While the guarantee trust is not new to the Republic of Panama, it has only recently become the primary assurance or collateral mechanism in automobile bank financing. Panama’s guarantee trust legislation dates back to 1925, but current legislation was enacted in 1984. In addition to automobile bank financing, guarantee trusts can also be used in real estate financing. However, this is a smaller growth industry, since guarantee trusts do not provide the same tax incentives granted to mortgages, such as preferential interest and deductibility of mortgage interest on income tax. The guarantee or collateral trust is a cost-effective and efficient alternative to traditional commercial financing mechanisms which require judicial enforcement.
1. WHAT IS A GUARANTEE TRUST?
A guarantee trust is a contract entered into by a person (the borrower) known as the Settlor, who transfers certain property assets to another person, known as the Trustee. That property serves as collateral for a financial obligation contracted with a third person (the creditor), known as the Beneficiary.
2. WHO ARE THE PARTIES INVOLVED IN A GUARANTEE TRUST?
There are three parties involved in any Guarantee or Collateral Trust:
- THE SETTLOR is the person who receives the funding to purchase a vehicle / property and who transfers that property to the Trustee as security for the financing.
- THE TRUSTEE is the person to whom the Settlor transfers the vehicle / property as collateral for the financing.
- THE BENEFICIARY is the Lender or Creditor/Financing Institution that provides the financing which is secured with the vehicle / property transferred to the Trustee.
3. WHAT IS THE PURPOSE OF A GUARANTEE TRUST?
A guarantee or collateral trust essentially assures the Beneficiary (creditor) that the Settlor (borrower) will faithfully and timely pay the principal and interest of the commercial financing granted.
4. WHAT HAPPENS TO PROPERTY IN A GUARANTEE TRUST?
The vehicle / property that become part of the guarantee or collateral trust is security for the financial obligations contracted with the bank or financial institution that financed the purchase.
5. WHAT RIGHTS DOES THE TRUSTEE HOLD ON ASSETS (COLLATERAL)?
The rights held by the Trustee are limited to the fulfillment of the purpose of the guarantee trust, which is to ensure that the Beneficiary will be paid the obligation contracted by the Settlor. This means that the Settlor will have full control of the vehicle / property acquired, as long as he/she is up-to-date with all of the obligations contracted with the Beneficiary and complies with the terms of the guarantee trust. Only in the case of a breach of these obligations shall the Trustee be entitled to take control/dispose of the vehicle / property as security in order to achieve payment of all outstanding obligations.
6. HOW DOES THE GUARANTEE TRUST TRANSACTION TAKE PLACE?
Once funding has been approved by the bank or financial institution, the Settlor signs the following documents:
- A Loan Agreement is the document containing the terms and conditions of the obligation undertaken by the Settlor with regard to the Beneficiary. The loan agreement describes the entire transaction and specifies the rights and obligations of the parties.
- The Trust Agreement is the contract that gives rise to the fiduciary relationship between Mossfon Trust Corporation, the Financial Institution, and the Settlor. The Trust Agreement will be signed each time funding is granted; it is through this document that ownership of the vehicle / property used as collateral will be transferred to Mossfon Trust.
7. WHAT ADVANTAGES DOES A GUARANTEE TRUST PROVIDE?
- Reduction of legal costs and transaction time: A guarantee trust for a vehicle or other property does not need to be formalized by public deed or registered at the Panama Public Registry. This type of financial mechanism significantly reduces the costs involved and makes the transaction time quicker and more dynamic.
- Expedited enforcement: In the case of non-compliance, guarantee trusts can be enforced immediately and without judicial procedures since the assets in a guarantee trust constitute an autonomous equity or property. This means that the equity or property held by the Trustee can be exercised as property rights, and not as credit rights, as in a mortgage.