How to Set Up a Cook Islands Trust

The Cook Islands, located in the South Pacific, have become synonymous with offshore asset protection strategies, particularly through their trust structures.

Cook Islands Trusts are favored worldwide for being able to protect assets from judgment creditors. In this guide I will explain the benefits, characteristics, and key considerations of establishing a trust in the Cook Islands.

What Is a Cook Islands Trust?

A Cook Islands trust is a legal technique that protects assets from creditors by locating them offshore. A Cook Islands trustee holds title to the assets. The trust works because it is extremely difficult for a U.S. creditor to bring an action against the Cook Islands trustee.

A Cook Islands trust holds title to any financial accounts set up within the trust structure. To set up a Cook Islands trust, you must (1) select a trustee company, (2) submit an application, (3) sign the trust deed, and (4) transfer assets to the trust.

How Does a Cook Islands Trust Work?

A Cook Islands trust operated under the Cook Island International Trusts Amendment Act of 1989. The Act made the Cook Islands the first jurisdiction to enact favorable trust laws that enable U.S. residents to protect their assets. The law affords the utmost asset protection while maintaining flexibility and privacy for U.S. citizens.

The Act requires the trust to have a trustee in the Cook Islands. Cook Islands trust companies are licensed and regulated by the Cook Islands government. Most Cook Islands trust companies are reputable, experienced, and thoroughly competent. Cook Islands law imposes strict procedures and qualifications on Cook Islands trust companies.

A Cook Islands trust can protect your assets from U.S. civil judgments because the trust’s assets and trustee are situated beyond the legal reach of U.S. state and federal civil courts. U.S. judges have no authority to compel an offshore trustee to take any action with trust assets. Creditors do not have the legal means to levy upon or interfere with administering an offshore trust’s assets.

To levy or garnish assets placed inside a Cook Islands trust, a U.S. judgment creditor must re-litigate the underlying U.S. lawsuit in the Cook Island courts and obtain a new foreign judgment. This is difficult, expensive, and rarely done.

Here’s a summary of the key features of Cook Islands Trusts:

1. Strong Asset Protection:
   • The Cook Islands boast some of the most stringent asset protection laws in the world. Once assets are transferred to a Cook Islands Trust, they are extremely difficult for creditors to reach. The laws provide that legal actions against trust assets must be fought in the Cook Islands courts under Cook Islands law, often deterring potential litigation.
2. Legal Framework:
   • The legal framework in the Cook Islands specifically caters to the needs of trust settlors seeking asset protection. For example, the statute of limitations for foreign creditors to challenge asset transfers into the trust is very brief, and the burden of proof is significantly high.
3. Confidentiality:
   • Trusts established in the Cook Islands offer high levels of confidentiality. The details of the trust, including the identities of the settlors and beneficiaries, are not publicly accessible. This privacy is maintained rigorously by local laws.
4. Flexibility and Control:
   • Cook Islands Trusts allow for excellent flexibility in terms of trust structure and administration. Settlors can have significant control over how the trust is managed without compromising the trust’s protection benefits. For example, settlors can retain certain rights, such as the ability to direct investments or to change trustees.

Benefits of a Cook Islands Trust

1. Protection from Future Creditors:
   • These trusts are designed to protect assets from future legal claims and creditor actions, including divorce settlements and bankruptcy proceedings.
2. Estate Planning:
   • They provide a means to plan an estate and pass wealth to future generations without the need for probate or the risk of public disclosure.
3. Legal Safeguards:
   • Cook Islands law disregards foreign judgments, meaning that a creditor would need to start a new lawsuit in the local jurisdiction, facing significant legal hurdles.

Steps to Establish a Cook Islands Trust

1. Choose a Trustee:
   • The Cook Islands requires that the trustee of a Cook Islands Trust must be a licensed trustee company located in the Cook Islands.
2. Draft the Trust Deed:
   • The trust deed should be carefully drafted to meet specific needs while complying with Cook Islands law.
3. Transfer Assets:
   • Once the trust is established, assets must be legally transferred to the trust. This can include financial assets, real estate, and other personal property.
4. Compliance and Management:
   • Regular management and legal compliance are necessary to ensure the trust operates effectively and continues to meet legal standards. This includes managing the trust’s assets and filing any required tax documents.

Who Is Involved in a Cook Islands Trust?

A Cook Islands asset protection trust involves unrelated third parties serving as settlors, trustees, beneficiaries, trust advisers, or trust protectors.

The Settlor. This person or entity establishes the trust by transferring assets to it.

The Trustee. This person or corporation in the Cook Islands holds and manages the trust assets according to the terms of the trust deed. The trustee has a legal duty to act in the beneficiaries’ best interests. The trustee has no beneficial interest in trust assets.

The Beneficiaries. These are individuals or entities that receive the benefit of the trust, as determined by the settlor. Most often, the settlor is the primary or only initial beneficiary. Should the settlor find themselves under legal duress from a domestic creditor, the trustee of the Cook Islands trust would withhold beneficiary distributions until the trustee is satisfied that any distribution made would not benefit the creditor.

The Trust Protector. You can appoint a trust protector who can retain the power to change trustees, reallocate beneficial interests, or direct the investment of trust assets.

Trust Advisor. Trust advisors may be foreign or U.S. persons with the authority to direct trust investments.

Disadvantages of a Cook Islands Trust

Cook Island trusts have potential disadvantages compared to other asset protection alternatives.

The first disadvantage is the trust’s setup cost. Establishing and maintaining a Cook Islands trust is more costly than trusts set up in other jurisdictions. The offshore trust industry in the Cook Islands is heavily regulated and requires skilled professionals to navigate, resulting in higher costs for legal advice, trustee services, and administrative expenses.

Furthermore, periodic audits and updates may be needed to maintain compliance with Cook Islands legislation and international standards. The financial burden may be prohibitive for individuals and entities with modest assets.

Sharing control of trust assets with a foreign trustee is the second disadvantage. You must cede substantial control over your assets to an offshore trustee whom you do not know personally.

Your relinquishing a degree of asset control is central to offshore trust asset protection, but this may be uncomfortable if you are accustomed to managing your wealth. Moreover, the reliance on foreign trustees risks potential mismanagement or misconduct despite the rigorous regulation of the Cook Island trust industry and liability insurance carried by Cook Island trust companies.

Therefore, picking the right trustee is critical in the Cook Islands trust formation process.

The third disadvantage is the geographical distance between yourself and the trust assets. Because of the trusts’ international nature and time zone differences, clients may struggle to manage and access the trust assets daily.

Finally, the evolving landscape of global financial regulation can present disadvantages compared to a domestic trust. U.S. regulatory agencies have increasingly pushed for transparency of offshore legal entities to combat criminal tax evasion and money laundering. Laws like the U.S. Foreign Account Tax Compliance Act (FATCA) and global initiatives led by the Organization for Economic Co-operation and Development (OECD) are increasing the pressure on offshore financial centers to share more information.

Future reporting requirements may ultimately diminish the confidentiality and asset protection offered by Cook Islands trusts. Consequently, the attractive features of a Cook Islands trust today might not be as effective in the future, depending on the evolving global regulatory environment.

Cook Islands Trust Taxation

The Cook Islands does not tax their offshore trusts. There is no income tax, capital gains tax, or estate duty tax when using a Cook Islands trust.

However, this does not mean Cook Islands trusts are entirely free from tax liabilities. U.S. citizens and residents are taxed on their global income, including income generated by offshore trusts. The U.S. tax law treats all foreign trusts as “grantor trusts,” meaning that trust income and loss flow through to the U.S. citizen that is the trust’s grantor. Your Cook Islands trust does not alter your U.S. tax obligations.

Finally, the global push for financial transparency heightens the tax risks associated with Cook Islands trusts. International initiatives, such as the OECD’s Common Reporting Standard (CRS), mandate the automatic exchange of financial account information. As a result, offshore trust structures are increasingly visible to tax authorities worldwide, raising the stakes for compliance with tax obligations.

The IRS requires persons with a beneficial interest in a foreign trust to file several information reporting forms. Failure to properly adhere to these strict reporting requirements can lead to substantial penalties and undermine the benefits of the trust structure. Obtaining professional tax advice is critical when considering a Cook Islands trust.

Is a Cook Islands Trust Worth It?

A Cook Islands trust can be extremely worthwhile for those seeking a high level of asset protection. A Cook Islands trust structure effectively shelters trust assets from future creditors, claims from a divorced spouse, and other legal judgments.

Moreover, the Cook Islands does not recognize foreign judgments, adding a significant protection layer for trust assets. For people facing potential significant liability, such as professionals in high-risk sectors, or those with a high net worth who want to protect their assets from future unforeseen threats, a Cook Islands trust can be a powerful tool.

FAQs About Cook Islands Trusts