How To Establish a Cook Islands Trust Offshore (What to Know)

How To Establish a Cook Islands Trust Offshore

How To Establish a Cook Islands Trust

When a US Person is considering establishing an Offshore Asset Protection Trust (OAPT) to protect their assets offshore, one of the most common types of international trusts they will consider is the Cook Islands trust. The Cook Islands trust is one of the original offshore asset protection trusts — and a favorite amongst US persons and taxpayers worldwide.  The Cook Islands trust has been around for many years with the goal of protecting the assets of the settler in situations in which a creditor or other third party may seek to invade the trust and litigate against the settlors, beneficiaries, etc. Let’s take a look at the basics of the Cook Islands international trust and whether it may be right for you and your needs.

International Trusts Act 1984

The body of law that controls the Cook Island trust is referred to as the International Trust Act of 1984. This act has been updated and amended several times and most recently in 1999. As a result of the amendments, the rules involving international trusts settled in the Cook Islands have changed over the past 15 years, but in general, still serve as a great vehicle for the protection of assets contained in the trust.

International Trust Act Overview

Here are some of the key excerpts from the International Trust Act: 

Execution of a trust instrument

• • • “Notwithstanding any rule of law or equity to the contrary and except where there is express provision to the contrary contained in the trust instrument, a trust instrument and any counterpart thereof (whether an original or copy including a facsimile copy) may be executed by the settlor, trustee and any other parties thereto at different times and in different places whether within or outside the Cook Islands and a trust instrument so executed and a trust thereby created, established or settled whether registered before or after the coming into force of this Act shall be as valid as if the trust instrument were executed by the settlor and those parties simultaneously at the time the trust instrument was executed by the settlor, and at a place within the Cook Islands.”

What does this Mean?

This means that the parties to the group do not need to be located in the same area or even in Cooks Islands for a Cook Islands trust to be valid – in fact, all the parties need not sign at the same time either.

Power of revocation

• • • “Unless an international trust contains an express power of revocation it shall be deemed to be irrevocable by the settlor and his legal personal representatives notwithstanding that it is voluntary.”

What does this Mean?

As with most offshore asset protection trusts, the general rule is that the trust is irrevocable (which is what helps provide the protection).

Fraud

• • • “Where it is proven beyond reasonable doubt by a creditor that an international trust settled or established or property disposed to an international trust

      • (a) was so settled, established or disposed by or on behalf of the settlor with principal intent to defraud that creditor of the settlor; and

      • (b) did at the time such settlement, establishment or disposition took place render the settlor insolvent or without property by which that creditor’s claim (if successful) could have been satisfied, then such settlement, establishment or disposition shall not be void or voidable and the international trust shall be liable to satisfy the creditor’s claim out of the property which, but for the settlement establishment or disposition, would have been available to satisfy the creditor’s claim and such liability shall only be to the extent of the interest that the settlor had in the property prior to settlement, establishment or disposition and any accumulation to the property (if any) subsequent thereto.”

What does this Mean?

It means that in order to prove fraud, it is required that the creditor proves beyond a reasonable doubt the trust was formed with the intent to defraud — in addition to other elements as well.

Application of the rule in Saunders v Vautier

• • • “Notwithstanding any rule of law or equity to the contrary, where a trust instrument empowers a trustee to accumulate income, or to refrain from making any distribution of capital or income until a specified date or event, or where any provision of the trust instrument otherwise prevents the making of any distribution of capital or income, notwithstanding that a beneficiary may, but for this section, otherwise be entitled to that accumulation or distribution, the trustee may, in his absolute discretion, subject to any other express terms of the instrument, give effect to that direction as he thinks fit notwithstanding that a beneficiary shall request the trustee to immediately distribute the accumulation or distribution and will give a valid discharge to the trustee for such distribution.”

What does this Mean?

This refers to a very important case that took place in England involving trusts and what powers beneficiaries can have over the actions of the trustee. In Saunder v Vautie, the courts held that beneficiaries could come together when they are of adult age and without disability and force the Trustee to make a transfer which otherwise results in the trust being terminated and the trustee losing her powers.

Foreign Judgements Not Enforceable

• • • “Notwithstanding the provisions of any treaty or statute, or any rule of law, or equity, to the contrary, no proceedings for or in relation to the enforcement or recognition of a judgement obtained in a jurisdiction other than the Cook Islands against any interested party shall be in any way entertained, recognised or enforced by any Court in the Cook Islands to the extent that the judgement:

      • (a) is based upon the application of any law inconsistent with the provisions of this Act or of the Trustee Companies Act 1981-2; or

      • (b) relates to a matter or particular aspect that is governed by the law of the Cook Islands”

What does this Mean?

This code section limits the ability to use a foreign judgment against a Cook Islands trust, which further goes to protect the assets of the Cook Islands trust.

Exclusion of Foreign Law

• • • “Without limiting the generality of section 13H, it is expressly declared that no international trust governed by the laws of the Cook Islands and no disposition of property to be held upon the trust thereof is void, voidable, liable to be set aside or defective in any fashion nor may relief be had under section 13B, nor is the capacity of any settlor to be questioned by reason that:

      • (a) the laws of any foreign jurisdiction prohibit or do not recognise the concept of a trust either in part or in whole; or

      • (b) the international trust or disposition avoids or defeats rights, claims or interests conferred by the law of a foreign jurisdiction upon any person, or contravenes any rules or foreign law or any foreign judicial administrative order or action intended to recognise, protect, enforce or give effect to any such rights, claims or interests; or (c) the laws of the Cook Islands or the provisions of this Act or the principal Act are inconsistent with any foreign law.”

What does this Mean?

Subject to other rules, the general theme is that foreign laws cannot be used to usurp the governing body of law involving the Cook Islands trust. Even if a foreign jurisdiction may not recognize the trust that will not in and of itself render the trust void or voidable.

 Community property 

• • • “Where a husband and wife transfer property to an international trust or a trust that subsequently becomes an international trust and immediately before being transferred, such property or any part or any accumulation thereto is, pursuant to the law of its location or the law of either of the transferors’ domicile or residence, determined to be community property, then notwithstanding such transfer and subject to the terms of the trust deed, that property and any accumulation thereto shall, for the purposes of giving effect to that law, be deemed to be community property and be dealt with in a manner consistent with that law but in every other respect shall be dealt with in accordance with the trust deed and the governing law of that deed.

      • (2) Notwithstanding anything to the contrary herein contained, nothing herein shall be construed so as to cause the trust, the trust fund, the trustees or any of them, the protectors or any of them, to be liable or obligated for any debt or responsibility of the settlor merely by reason of this section.”

What does this Mean?

In a situation in which a husband and wife transfers property to the international trust, depending on the status of their relationship it could result in the property becoming community property. In the United States, not all states utilize community property laws — although California does recognize them.

 Commencement of proceedings  (In pertinent part)

• • • (1) No action or proceedings, whether pursuant to this Act or at common law or in equity, to

      • (a) set aside the settlement of an international trust, or

      • (b) set aside any disposition to any international trust, or

      • (c) seek relief or remedy under section 13B, shall be commenced, unless such action or proceedings is commenced

      • (d) in the High Court of the Cook Islands; and

      • (e) before the expiration of 2 years from the date of

        • (i) the settlement of the international trust, or

        • (ii) the disposition to the international trust, as the case may be

    • (2) No action or proceedings whether pursuant to this Act or at common law or in equity shall be commenced by any person

      • (a) claiming to have had an interest in property before that property was settled upon or disposed to an international trust; and

      • (b) seeking to derive a legal or equitable interest in that property, unless such action or proceedings is commenced

      • (c) in the High Court of the Cook Islands; and

      • (d) before the expiration of 2 years from the date that the property referred to in paragraphs (a) and (b) was settled upon or disposed to an international trust.

What does this Mean?

Remembering, that the purpose of this type of trust is to protect the assets of the trust. And Cook islands want wealthy people from across the club to put their trust into a Cook Islands international trust. Thus, the Cook Islands Trust limits the ability to pursue a case and it is generally limited to two years – but this can vary depending on the specific facts and circumstances of the situation.

Form 3520/3520-A for Offshore Asset Protection Trusts

When it comes to reporting foreign trusts, the Internal Revenue Service has made enforcement a key priority. Foreign trust reporting could be complicated, with taxpayers being required to file Forms 3520 and 3520 –A.  The failure to properly file Forms 3520 may result in significant fines and penalties and they could be very difficult to abate.

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