The Jones Clause in Cook Islands Trusts

The Jones clause is a trust deed provision that authorizes the trustee to pay a specific creditor’s claim from trust assets under defined conditions. It is sometimes called an “exceptions to trust clause” or a “contingent payment clause.” The purpose of the Jones clause is to address a problem that arises when a settlor transfers assets to an offshore trust while a known creditor claim exists or is reasonably foreseeable: the risk that the transfer will be treated as fraudulent and that the settlor will face contempt sanctions for making it impossible for the creditor to collect.

The Jones clause does not weaken the trust. It creates a narrow, conditional mechanism through which a specific creditor can be paid if certain strict criteria are satisfied, while preserving the trust’s protections against all other claims. In practice, payments under a Jones clause are extremely rare. But the clause’s presence in the trust deed serves important functions in both fraudulent transfer analysis and contempt defense.

How the Jones Clause Works

A Jones clause identifies a specific creditor or category of creditor that had an existing or reasonably anticipated claim against the settlor at the time assets were transferred to the trust. The clause then authorizes the trustee to pay that creditor from trust assets, but only if a defined set of conditions are met.

The typical conditions include that the creditor must have obtained a final, non-appealable judgment against the settlor, that the settlor must have insufficient assets outside the trust to satisfy the judgment, and that the creditor must make a direct claim to the trustee in accordance with the procedures specified in the trust deed. Some Jones clauses impose additional requirements, such as a time limit within which the creditor must present the claim to the trustee after obtaining a final judgment or a requirement that the creditor first exhaust all remedies against the settlor’s non-trust assets before approaching the trustee.

The trustee retains discretion over whether to pay the claim. The Jones clause authorizes payment; it does not mandate it. The trustee evaluates whether the conditions have been satisfied before releasing any funds. If the conditions are not met, the trustee declines the request and the trust’s standard protective provisions remain in effect.

Why the Jones Clause Exists

The Jones clause addresses two distinct risks that arise when a settlor establishes a Cook Islands trust while a creditor claim is pending or foreseeable.

The first risk is fraudulent transfer exposure. Under both U.S. law and Cook Islands law, transferring assets to a trust with the intent to defraud a specific existing creditor can render the transfer voidable. The Cook Islands International Trusts Act imposes a two-year limitation period and a beyond-reasonable-doubt burden of proof for fraudulent transfer claims, but the exposure still exists during the limitation period and for transfers made with identifiable intent. The Jones clause mitigates this risk by preserving a pathway for the known creditor to be paid from the trust. Because the creditor retains a mechanism to collect, the argument that the transfer was designed to make collection impossible is substantially weakened.

The second risk is contempt of court. When a U.S. court orders a settlor to repatriate trust assets and the settlor claims inability to comply because the trustee will not follow instructions given under duress, the court evaluates whether the settlor’s inability is genuine or self-created. If the settlor transferred assets to a trust structured to make compliance categorically impossible, the court may conclude that the impossibility was manufactured and hold the settlor in contempt. The Jones clause reduces this risk by ensuring that repatriation of trust assets to satisfy the specific claim remains possible in theory. The settlor has not made it impossible for the creditor to be paid; the trust deed provides a mechanism for payment. This does not guarantee that a court will accept the defense, but it removes one of the arguments courts have used to find contempt in cases like FTC v. Affordable Media and In re Lawrence.

The contempt risks article discusses how U.S. courts analyze impossibility defenses in Cook Islands trust cases.

When the Jones Clause Is Used

Not every Cook Islands trust includes a Jones clause. The clause is relevant only when a known or reasonably foreseeable creditor claim exists at the time the trust is established or funded.

The most common scenario involves a settlor who has an existing obligation that cannot be fully satisfied before the trust is established. Tax obligations are a frequent example. Because the IRS and state tax authorities can characterize virtually any transfer as fraudulent when it prevents collection of a tax debt, attorneys routinely include a Jones clause directing the trustee to pay valid tax claims. The Grant case (United States v. Grant) illustrates what happens when a settlor transfers assets to an offshore trust without adequately addressing existing tax liabilities: the court treated the transfer as fraudulent and pursued contempt sanctions.

Other common scenarios include pending but unresolved litigation where the outcome and amount are uncertain, known contractual obligations that have not yet matured into judgments, and professional liability exposure where a specific claim has been asserted but not yet adjudicated. In each case, the Jones clause names the specific creditor or describes the specific claim and sets the conditions under which the trustee may pay.

When no existing or foreseeable creditor claim exists at the time of trust formation, a Jones clause is unnecessary. If the trust is established well in advance of any litigation and the settlor is solvent after the transfer, the fraudulent transfer and contempt risks the Jones clause addresses simply do not arise.

How the Jones Clause Interacts with Other Trust Provisions

The Jones clause does not replace or override the trust’s protective provisions. It operates alongside them.

The duress clause instructs the trustee to disregard directions given under court compulsion. The Jones clause creates an exception: the trustee may pay the specified creditor even during a duress event, provided the clause’s conditions are met. This interaction is important because it means the trust can simultaneously resist general repatriation orders (through the duress clause) while permitting targeted payment to a specific pre-identified creditor (through the Jones clause). The two provisions are complementary rather than contradictory.

The spendthrift clause prevents beneficiaries from assigning their interests and prevents creditors from attaching them. The Jones clause does not affect the spendthrift provision as to other creditors. It creates a limited exception for one identified claim, leaving all other creditor protections intact.

The choice of law provision directs that Cook Islands law governs the trust. The Jones clause operates within that framework. The conditions for payment under the Jones clause are evaluated under Cook Islands law and administered by the Cook Islands trustee, not by a U.S. court.

Practical Limitations

The Jones clause is a drafting tool, not a guarantee. Its effectiveness depends on how it is drafted and how it fits within the broader trust structure.

A Jones clause that is drafted too broadly can create unintended exposure. If the clause authorizes the trustee to pay “any creditor” rather than a specifically identified creditor or narrowly defined category, it effectively converts the trust from a protective structure into one that is routinely accessible to claimants. The clause should be as narrow as possible, identifying the specific claim, creditor, or obligation it addresses.

A Jones clause also does not prevent a U.S. court from ordering the settlor to direct the trustee to pay. It merely provides a framework under which the trustee may choose to pay voluntarily. If the trustee declines to pay because the clause’s conditions are not satisfied, the U.S. court still has limited ability to compel the Cook Islands trustee to act. The clause’s primary value is in its effect on the fraudulent transfer analysis and the contempt calculus, not in guaranteeing a specific outcome for the creditor.

The clause’s existence in the trust deed may also become known to the creditor during discovery or post-judgment proceedings. A creditor who learns that the trust deed includes a Jones clause may attempt to invoke it, which is by design. The clause is intended to provide a mechanism for payment; the conditions attached to it determine whether payment actually occurs. In Southpac’s experience administering trusts with Jones clause provisions, creditors rarely pursue the clause’s mechanism to completion. They more commonly pursue settlement through domestic proceedings before involving the trustee directly.

Drafting Considerations

The Jones clause should be drafted by U.S. counsel in coordination with the Cook Islands trustee. Several decisions must be made during the drafting process.

The first is which creditor or claim the clause addresses. The clause should identify the creditor by name or describe the claim with enough specificity that the trustee can determine whether a particular demand falls within its scope. Vague descriptions create ambiguity that can be exploited by claimants the clause was never intended to cover.

The second is what conditions must be satisfied before payment. At minimum, the clause should require a final, non-appealable judgment and exhaustion of non-trust assets. Additional conditions, such as time limits for presenting the claim or caps on the amount payable, further narrow the clause’s scope and protect the trust’s assets from excessive exposure.

The third is whether the clause operates as a directive or a grant of discretion. Most practitioners draft the Jones clause as discretionary, meaning the trustee is authorized but not required to pay. This preserves the trustee’s independent judgment and avoids converting the clause into an enforceable obligation that a creditor could use to compel payment through Cook Islands proceedings.

The trust agreement article provides an overview of all key trust deed provisions. For information about the overall trust formation process, see the application process article. For a comprehensive overview of Cook Islands trust planning, return to the Cook Islands trust overview.