Divorce and the Cook Islands International Relationship Property Trust (IRPT)

For decades, high-net-worth couples have relied on prenuptial agreements to protect family wealth. And for decades, family court judges have been throwing them out.

The uncomfortable truth about pre-nuptial agreements is that they are merely contracts. Like any contract, they can be challenged, debated, and ultimately invalidated by a judge who decides the terms are “unconscionable” or that circumstances have changed.

In 2021, the Cook Islands introduced a superior solution: The International Relationship Property Trust (IRPT). This is a different type of trust than a Cook Islands trust used for asset protection.

This structure, created by the International Relationship Property Trust Act 2021, shifts the paradigm from “Contract Law” to “Property Law.” Instead of asking a judge to respect your agreement, the IRPT physically removes the assets from the family court’s jurisdiction, ensuring that your dynasty stays intact regardless of what a divorce decree says.

The Problem with Pre-Nups

To understand why the IRPT is necessary, you must first understand the fragility of the domestic prenuptial agreement.

In many U.S. states (especially California, New York, and Florida), family courts operate under the principle of “Equitable Distribution” or “Community Property.” The goal of the family court judge is to achieve a “fair” result. If a pre-nuptial agreement signed 20 years ago results in a settlement that the judge perceives as “unfair” today, they have broad discretion to set it aside.

Common reasons Pre-Nups fail:

• Duress: “He told me he wouldn’t marry me unless I signed it the night before the wedding.”
• Inadequate Disclosure: “He didn’t tell me about the offshore accounts.”
• Unconscionability: “Leaving me with nothing while he keeps $50 million is against public policy.”

When a pre-nuptial agreement fails, your assets are laid bare before the court. The IRPT solves this by removing the discretion of the judge entirely.

What is an International Relationship Property Trust (IRPT)?

The IRPT is a specialized offshore trust designed specifically for married couples (or couples in a civil union/de facto relationship). Unlike a standard Asset Protection Trust, which is usually set up by one person, the IRPT is a Joint Trust settled by both partners.

The Statutory “Clean Break” Rebuttal

The core power of the IRPT comes from Section 16 of the Act.

In most Western legal systems, divorce courts apply the “Clean Break” principle—the idea that the couple’s financial ties should be severed, assets sold, and cash divided.

Section 16 explicitly rebuts this principle. It mandates that assets held in an IRPT must remain intact and cannot be divided or sold simply because the couple has separated.

Here’s how it works in practice.

If you and your spouse place a family business or a real estate portfolio into an IRPT, and you later divorce, the Cook Islands Trustee is forbidden from selling the business to split the cash. The asset remains in the trust, managed for the benefit of the beneficiaries (often the children), while the ex-spouses receive distributions according to the Trust Instrument, not the court order.

You are effectively privatizing your divorce settlement. You decide the rules before the marriage fails, and Cook Islands law ensures those rules are followed.

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Step-Up in Basis Under Section 1014

The most persuasive argument for the IRPT is not legal, but financial. By structuring this as a specialized joint trust, we can often achieve tax benefits that a standard pre-nup or tenants by the entirety title cannot offer.

The goal is to leverage IRC § 1014(b)(6) to achieve a step-up in basis upon the death of the first spouse.

The “Step-Up” Problem

In most non-community property states (like Florida or New York), if you own a $10 million asset jointly with your spouse (basis $1 million) and your spouse dies:

• You only get a “Step-Up” on 50% of the asset.
• If you sell the asset the next day, you still owe capital gains tax on your surviving half.

IRPT Solution

By drafting the Cook Islands IRPT to function similarly to a “Community Property Trust,” we can position the assets to be treated as community property for tax purposes.

When the first spouse dies, the entire asset (100%) receives a Step-Up in Basis to the fair market value.

If the surviving spouse sells the asset immediately, they pay zero capital gains tax. On a $10 million portfolio, this single clause can save over $2 million in federal taxes.

Firewall Against Foreign Divorce Decrees

Section 82 of the International Relationship Property Trust Act provides the statutory armor that prevents a U.S. family court judge from raiding the trust. It explicitly states that the Cook Islands courts will not recognize a foreign judgment if that judgment is inconsistent with the terms of the Trust Instrument.

Division of Assets

In a typical divorce, a U.S. judge issues a “Dissolution of Marriage” decree and orders the division of marital assets (e.g., “Husband gets 50%, Wife gets 50%”).

U.S. banks and brokerages comply immediately.

However, the Cook Islands Trustee reviews the order. If the Trust Instrument says “Assets are to remain managed for the benefit of the family line and cannot be liquidated,” the Trustee must reject the U.S. court order.

The U.S. judge has no jurisdiction to force the sovereign Trustee to sell the assets. This forces the divorcing parties to negotiate a settlement based on the Trust’s distribution rules (which you wrote during happier times) rather than the erratic discretion of a family court judge.

IRS Tax Reporting (Forms 3520 & 3520-A)

As with all foreign trusts, tax neutrality relies on strict tax compliance.

Because the IRPT is a foreign trust with U.S. beneficiaries, it requires the standard suite of IRS reporting forms. As a former IRS attorney, I ensure my clients understand that these forms are mandatory, not optional.

1. Form 3520: Filed by each spouse to report transfers into the trust.
2. Form 3520-A: Filed by the Trustee annually to report trust activity.
3. Real Estate Note: If the IRPT holds U.S. real estate, it must be done through a specific structure (usually a U.S. LLC owned by the Trust) to avoid FIRPTA withholding issues upon sale.

Conclusion

The Cook Islands International Relationship Property Trust effectively allows you to opt-out of the public, messy, and unpredictable U.S. divorce court system. It allows you to create your own “Private Family Court,” where the rules are set by you, the assets remain intact, and the legacy survives the breakup of the marriage.