Setting Up a Cook Islands Trust During a Lawsuit

Establishing a Cook Islands trust after litigation has begun is legally possible. People do it. But the decision involves tradeoffs that do not exist in pre-litigation planning, and anyone considering it needs to understand exactly what changes and what does not.

The short version: Cook Islands law still provides meaningful protection even when the trust is funded after a claim arises. But U.S. courts will scrutinize the transfer far more aggressively, the risk of contempt increases substantially, and the settlor’s negotiating position is weaker than it would have been had the trust been established earlier. The trust does not become useless. It becomes more complicated and more expensive to defend.

What Cook Islands Law Says

The International Trusts Act addresses post-claim transfers directly. Under Section 13B, a creditor can challenge a transfer to a Cook Islands trust as fraudulent only by proving two elements beyond a reasonable doubt: first, that the settlor made the transfer with intent to defraud that specific creditor, and second, that the transfer rendered the settlor insolvent or unable to satisfy that creditor’s claim. The standard of proof is the highest available in civil proceedings.

Section 13K imposes a statute of limitations on these challenges. A creditor must file in the Cook Islands within one year of the trust being funded or within two years of the cause of action accruing, whichever is shorter. Each transfer to the trust starts its own clock. After the applicable period expires, the Cook Islands courts will not hear the claim regardless of the underlying facts.

Cook Islands law applies these provisions even when the trust is established during active litigation. The statute does not distinguish between pre-litigation and post-litigation transfers. The same burden of proof and the same time limits apply. The framework does not collapse simply because the timing looks suspicious.

However, Cook Islands law is only half the picture.

What U.S. Courts Do

A U.S. court does not apply Cook Islands law when evaluating whether a transfer was fraudulent. It applies the law of the state where the settlor resides, typically the Uniform Voidable Transactions Act or its state equivalent. Under U.S. fraudulent law, the standard of proof is a preponderance of the evidence rather than beyond a reasonable doubt, and courts consider “badges of fraud” including the timing of the transfer relative to the claim.

Transferring assets to an offshore trust after a lawsuit has been filed is one of the strongest badges of fraud a court can identify. It does not automatically make the transfer voidable, but it shifts the practical burden heavily onto the settlor to demonstrate a legitimate, independent purpose for the transfer.

If a U.S. court determines the transfer was fraudulent under state law, it can declare the transfer void as to that creditor and order the settlor to repatriate the assets. The court cannot directly compel the Cook Islands trustee to release the funds. But it can hold the settlor in contempt for failing to comply with the repatriation order, which may result in fines, sanctions, or incarceration.

The central tension is that the assets may be protected under Cook Islands law while the settlor personally faces consequences in the U.S. court system. The trustee may refuse to return the funds, as Cook Islands law requires. But the settlor bears the cost of that refusal.

The Contempt Problem

Contempt risk exists whenever a U.S. court orders repatriation and the settlor cannot or will not comply. But the risk is materially higher when the trust was established during litigation.

Courts evaluate contempt through two questions: did the person have the ability to comply with the order, and did they willfully refuse? When a trust is established years before any claim arises and the trustee independently refuses repatriation under a duress clause, the settlor has a stronger argument that compliance is genuinely impossible. The structure was not created in response to the litigation, the settlor does not control the trustee, and the refusal is the trustee’s independent decision under Cook Islands law.

When the trust is established during or immediately before the litigation, that argument weakens. The court may conclude that the settlor created the impossibility deliberately and that the “inability” to comply is self-manufactured. Courts have consistently held that self-created impossibility is not a defense to contempt. The cases in which settlors have been incarcerated for contempt overwhelmingly involve trusts established close in time to the underlying claim.

What Changes in the Setup Process

The trust formation process does not change in its basic sequence, but several elements become more difficult.

Trustee acceptance becomes harder. Cook Islands trustees conduct due diligence on every prospective settlor, and pending litigation is a factor they evaluate. Some trustees will decline to accept a settlor with active litigation, particularly if the claims are large relative to the assets being transferred. Others will accept the engagement but require enhanced due diligence, a more detailed solvency analysis, and sometimes a legal opinion from U.S. counsel addressing the fraudulent transfer risk.

The affidavit of solvency receives greater scrutiny. Every Cook Islands trust formation requires the settlor to execute an affidavit confirming that the transfer will not render them insolvent. When the trust is established during litigation, this affidavit must account for the pending claim. If the claim is large enough that a judgment could exceed the settlor’s remaining assets after the transfer, the affidavit becomes difficult to execute truthfully. A false affidavit of solvency can be used against the settlor in both U.S. and Cook Islands proceedings.

The Jones clause becomes more relevant. A Jones clause authorizes the trustee to pay a specific existing creditor under defined conditions. Including a Jones clause that addresses the pending claim serves two functions: it mitigates the fraudulent transfer analysis by preserving a payment pathway for the existing creditor, and it provides a potential defense to contempt by showing that repatriation remains theoretically possible through the trustee’s discretion.

U.S. counsel’s role expands. Pre-litigation planning involves designing the structure and coordinating with the trustee. Mid-litigation planning adds several layers: evaluating the fraudulent transfer exposure under applicable state law, assessing contempt risk, coordinating with litigation counsel, and documenting the settlor’s legitimate purposes beyond asset protection. The additional work increases legal fees and extends the timeline.

The Settlement Dynamic

Despite the increased risks, mid-litigation trust formation sometimes serves a practical purpose that has nothing to do with whether the trust would survive a full legal challenge.

A creditor who obtains a U.S. judgment against a settlor with a Cook Islands trust faces a collection problem. The judgment is not enforceable in the Cook Islands. The creditor must hire Cook Islands counsel, file a new proceeding, and meet the beyond-reasonable-doubt standard within the statute of limitations. Many creditors conclude that offshore enforcement costs exceed the expected recovery and agree to settle for less than the full judgment amount.

The settlement dynamic exists regardless of when the trust was established. A trust funded during litigation still requires the creditor to pursue enforcement in the Cook Islands if the trustee refuses to release the assets. What changes is the settlor’s exposure to contempt in the U.S. proceeding, which gives the creditor additional leverage that would not exist with a pre-litigation trust.

Mid-litigation trusts often produce settlements, but the settlement discount is smaller than it would have been with earlier planning, and the settlor bears greater personal risk during the negotiation.

The Honest Assessment

Establishing a Cook Islands trust during active litigation is not fraudulent, not illegal, and not automatically ineffective. Cook Islands law does not penalize the timing. The trust’s protective provisions function the same way regardless of when the trust was established. The trustee’s obligations under Cook Islands law do not change.

What changes is the settlor’s position in the U.S. legal system. The fraudulent transfer analysis is harder to defend. The contempt risk is higher. The cost is greater. The trustee may be harder to find. And the overall negotiating position is weaker than it would have been with planning done before any claim existed.

The strongest Cook Islands trusts are established well in advance of any foreseeable claim, funded with assets the settlor can afford to transfer without becoming insolvent, and administered by a trustee who has no reason to question the settlor’s motives. Every departure from that baseline reduces the structure’s effectiveness. Mid-litigation planning represents the largest departure, and the consequences are proportional.