment (IPI) or copy of the certificate stating that the property is exempt from property tax, and certification from the Internal Revenue Office showing the seller is current with his or her tax obligations.

If the seller is a corporation:

• Copy of the corporate documentation, including bylaws, up-to-date registration at the Mercantile Registry and resolution authorizing the sale.
• Certification from the Internal Revenue Office showing the corporation is current with its tax obligations, specially Income Tax and Tax on Assets.

If the property is part of a condominium:

• Copy of the condominium declaration.
• Copy of the condominium regulations.
• Copy of the approved construction plans.
• Certification from the condominium administration showing the seller is current with his or her condo dues.
• Copies of the minutes of the last three condominium meetings.

If the property is a house:

• Copy of the approved construction plans.
• Inventory of furniture, etc.
• Copies of the utilities contracts and receipts showing that the seller is current.

Once the documentation listed above is obtained, the attorney should address every item on the following checklist:

• Title Search: A certification should be obtained from the appropriate Title Registry Office regarding the status of the property, stating who the owner is and whether any mortgages, liens or encumbrances affect it. The buyer should insist that his or her attorney confirm the results of the Registrar=s search by investigating the pertinent files at the Title Registry Office.

• Survey: An independent surveyor should verify that the property to be sold coincides with the one shown on the survey presented by the seller except when the property is located in a previously inspected subdivision. Cases have occurred in which a buyer acquires title over a property some distance away from the one he or she believes to be purchasing due to careless work by a previous surveyor or to fraud by the seller. The survey should be checked even when the seller provides a government-approved plat.

• Inspection of Improvements: A qualified builder or architect should examine any improvements to be sold (house, condo) to confirm that the plans presented are correct and that the improvements are in good condition.

• Permits: The attorney should confirm that the property to be purchased may be used for the purposes sought by the buyer. There are many legal restrictions which should be taken into account before purchasing. For example, Law 305 of 1968 establishes a 60-meter “maritime zone” along the entire Dominican coastline, measured from the high tide mark inland, which in effect converts all beaches into public property. No building is allowed within the maritime zone without a special permit from the Executive Branch. Also, in tourist areas, there are building restrictions administered by the Ministry of Tourism.

• Possession: The attorney should check that the seller is in possession of the property. It should be ensured that no squatters’ rights of any kind exist. Special precautions should be taken with unfenced properties outside known subdivisions. Fencing them before closing is advisable. If there are tenants on the property, the buyer should be informed that Dominican law is protective of a tenant=s rights and that evicting a recalcitrant tenant is time-consuming and expensive.

• Employees: The seller should pay any employees working on the property their legal severance, otherwise the buyer may find himself liable for the payment later.

• Utilities: The attorney or buyer should check that the seller does not have any utility bills pending by inquiring at the appropriate power distributor, water, cable and telephone companies.

Taxes and Expenses on Property Transfers

Taxes must be paid before filing the purchase at the Title Registry Office. Taxes and expenses on the conveyance of real estate are approximately 3.5% of the government-appraised value of the property, as follows:

• 3% Transfer Tax (Law # 288-04)
• Minor expenses such as cost of certified check required to pay taxes to Internal Revenue, sundry stamps and tips at the Registry.

Taxes are paid based on the market value of the property as determined by the tax authorities, not on the price of purchase stated in the deed of sale.

Buyers wishing to lessen the impact of transfer taxes have the option of using a loophole in the law which allows the contribution in kind of property into corporations without paying transfer taxes. For this, cooperation from the seller is essential.

Property Taxes

Properties held in the name of an individual are subject to an annual property tax (”IPI”) of 1% of government-appraised value in excess of RD$5,000,000 pesos except for un built lots or farms outside city limits and properties whose owner is 65 years old or older, who has registered it in his or her name for more than 15 years and has no other property.

If the property is held by a corporation, no property tax is due. Instead, the corporation must pay a 1% tax on corporate assets. However, any income tax paid by the corporation will constitute a credit toward the tax on assets, so that if corporate income taxes paid are equal to or higher than the taxes on assets due, the corporation will have no obligation to pay taxes on its assets.

Title Insurance

In the Dominican Republic, as in many Latin American and European countries, the government provides title insurance. The old Land Registry Law established an indemnity fund with which to pay claimants who due, for example, to an error of the Registrar, were deprived of their property. Unfortunately, the funds collected were used by the government for other purposes.

The Property Registry Law in effect since April 4, 2007, has created a new 2% tax on all conveyances in order to establish an indemnity fund. It is also possible to obtain title insurance from private insurers.

Purchase of Real Estate by Foreigners

There are no restrictions on foreigners purchasing real property in the Dominican Republic. Formerly, Decree 2543 of March 22, 1945 and its amendments required that foreigners obtain prior Presidential approval except in certain cases. Decree 21-98 of January 8, 1998 abolished this regulation and established as the only requirement that the Title Registry Offices keep a record, for statistical purposes, of all purchases made by foreigners.

Inheritance of Real Estate by Foreigners

There are no restrictions on foreigners inheriting title to real property in the Dominican Republic. Inheritance taxes have been recently lowered to 3% of the appraised value of the estate. If the beneficiary resides outside the Dominican Republic, inheritance taxes are subject to a 50% surcharge, raising the tax rate to 4.5%.

Inheritance of real estate is governed by Dominican law which provides for “forced heir ship”: part of the inheritance must go to certain heirs by law. For example, a foreigner with a child must reserve 50% of the estate to that child despite the existence of a will or of the law of his country of residence. To avoid the application of Dominican rules of inheritance to the estate, it is advisable for foreigners to hold real estate indirectly through a holding company.

Real Estate Agents

Real estate agents in the Dominican Republic are not licensed or regulated by the government. There is presently a bill in Congress which may regulate the practice in the near future.

Decree-Law 1988 defines the validity and types of frequently used contracts, and has governed contract law in all transactions since the 1993 election. 

The 2001 land law provides only general provisions. Detailed formalities regarding real property leases will be issued later, by Sub-Decree of the Royal Government of Cambodia.

Rents

The parties to a property rental contract may freely negotiate the terms - the rent, period of lease, rental fees, other legal rights and obligations, renewal, rent increase, and the conditions for the termination of the contract .

Cambodian Laws do not regulate increases in the rent at renewal of the contract, or specify any method. The landlord shall inform the tenant if he wants to increase the rent within a reasonable time (as specified in the contract). Both parties can then negotiate the new rent. If the negotiation fails, the contract may be terminated.

Security Deposits

There is no legal restriction on security deposits or rental deposits. Rental deposits are normal, the most common being from three months to six months’ rent, depending on the lease duration: short or long term. Security deposits are rare.

Duration of Contract/Eviction

A lease contract can be made for an undetermined period (though an undetermined lease may not exceed 12 years), or a determined period, which can be long term (15 years) or short term. There can be an option to renew, by mutual agreement between the parties.

A lease contract can be oral if the lease is less than one year, but must be written if the lease is longer than one year. Any oral lease agreement is considered to be a temporary lease, and can be terminated at any time by giving prior notice equal to the rental payment period.

If no prior notice is given by either party and there is no any clause mentioning the automatic termination at the end of contract, in the case of both determinate and indeterminate contracts, the contract is automatically renewed.

Termination of the contract by either party is not easy, if the lease contract does not contain a termination clause. Cambodian Laws do not set out a suitable prior notice period for eviction at the end of a lease, except in the case of the undetermined lease contract, which requires at least one or two months prior notice for its termination. Therefore it is very important to insert a termination clause in the contract, providing a suitable prior notice for termination of the contract.

Termination before the contract’s date of expiry by the landlord is possible if:
• The tenant does not perform his obligations or
• The tenant improperly uses the lease property in a manner inconsistent with its normal function or
• The tenant uses the property in a manner which causes damages to the leased property.

Subleasing is prohibited, unless explicitly permitted by the contract prior.

Clauses for terminating the contract before its expiry date may be included in the contract. In the absence of such a clause, the suffering party shall be entitled to remedies and damages, in accordance with the lease contract and/or the court’s decision.

The contract ends if the tenant dies, unless the tenant’s heirs want to continue it. But the contract remains in effect if the landlord dies.

The effectiveness of the legal system

Disputes between landlord and tenant are resolved through the ordinary provincial or municipal courts. Two attempts at reconciliation in front of a handling court clerk or judge are required, after the filing of the complaint, before the trial hearing.

The timeframe for the trial process is not clearly defined by law.

If one party is unsatisfied with the court’s decision, he can appeal to the higher courts.

Legislation

Laws and Regulations which cover Landlord and Tenant issues:
- Land Law dated August 30, 2001; and
- Decree-Law No. 38 dated October 28, 1988.
- Circular No. 01 Dated January 18, 1990 regarding the management of Residences and Land Leased to International Organizations, Foreign Companies and Foreigners

a. A Foundation is a sui generis body corporate, in existence only in Panama, Liechtenstein and Austria, but where only Panama and Liechtenstein are “offshore jurisdictions”.

b. It offers total secrecy and anonymity; no requirement to disclose beneficiaries; no requirement to file annual returns or financial statements; full exemption from taxation on any business activity or transaction carried outside of Panama; simple ongoing administration; complete management privacy and confidentiality.

c. A Foundation may transact in whatever currencies it chooses; its founders, members of the foundation council and protectors may be of any nationality and may be residents of any country; the accounting books of the Private Foundation may be kept in Panama or abroad.

d. In no case may its assets be used to satisfy the founder’s or the beneficiaries’ obligations.

e. The law on inheritance regarding the founder’s or the beneficiaries’ domicile is not opposable to the foundation nor may it affect its validity or prevent the fulfillment of its objectives.

f. There are favorable asset protection sections in law.

II. Constitution Requirements

The Panama Private Foundation is a legal entity established through a private or public instrument, by either one or more private person(s) or corporate entity(ies) (called the Founder(s) and the allocation or endowment of funds or assets by the Founder is essential to its creation. The Foundation becomes a corporate body (juridical person) by registering a Foundation Charter at the Public Registry which contains:

a. Its name, which must include the word “Foundation” (in any language)

b. Its domicile

c. The initial capital/estate (expressed in any currency) which can not be less than the equivalent of US$10,000.00

d. The name(s) and address(es) of the Member(s) of the Foundation Council which administers the estate (they can be individuals or corporate entity(ies)

e. The name and domicile of the Foundation’s Resident Agent in Panama (which must be a lawyer or law firm)

f. The objectives and goals of the Foundation (these must be possible, reasonable, moral, and legal)

g. The manner in which the Beneficiaries (which may include the Founder), are selected

h. Reservation of the right to modify the Foundation Charter

i. The duration of the Foundation

j. The use to be made of the Foundation’s assets and the manner in which its estate is to be liquidated in the event of dissolution.

III. Foundation Council

Members of the Foundation Council may be natural or juridical persons of any nationality, and do not need to be residents of the Republic of Panama. GERLI & CO. may provide members of the Foundation Council acting as nominee if so desired. The Foundation Council has the following obligations and duties:

a. To manage the assets of the Foundation in accordance with the Foundation Charter or its regulations.

b. To carry out those acts, contracts or business as may be expedient or necessary to fulfill the purpose of the foundation and to include in such contracts, agreements and other instruments or obligations, such clauses and conditions as are necessary and expedient, being consistent with the foundation’s purposes and not contrary to law, morality, good manners or public order.

c. To inform the beneficiaries of the foundation about its economic situation as provided by the Foundation Charter or its regulations.

d. To hand over to the beneficiaries of the foundation the assets or resources settled in their favor in the Foundation Charter or its regulations.

e. To carry out those acts or contracts which the foundation, according to the Private Foundations Law and other applicable legal or regulatory provisions, may be permitted to carry out.

IV. Beneficiaries

Optional Foundation Regulations (which are not registered at the Public Registry) can also be prepared, and this document could contain details regarding the Foundation Council’s attributes, frequency of statements, causes for removal of the Foundation Council, and the manner of distribution of the Beneficiaries’ interests. It is not required to appoint beneficiaries in the Foundation Charter, and in order to protect the Founder, the Beneficiaries are appointed in the Foundation’s Regulations that are kept under strict confidentiality in the Registered Agent’s office.

VI. Obligations

As established in the Private Foundations Law, the foundation’s assets shall constitute a separate estate from those of the founder’s personal assets for all legal purposes. Therefore, same may not be seized, attached, or be the object of any action or preventive measures, save for obligations incurred or damages caused upon fulfillment of the foundation’s aims or objectives or due to the legitimate rights of the foundation’s beneficiaries. In no case shall they be used to satisfy the founder’s or the beneficiaries’ obligations. The founder’s creditors shall have the right to object to the contribution or transfer of assets of a foundation where same constitutes a fraudulent act against creditors, but the rights and actions of such creditors shall prescribe in three (3) years as from the date of the contribution or transfer of assets to the foundation.

Also, members of the Foundation Council and of the supervisory bodies, if any, as well as public servants or private sector employees who have knowledge of the activities, transactions or operations of foundations shall maintain secrecy and confidentiality regarding these at all times. Breach of this obligation shall be punishable by six (6) months imprisonment and a B/.50,000.00 fine, without prejudice to the corresponding civil liability.