Setting Up a Cook Islands Trust While Married

Marriage introduces specific legal considerations when establishing a Cook Islands trust. The central question is whether the assets being transferred are marital property, separate property, or some combination, because the classification determines what each spouse must do, what risks exist, and what additional protections the trust deed should include. Getting this wrong can undermine the trust’s protective value entirely.

Marital Property vs. Separate Property

The distinction between marital and separate property is the threshold issue. In every U.S. state, assets acquired during the marriage through either spouse’s earnings are generally treated as marital property subject to division in divorce. How that division works depends on whether the state follows community property or equitable distribution principles, but the fundamental point is the same: one spouse cannot unilaterally remove marital assets from the other spouse’s reach by placing them in a trust.

In the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse owns an undivided one-half interest in all community property. Neither spouse can transfer community property without the other’s consent. Attempting to fund an offshore trust with community property without spousal consent is a fraudulent conveyance as to the non-consenting spouse. It does not matter that the trust is governed by Cook Islands law. A U.S. court with personal jurisdiction over the settlor spouse can and will treat those assets as marital property subject to division.

Riechers v. Riechers, 679 N.Y.S.2d 333 (1998), illustrates the consequences. Dr. Riechers established a Cook Islands trust and funded it with approximately $4 million in marital assets routed through a Colorado limited partnership. His wife was named as a beneficiary only in her capacity as “Spouse of the Settlor,” meaning she would lose beneficiary status upon divorce. The New York court acknowledged it had no jurisdiction over the trust corpus in the Cook Islands, but it had personal jurisdiction over Dr. Riechers. It ordered him to pay his wife half the value of the marital assets placed in the trust. The trust structure did not fail in the Cook Islands. It failed in the divorce court because the assets transferred were marital property, the wife had not consented, and the court could reach the husband personally even though it could not reach the trust.

Separate property, by contrast, belongs to one spouse alone. This typically includes assets owned before the marriage, inheritances received by one spouse, and gifts made specifically to one spouse. Funding a Cook Islands trust with genuinely separate property does not implicate the other spouse’s property rights and does not require spousal consent. The challenge is proving that the assets are in fact separate. Commingling separate and marital funds in the same account, for example, can convert separate property into marital property under many states’ laws.

When Both Spouses Agree

When both spouses want to establish a Cook Islands trust together, the structure is more straightforward but still requires careful drafting. There are two common approaches.

The first is a joint trust with both spouses as co-settlors and co-beneficiaries. Both spouses transfer assets to the trust, both remain eligible for discretionary distributions, and the trust deed reflects their shared intent. This approach works well when both spouses are aligned on asset protection goals and want to protect the family’s combined wealth from third-party creditors.

The second is separate trusts for each spouse, each funded with that spouse’s separate property. This approach preserves the separate character of each spouse’s assets and can provide additional protection if one spouse faces a claim that the other does not. It is more complex and more expensive because it requires two trust deeds, two trustee relationships, and two sets of compliance filings.

Regardless of which approach is used, both spouses should have independent legal counsel review the trust terms. This is not optional in the practical sense. If a trust funded with marital assets is later challenged in divorce proceedings, the non-settlor spouse’s ability to show that they had independent counsel and understood the terms significantly affects how a court views the arrangement.

Section 13J: Community Property Preservation

The Cook Islands International Trusts Act includes a provision specifically addressing community property. Section 13J provides that when a husband and wife transfer community property to an international trust, that property retains its community property character notwithstanding the transfer. The trust deed governs the administration of the property, but for purposes of community property law, the assets are still treated as community property.

This provision serves two purposes. First, it preserves the full step-up in basis that community property receives when one spouse dies. Under U.S. tax law, community property receives a step-up in basis on both halves of the property at the first spouse’s death, not just the decedent’s half. If the transfer to the trust destroyed the community property character, the surviving spouse would lose this tax benefit on the living spouse’s half. Section 13J prevents that outcome.

Second, it clarifies that the Cook Islands does not treat the transfer as converting community property into some other form of ownership. The assets remain community property for purposes of the law of the state where they originated, which means each spouse’s rights are preserved. This matters if the marriage later ends in divorce: the assets retain their community character and are subject to division under the applicable state’s community property rules.

Section 13J can also work in reverse. If a settlor holds separate property and wants to ensure it remains separate after transfer to a Cook Islands trust, the trust deed can include language preserving the separate property classification. This is particularly relevant for settlors in community property states who want to fund a trust with assets acquired before marriage or received by inheritance.

The Relationship Property Trust

The Cook Islands enacted the International Relationship Property Trust Act (IRPT Act) to address a problem that standard asset protection trusts do not solve: the risk that a divorce court will order trust assets divided between the spouses.

A standard Cook Islands asset protection trust protects against third-party creditors. It does not necessarily protect against a spouse’s claim in divorce proceedings. As Riechers demonstrates, a U.S. court may not be able to reach the trust corpus directly, but it can order the settlor spouse to pay the other spouse a share of the trust’s value. If the trust was funded with marital assets, the court has strong grounds to do so.

The IRPT is a separate trust vehicle designed specifically for married or cohabiting couples. It operates under its own statute rather than the International Trusts Act, although it shares many of the ITA’s protective provisions. The key distinctions are as follows.

Both partners must be settlors of the IRPT, and the trust instrument must contain a “relationship agreement” in which both partners affirm, modify, or waive their respective rights to the relationship property settled in the trust. Both partners must have independent legal representation before entering into the relationship agreement, and both must provide full disclosure of their assets and income. These requirements are designed to ensure the arrangement is genuinely consensual and informed.

Once the relationship property is settled in an IRPT, the trust instrument governs what happens to that property if the couple separates. The IRPT Act provides that the trust assets cannot be divided and distributed between the parties upon separation or divorce except to the extent specifically provided for in the trust deed. This directly negates the “clean break” principle that many family courts apply, which ordinarily directs courts to divide trust assets between separating parties. After separation, the trust deed can only be amended by the Cook Islands High Court, not by a foreign family court.

Foreign judgments that contradict the purpose of the IRPT Act or order the sale or division of relationship property against the trust’s terms are unenforceable in the Cook Islands. This is the same non-recognition framework that applies to standard Cook Islands trusts under the ITA, extended specifically to divorce and separation proceedings.

The IRPT can also be dual-registered as an international trust under the ITA, which layers the standard creditor protection provisions on top of the relationship property protections. Dual registration is important because the IRPT Act on its own does not replicate the ITA’s fraudulent transfer provisions or its two-year statute of limitations. Couples who want both creditor protection and relationship property protection need dual registration to get both.

Practical Considerations

Several practical issues arise when establishing a Cook Islands trust during marriage.

Timing matters. A trust established years before any marital difficulty arises is far less vulnerable than one established when the marriage is already under strain. If a court concludes the trust was created in anticipation of divorce to deprive the other spouse of marital assets, the consequences are severe regardless of where the trust is located.

Disclosure is essential. Both spouses should be aware of the trust’s existence and terms. Attempting to conceal a Cook Islands trust from a spouse is both practically difficult (given U.S. tax reporting requirements that generate a paper trail) and legally counterproductive. Courts treat concealment as evidence of bad intent.

U.S. tax reporting applies regardless of marital status. The trust will be treated as a foreign grantor trust for U.S. tax purposes, requiring Forms 3520 and 3520-A, FBAR filings if foreign account balances exceed $10,000, and Form 8938 reporting under FATCA. Married couples filing jointly will report the trust on their joint return. The IRS tax reporting article covers these obligations in detail.

The trustee’s KYC and AML due diligence extends to both spouses when both are involved in the trust structure. If both spouses are co-settlors, both must provide identification, proof of address, source of funds documentation, and tax residency certifications. The KYC and AML requirements article explains what the trustee collects and why.

Finally, the trust deed itself must be drafted with the marital situation in mind. The beneficiary designations, distribution provisions, and protective clauses should all reflect whether the trust is designed to protect both spouses jointly, one spouse individually, or the family unit including children. These are not default provisions. They require deliberate drafting decisions made with input from both U.S. counsel and the Cook Islands trustee.

For information about the trust deed and its key provisions, see the trust agreement article. For 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.