Setting Up a Cook Islands Trust During a Lawsuit

Establishing a Cook Islands trust after litigation has commenced presents unique challenges and opportunities. While conventional wisdom suggests establishing trusts before claims arise, the International Trusts Act of 1984 permits trust formation during pending litigation with specific structural requirements.

Legality of Trust Formation During Litigation

No law prohibits establishing a Cook Islands trust while a lawsuit is pending. Trust formation remains legal regardless of timing. However, transfers made after claims arise implicate fraudulent transfer laws in both U.S. jurisdictions and the Cook Islands.

Fraudulent transfer is a civil matter in most U.S. states, not a criminal offense. If a court determines a transfer was fraudulent, the typical remedy is voiding the transfer and returning assets to the debtor’s reach. The debtor faces no criminal penalties, fines, or imprisonment for fraudulent conveyance itself in most jurisdictions.

California represents an exception, where Penal Code Section 154 classifies fraudulent transfer as a misdemeanor (or felony if involving more than $250 in stocks). However, criminal prosecution under these provisions remains extremely rare, and we are not aware of any convictions under these statutes.

The Jones Clause Requirement

When a Cook Islands trust is established during pending litigation or after a specific claim has arisen, Cook Islands trustees require inclusion of a Jones clause in the trust deed. This provision addresses the known creditor’s claim directly within the trust structure.

A Jones clause provides a mechanism through which a creditor with a specific claim existing at the time of trust formation may potentially receive payment from trust assets if they:

• Successfully obtain a judgment against the settlor in their home jurisdiction
• Satisfy strict procedural requirements and timelines
• Meet specific criteria established in the trust deed
• Demonstrate compliance with Cook Islands legal standards

The Jones clause theoretically allows creditors to pursue recovery without initiating entirely new proceedings in Cook Islands courts. In practice, however, payments under Jones clauses are extremely rare.

Practical Operation of Jones Clauses

Jones clauses contain substantial procedural barriers that protect trust assets while providing a theoretical avenue for creditor recovery. Typical Jones clause provisions require:

• Notification to the trustee within specified timeframes after judgment
• Certification that the judgment is final and all appeals have been exhausted
• Evidence that the settlor lacks other assets to satisfy the judgment
• Demonstration that the transfer to the trust was not protected under Cook Islands law
• Payment of trustee fees and costs associated with evaluating the claim

Creditors face significant obstacles in satisfying these requirements. The trustee exercises discretion in evaluating whether Jones clause conditions have been met. Most creditors pursue settlement negotiations rather than attempting to navigate Jones clause procedures.

Difficulty of Creditor Recovery

Even with a Jones clause, creditors face formidable challenges in accessing trust assets. The Cook Islands International Trusts Act Section 13B establishes a beyond-a-reasonable-doubt evidentiary standard for fraudulent transfer claims. This criminal-law level of proof requires creditors to demonstrate that the settlor transferred assets with the sole intent to defraud that specific creditor.

The Cook Islands statute of limitations provides additional protection. Creditors must file fraudulent transfer claims in Cook Islands courts within:

• One year from the date of asset transfer, or
• Two years from the date the creditor’s cause of action accrued

After these periods expire, Cook Islands courts will not entertain fraudulent transfer claims regardless of the circumstances. During the one-to-two-year window, assets remain protected within the trust structure.

Cook Islands courts do not recognize or enforce foreign judgments. A U.S. judgment against the settlor has no direct effect on Cook Islands trust assets. The creditor must initiate entirely new litigation in Cook Islands courts, retain local counsel, and re-litigate the fraudulent transfer issue under Cook Islands law.

This requirement imposes substantial costs. Cook Islands litigation requires:

• Retaining Cook Islands attorneys (contingency fees are prohibited)
• Posting litigation bonds (often $50,000 or more)
• Travel to the Cook Islands for court proceedings
• Meeting the beyond-a-reasonable-doubt evidentiary burden

These barriers filter out most creditor claims. The economic cost of pursuing Cook Islands litigation frequently exceeds the potential recovery value.

Strategic Settlement Leverage

Trusts established during litigation provide significant settlement leverage despite potential fraudulent transfer vulnerabilities. The existence of a Cook Islands trust alters the creditor’s risk-benefit analysis.

From the creditor’s perspective:

• Obtaining a U.S. judgment does not guarantee asset recovery
• Cook Islands litigation costs $50,000-$150,000 or more
• Success in Cook Islands courts is uncertain given evidentiary standards
• The two-year statute of limitations creates time pressure
• Settlement provides certain recovery versus uncertain litigation outcomes

Settlors with Cook Islands trusts typically negotiate settlements at substantial discounts to claimed damages. Creditors rationally assess that accepting 20-40 cents on the dollar in settlement exceeds the expected value of pursuing Cook Islands litigation.

This dynamic functions even when the trust was established after the lawsuit was filed. The academic vulnerability to fraudulent transfer claims matters less than the practical difficulty of recovery. Creditors must decide whether to invest substantial additional resources pursuing assets in a foreign jurisdiction with defendant-friendly laws.

U.S. Court Responses

U.S. courts have attempted various strategies to compel the repatriation of Cook Islands trust assets. Common approaches include:

• Contempt orders against settlors for failing to return assets
• Orders directing settlors to instruct trustees to repatriate funds
• Incarceration for civil contempt until compliance
• Monetary sanctions and fines

These efforts have generally failed to achieve actual asset recovery when trusts are properly structured. The settlor’s impossibility defense—that they lack legal authority to compel the trustee’s compliance—has been accepted by courts once settlors demonstrate they cannot force repatriation.

The duress clause in Cook Islands trust deeds specifically addresses court-ordered instructions. When a settlor gives directions to the trustee under legal compulsion, the trustee is required under Cook Islands law to refuse compliance. This legal framework creates the impossibility that protects settlors from indefinite contempt.

In FTC v. Affordable Media, LLC (Anderson case), the settlors were held in contempt and incarcerated for several months. However, the assets remained in the Cook Islands trust throughout the litigation. The FTC ultimately settled with the Cook Islands trustee rather than pursuing litigation in Cook Islands courts.

Asset Type Considerations

The effectiveness of Cook Islands trusts during litigation depends significantly on asset types and locations.

Liquid Assets

Bank accounts, securities portfolios, and cryptocurrency held offshore provide maximum protection. Once these intangible assets are titled in the name of an offshore LLC owned by the Cook Islands trust and held in non-U.S. financial institutions, U.S. courts cannot effectively seize them.

U.S. Real Estate

Real property located in the United States remains vulnerable regardless of Cook Islands trust ownership. U.S. judges retain jurisdiction over U.S. real estate and can order seizure or foreclosure. Transferring U.S. real estate to a Cook Islands trust during litigation provides minimal protection and may be easily reversed as a fraudulent conveyance.

Business Interests

Operating businesses present complexity. If the business operates in the United States, courts may assert jurisdiction over business assets even if legal title is held by offshore entities. The practical operation and location of business assets determine vulnerability more than the formal ownership structure.

State Law Variations on Fraudulent Transfer

Most U.S. states adopted the Uniform Fraudulent Transfer Act (UFTA) or its successor, the Uniform Voidable Transactions Act (UVTA). These model acts establish civil remedies for fraudulent transfers without criminal penalties.

Typical state law remedies include:

• Voiding the transfer and returning assets to debtor’s ownership for collection purposes
• Judgment against the transferee if they participated knowingly in the fraudulent transfer
• Attorney fees and costs (in some jurisdictions)
• Punitive damages (rarely awarded)

State statutes of limitations for fraudulent transfer claims typically range from four to six years from the date of transfer. However, these limitations apply only in the state where the claim is brought. Cook Islands courts apply their own one-to-two-year limitations regardless of longer periods available in U.S. jurisdictions.

Conclusion

Cook Islands trusts can be established during pending litigation, though such timing creates fraudulent transfer vulnerabilities in U.S. courts. The Jones clause requirement provides a theoretical mechanism for creditor recovery while imposing substantial procedural barriers.

The practical difficulty of pursuing assets in Cook Islands courts—combined with high costs, short statutes of limitations, and beyond-reasonable-doubt evidentiary standards—creates significant settlement leverage even for trusts established after lawsuits commence.

Fraudulent transfer is a civil matter in most states, carrying no criminal penalties. The primary consequence is potential reversal of the transfer, not incarceration or fines for the fraudulent transfer itself (though contempt of court for violating orders presents separate concerns).

Settlors considering Cook Islands trusts during litigation should consult experienced asset protection counsel to evaluate whether the costs, risks, and potential benefits align with their specific circumstances. While such trusts provide substantial protection and settlement leverage, they function best when established before claims arise.