Cooks Island Trust: The Nuts and Bolts

July 10, 2022  |   By: Max Dilendorf, Esq.

I. INTRODUCTION

A Cook Islands Asset Protection Trust is one of the most secure asset protection solutions in the world today.

The primary advantages of a Cook Islands Trust include:

  • Protection for assets and investments, limiting the reach of creditors, banks, or any court orders originating from outside the Cook Islands
  • A two-year statute of limitations on all creditors that bring an action against the settlor or the trust
  • Assets are held in tax-neutral jurisdiction
  • The Cook Islands Asset Protection Trust Act provides several barriers to litigation
  • Assets located outside the Islands can still be protected by the Cook Islands Trust
  • Offers many types of trust arrangements and does not require public registration of trust deeds

Given such a flexible trust structure that creates several investment opportunities, this article explains what a Cook Islands Trust is, how it is structured, and the ways it keeps assets safe from attack.

II. BENEFITS OF USING A COOK ISLANDS TRUST STRUCTURE

Setting up an offshore trust in the Cook Islands is useful because the assets are afforded more layers of protection from litigation and creditor attack.

The offshore trust can be used to protect the following:

  • Stock market portfolios
  • Investment portfolios
  • Intellectual property
  • Company stocks or shares
  • Digital assets (cryptocurrencies)
  • Real estate
  • Various other tangible and liquid assets.

Notably, it is not required for an asset to be located on the Cook Islands for it to be protected. However, because of jurisdiction requirements, real estate assets in the U.S. may not be fully protected.

a. Incredible Layers of Protection:

The Cook Islands’ legal system favors individuals defending themselves in legal proceedings and it is widely considered to provide some of the most incredible layers of protection in the world.

If creditors seek to claim a settlor’s assets contained within a Cook Islands trust, those creditors will have to file a lawsuit in the Cook Islands before the SOL expires, prove beyond a reasonable doubt the assets were placed in the Cook Islands Trust with the intent to defraud, and pay legal and court fees upfront.

Given these challenging factors, creditors are often deterred from fighting what will likely be a losing battle because they will be required to pursue an action against the trustee in the Cook Islands, hire a foreign attorney, etc., and potentially lose the claim in addition to their trust assets.

1. Statute of Limitations:

The statute of limitations (SOL) is what the law prescribes regarding how long a person has to bring legal action regarding a specific case. If the SOL for a case expires, the plaintiff is generally barred from bringing their lawsuit.

When someone transfers their assets to a Cook Islands Trust, there is a one-year statute of limitations for the creditor to bring an action against them or the trust.

An exception to this rule is provided when the settlement or disposition takes place more than two years after the date the cause of action accrued (DCAA).[1]

For instance, if a creditor claims a fraudulent conveyance (transferring assets with the deliberate intention of putting the assets beyond a creditor’s reach), they would then be required to commence action within two years from the date of settlement.

2. Burden of Proof Standard:

If action is commenced within the statutory time period, then the creditor would need to provide proof beyond a reasonable doubt (more than 90%) that the settlor had the principal intent to defraud the creditor bringing the action, and the settlement rendered the creditor insolvent.

While the Cook Islands requires plaintiffs to provide proof beyond a reasonable doubt in order to prevail on their civil claims, the standard of proof for civil cases in the U.S. is for plaintiffs to provide a preponderance of the evidence, which is a much lower burden to meet.

3. Payment of Legal Expenses

Another barrier for creditors or others filing claims against a Cook Islands trust is the requirement of prepaid legal fees. Further, if someone has received a judgement, and they want to enforce it on the Cook Islands, they must prepay all legal expenses.

For instance, when a creditor obtains a court order authorizing the seizure of trust assets before the SOL expires, there are still several barriers in the Cook Islands legal and financial system that could frustrate these attempts.

The first barrier is having to litigate in the Cook Islands. While the U.S. legal system makes it easy to file a lawsuit, and contingency fees mean plaintiffs can often sue others without paying a dime, the legal system in the Cook Islands is not so considerate towards plaintiffs.

Bringing a lawsuit in the Cook Islands is an expensive and lengthy process. Another barrier is the fact that the legal burden will lie on the person bringing the lawsuit to prove beyond a reasonable doubt that assets were placed in the Cook Islands Trust with the objective to defraud.

In most cases, meeting such standard of proof is quite challenging, considering that there are multiple legitimate reasons to set up an offshore trust.

4. Protection from Litigation

The development of the Cook Islands offshore trust industry is designed to discourage unscrupulous claims and prevent attacks on a settlor’s valuable assets.

Accordingly, the laws surrounding the offshore asset protection trust statutes on the Cook Islands are among the most formidable asset protection laws in the world.

In order to be protected by these statutes, the assets must first be placed in a Cook Islands Asset Protection Trust.

According to a 2015 New York Times article, Cook Islands, a Paradise of Untouchable Assets, these islands are “a paradise where you can be lawsuit-proof.”

The New York Times and many other media reports cite examples of how U.S. courts have been unsuccessful in their attempts to attack Cook Islands trusts:

  • In 2009, Nadya Suleman (also known as “Octomom”) filed a lawsuit against the fertility doctor who implanted embryos in her, resulting in eight child births. However, Dr. Kamraya held assets in a Cook Islands trust, making them extremely difficult to recover.
  • In 2007, the Federal Trade Commission (FTC), filed suit against Kevin Trudeau, author of The Weight Loss Cure, for “airing blatantly deceptive infomercials” and received judgement of $37.5 million. Despite the money recovered, the FTC collected nothing from Mr. Trudeau’s Cook Islands trust.
  • In a years-long lawsuit, government-sponsored lender, Fannie Mae filed an action against Oklahoma real estate investor Andrew Grossman after defaulting on his loans. In waiting to collect on a $10 million judgement, Fannie Mae has been able to collect $12,000; however, remains unsuccessful in recovering anything held in Grossman’s Cook Islands trust.

These examples demonstrate that even lawsuits or judgments originating from powerful supercreditor countries such as the United States will not be able to reach assets placed in Cook Islands trusts. [2]

III. STEP BY STEP PROCESS OF SETTING UP THE TRUST

Establishing a Cook Islands International Trust is regarded as a top-tier addition to any estate planning, asset protection, or wealth management structure.

There are four parties needed for the structure of the trust: (1) settlor, (2) trustee, (3) trust protector and (4) beneficiary.

  • Settlor:Person who creates a trust and places assets under it.
  • Trustees:There can be more than one trustee. The trustee(s) is the holder(s) the assets’ legal title and administers the trust. Also, all trustees are legally bound to protect a settlor’s assets on behalf of the trust’s beneficiaries.
  • Trust Protector (optional):Person responsible for appointing trustees and overseeing their activities. The settlor appoints the protector to supervise the trust and to ensure that the trustee is acting in the settlor’s best interest. The protector may be an attorney, family member, or some other trustworthy person.
  • Beneficiary: Anyone who benefits from the trust. For most Cook Islands Trusts, the beneficiary and the settlor are the same person. But the settlor may add others to the trust (e.g., family members).

a. Using the Cook Islands Trust Structure for Asset Protection

a. Formation of an LLC

Frequently, trusts are formed in the Cook Islands in conjunction with a limited liability company (LLC). To do so, the settlor must open a bank account in the name of the LLC company.

Then, the trust would take 100% ownership of the LLC and the settlor of the trust would be named the manager of the duly formed company.

As manager, the settlor is able to control all of the assets held within the LLC’s accounts.

  • The Settlor establishes a Cook Islands International Trust
  • A Cook Islands licensed trustee company provides the Trustee
  • The Settlor and his family members can be appointed as discretionary beneficiaries of the Trust
  • A Protector can be appointed to monitor the activities of the Trustee, and can be granted absolute or veto powers or a combination of both
  • The Settlor can provide a letter to the Trustee detailing his/her wishes in regard to the investment and distribution of assets both during and after his/her lifetime
  • The Trust owns 100% of a limited liability company (“LLC”) incorporated in the Cook Islands, or other jurisdiction appropriate to the client’s circumstances
  • The Settlor, or his representative, is the Manager of the LLC.
  • Assets are held and managed within the LLC or entities underlying it

The structure is extremely advantageous for a host of reasons including:

  • The Settlor’s management and operation of the assets held within the trust structure (e.g., family businesses) without Trustee interference.
  • The Settlor’s control over personal and business assets (e.g., decision making as to the passing down of personal and business assets)
  • Ultimate protection against fraudulent conveyance claims
  • High level of privacy and confidentiality of ownership and the assets held within the trust

IV. SMART TRUSTS FOR CRYPTO

Cook Islands Ministry of Finance and Economic Management (MFEM) recently modernized the trust industry by launching ‘Smart Trust platform’ built on a blockchain.  This moved the traditional legal framework and processes onto a blockchain-based digital platform.

This program enables creation of Crypto Smart Asset Protection Trusts, which allows clients to manage their crypto assets and NFTs in a safe and trusted environment. 

Crypto Smart Asset Protection Trusts built on the blockchain:

  • ensures privacy;
  • allows management and trading of cryptocurrencies inside placed inside of a trust;
  • ensures transparency between desired individuals (e.g., trust beneficiaries) but not available to the world at large;
  • allows transfer of digital asset ownership to the trust from any third party;
  • allows transfer of asset’s ownership out of the trust.

The use of Crypto Smart Asset Protection Trusts allows asset protection planners and clients access protection without the inherent problems and risks of traditional trusts.  Smart Trusts efficiently combined the benefits of the traditional trust with blockchain technology, transcending limitations that existed in the ownership, management and administration of both cryptocurrency and physical assets.

V. TAX CONSIDERATIONS

A Cook Islands Trust is not considered a tax-free structure intended to conceal assets from the IRS or evade one’s tax responsibilities. Rather, the trust is formed under a tax-neutral structure and is beneficial for placing valuable assets in a highly protected jurisdiction.

Further, any assets held in a Cook Islands trust will not be liable for gift tax, estate tax, income tax, capital gains tax, or any other local taxes imposed by the Cook Islands.

However, it is important to understand that moving the trust to the Cook Islands does not absolve the settlor of their obligation to pay all relevant United States taxes.

Completed vs. Incomplete Gift Transfers

In deciding whether a settlor’s contribution to the trust is a completed gift (subject to federal gift tax), or an incomplete gift, the government looks for whether the settlor has retained any control or power over the trust.

The Treasury Regulations provide a transfer is a completed gift only to the extent that the settlor “has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or for the benefit of another” and is incomplete to the extent that the settlor reserves the power to re-vest the property in himself.[3]

However, the incorporation of a Cook Islands trust can be structured in such a way that allows for the settlor to retain a threshold of control over the disposition of assets while still qualifying transfers as incomplete gifts not subject to federal gift tax.[4]

Gift and Estate Tax

A settlor of a self-settled discretionary OAPT can, without sacrificing any of their objectives under the trust, dictate whether a transfer faces gift tax or estate tax treatment.

For example, if the settlor favors gift tax treatment over estate tax inclusion, the trust agreement will include specific language indicating the settlor’s preference.

If the OAPT settlor prefers to avoid present gift taxes and to pay estate taxes later, they could do so by reserving certain powers over the assets, such as a testamentary power to appoint the assets among a class of beneficiaries.

Such retained controls avoid a present gift tax on the transfer to the trust while still shielding the assets from the settlor’s creditors.

V. FORMATION REQUIREMENTS

The formation of a Cook Islands Trust has multiple moving parts, contractual agreements and parties involved.

Documents needed to establish a Cook Islands Trust include:[5]

Trust Deed – The Trust Deed is the ‘rulebook’ for the Trust and sets out the powers, duties, and responsibilities of the Settlor, Trustee, Protector, Beneficiaries, and any other relevant parties.

Deed of Indemnity – On occasion, establishing an offshore trust is done to prevent significant loss when claims are made against the Settlor. Therefore, it is important that both the Trustee and Settlor understand the risk of litigation and that the Settlor indemnifies the Trustee against any losses, which may result from its acceptance of the trusteeship.

Letter of Wishes (optional) – A Letter of Wishes explains the desires of the Settlor to the Trustee. A Letter of Wishes is not binding but will be regarded by the Trustee as being indicative of the Settlor’s wishes and will generally be highly informative of Trustee decisions.

Due Diligence – Due diligence is undertaken by a Cook Islands Trustee to ensure that regulatory obligations are met and that clients can be onboarded with a clean bill of health.

Client due diligence will include:

  • a confidential client questionnaire,
  • notarized or certified proofs of identity or address,
  • a sworn affidavit of solvency, and
  • supporting documentation relating to the source and ownership of any funds due to be transferred to the trust.

References

[1] The cause of action is the origin of why a person is bringing legal action against the settlor and the trust assets.

[2] Leslie Wayne, Cook Islands, a Paradise of Untouchable Assets, NYT Int’l Bus., (2013), https://www.nytimes.com/2013/12/15/business/international/paradise-of-untouchable-assets.html.

[3] TREAS. REG. § 25.2511-2(b)-(c). Cf. In a case involving an Alaska trust, the IRS recognized that transfers to the trust were completed gifts, even though the settlor was a discretionary beneficiary, because he could not re-vest beneficial title or change the beneficiaries. P.L.R. 200944002.

[4] Treas. Reg. section 25.2511-2(b) (as amended in 1983) provides:

As to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave him no power to change its disposition, whether for his own benefit or the benefit of another, the gift is complete. But if upon a transfer . . . the donor reserves any power over its disposition, the gift may be wholly incomplete…

Id.

[5] Connor Steens, A Beginner’s Guide to Setting Up a Cook Islands Trust, https://southpacgroup.com/setting-up-a-cook-islands-trust/

Resources:

 

This article is provided for your convenience and does not constitute legal advice. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome.

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