What Is a Cook Islands Trust?

A Cook Islands trust is an international trust established in the Cook Islands to protect assets from domestic creditors. The Cook Islands is widely considered to be the best country to set up an offshore trust.

The Cook Islands are made up of 15 islands located in the South Pacific (same time zone as Hawaii).

Key Points About Cook Islands Trusts

• A Cook Islands trust is an asset protection trust set up under the laws of the Cook Islands.
• Cook Island trusts are known for providing strong protection against U.S. judgments, making them a popular asset protection tool.
• Cook Island trusts must comply with international laws and regulations against illegal activities like tax evasion.

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.

How Does a Cook Islands Trust Protect Assets?

A Cook Islands trust protects 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.

Cook Islands Trust Advantages

The Cook Islands gives you the following asset protection advantages:

• Transfers into a Cook Islands trust made more than two years after a creditor’s cause of action has accrued are fully protected.
• A creditor must file a lawsuit in the Cook Islands within one year from the time the cause of action accrues if the assets are transferred into the.
• Fraudulent transfer claims against your personal property cannot be brought in the U.S. The creditor must file the fraudulent transfer action in the Cook Islands, which is very expensive and burdensome.
• A creditor’s fraudulent transfer lawsuit must prove beyond a reasonable doubt that you intended to defraud that particular creditor and that the transfer left you insolvent.

How to Set Up a Cook Islands Trust

Setting up a Cook Islands trust requires a series of steps typically done with the assistance of a U.S. attorney specializing in offshore trust formation. Here is a general step-by-step guide:

1. Choose a Trustee Company. The choice of trustee company is the most important step in the Cook Islands trust formation. The trustee must be a licensed trust company in the Cook Islands.
2. Background Check. Your attorney will assist you in completing the trust application. The trust company must complete a background check and will need to know the source of the wealth being used to fund the trust.
3. Prepare Trust Agreement. Your attorney will prepare the trust agreement. This document outlines the terms of the trust. It identifies you as the Grantor/Settlor (the person creating and funding the trust), the beneficiaries (those who will benefit from the trust), and the trustee.
4. Decide on a Protector. You can optionally appoint a trust protector, an individual or institution given certain powers over the trust. A trust protector enhances the trust’s asset protection. The trust protector should not be located in the United States.
5. Transfer Assets. Once the trust is registered, you will work with the trustee company to transfer some of your assets into the trust. These can include cash, securities, or even business interests.

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.

How are Cook Islands Trusts Taxed?

The Cook Islands does not tax their offshore trusts. No income tax, capital gains tax, or estate duty applies to an offshore trust, provided that neither you nor your beneficiaries are residents of the Cook Islands.

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.

Cook Islands Trust Bank Account

A Cook Island trustee typically will open an offshore bank account immediately after forming a Cook Islands trust. This bank account is the primary mechanism through which the trust’s assets are managed. Once the trust is established, the assets transferred to the trust, including the money in the associated bank account, are legally owned and managed by the trustee of the Cook Islands trust.

The bank account is sometimes opened in the same jurisdiction as the trust. The trustee can also open a trust bank account in another jurisdiction, particularly within the European Union. The choice depends on your individual preferences and financial plan.

Setting up a bank account for an offshore trust is not as straightforward as opening a personal bank account. Banks are subject to stringent international regulations regarding money laundering and financial crimes. They must perform rigorous due diligence before accepting business from offshore entities and foreign persons.

No matter where they are located, international banks will require detailed information about the trust, source of funds, and yourself as the trust grantor.

Fraudulent Transfers

Cook Islands law puts the burden of proof on your creditor to demonstrate beyond a reasonable doubt (the highest standard of proof) that you transferred assets into the trust with the explicit intent to defraud that specific creditor.

Moreover, the claim must be brought within a specified time frame, typically within two years of the alleged fraudulent transfer. This is a far more protective stance than U.S. fraudulent transfer laws and many other jurisdictions where there is a lower standard of proof, and claims may be brought longer after the transfer.

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