Is A Cook Island Trust Safe? A Guide to Possible Problems
- Last updated on . Written by Offshore Protection.
In the world of offshore asset protection, the Cook Islands Trust is widely recognised as the gold standard. It was one of the first genuine offshore asset protection vehicles widely available to wealthy individuals from all parts of the globe.
To this day, it remains a highly effective tool to protect one’s wealth, maximise financial privacy and safety, and optimise estate planning and taxes.
In this article, we will focus on specific aspects related to the Cook Islands trust, such as whether it is legal and safe, what problems there may be if any, why people form Cook Islands trusts, and the important roles of different parties like the trustee and trust attorney.
Table of Contents:
- Are Cook Islands Asset Protection Trusts Legal?
- Are Cook Islands Asset Protection Trusts Safe?
- Are There Any Problems With Cook Islands Asset Protection Trusts?
- Why Do People Have Them?
- Cook Islands Asset Protection Trust In A Divorce
- Common Questions About Cook Islands
- Do You Need A Cook Island Trust Attorney?
- Do You Need A Cook Islands Trust Trustee?
- What Is Cook Islands Trust Company?
- Cook Islands Trust Reviews?
- Is A Trust For You?
Are Cook Islands Asset Protection Trusts Legal?
Cook Islands Trusts are completely legal financial vehicles for asset protection. Trusts formed in the Cook Islands comply with international laws and standards for transparency and anti-money laundering, and there is nothing which makes their use illegal.
In fact, many legal professionals agree that a Cook Islands Trust is the strongest legal asset protection vehicle in the world today.
The media and public opinion often portray offshore trusts as just being a way for criminals to commit fraud, but this is certainly not the norm, especially when it comes to a reputable trust structure like in the Cook Islands.
Cook Islands has numerous regulations and governing bodies in force which apply to its asset protection trusts and ensure that they remain legal and compliant. These include:
- Anti-Money Laundering (AML) regulations,
- Combating Financial Terrorism (CFT) systems,
- The Financial Supervisory Commission (FSC),
- The Financial Transaction Reporting Act (FTRA),
- Cook Islands Financial Intelligence Unit (CIFIU).
Are these Safe?
Cook Islands’ government entities and its unique trust regulations work together to ensure that a Cook Islands trust is one of the safest financial vehicles available in the world. Thus, Cook Islands trusts have the major advantage of providing the utmost protection to your assets in a way that is completely legal and compliant.
In general, asset protection trusts are extremely safe and effective financial vehicles by nature. This is because they remove legal ownership of the assets from the grantor and transfer them to a separate legal entity (the trust).
At the same time, the grantor is allowed to simultaneously name themselves the sole beneficiary, meaning they retain the benefits of the assets, and for all practical purposes remain in control of the assets they have transferred to the trust.
In addition, they are irrevocable, which means that the terms cannot be changed, and the assets cannot be simply withdrawn by the grantor if the court orders them to do so. This is in stark contrast to revocable trusts whereby the grantor legally retains ownership of the assets.
In addition to this, there are a number of specific characteristics of a Cook Islands trust which make it especially safe and effective, even when compared to other conventional asset protection trusts. These include:
1. Short statute of limitations of only two years
“Statute of limitations” is the maximum time period that a creditor has in which to make a legal claim on assets, from the day of the “cause of action”. This means that when the statute of limitations has passed, the plaintiff is generally not allowed to open a lawsuit anymore.
The statute of limitations in the Cook Islands is a mere two years. This means that if more than two years has passed since the event occurred that allows a person to make a claim on the assets, they can no longer do so.
If this time period has passed, they will also not be able to make a case of fraudulent conveyance, which is defined as deliberately transferring assets so as to put them beyond a creditor’s reach.
2. High level of protection from foreign court rulings
Even if a creditor does manage to bring a case against you within the short state of limitations period, they will have a tough time successfully claiming any of the assets held in the safety of the trust.
The Cook Islands’ judiciary system does not take kindly or even recognise foreign court rulings. This is especially the case when it comes to financial matters and claims, such as those related to trusts based in the Cook Islands.
As such, the plaintiff must open a new case in the Cook Islands itself, even if they have already initiated a case in another jurisdiction.
First off, this itself is an added barrier with additional expenses and complexities which deters most prospective plaintiffs. Secondly, trust law in the Cook Islands is extremely protective towards trusts on its shores, and it is rare and difficult to successfully claim assets held by such a trust. This is confirmed in the strong case law which has upheld the rights and protections of asset protection trusts.
A creditor needs to know about the assets you hold in order to make a claim against them.
If you keep your assets in a domestic asset protection trust, it will indeed provide some level of protection, but a quick search by any attorney will be able to identify these assets and link them to your name.
On the other hand, Cook Islands upholds the sanctity of financial privacy, especially for its trust holders. This will offer you a high level of confidentiality which will make it difficult for creditors to find your assets and thereafter make a claim against them.
Read more: Setting up a Cook Islands Trust
Are There Any Problems with Cook Islands Asset Protection Trusts?
It should be clear that Cook Islands trusts are extremely powerful financial vehicles for asset protection, and therefore there are not many problems associated with using them. We have put together a few potential issues to be aware of though:
- Cost: forming and then maintaining a Cook Islands trust is by no means cheap. There are various things which contribute to the high costs, such as: trustee expenses, bank account fees, brokerage fees, complying with IRS reporting requirements, annual maintenance fees. The total formation costs can easily end up being between $10,000, along with ongoing annual fees of $5,000. This really only makes Cook Islands trusts suitable for very high-net-worth individuals who intend to transfer large sums of capital or assets to the trust.
- Unwillingness to give up control of assets: the prospect of relinquishing control of their assets to a trustee is daunting for many settlors, and they feel reluctant to do so. This obviously creates a problem, because it means the trust cannot be properly set up and the assets will remain unprotected.
- This reluctance comes from a misunderstanding of the level of protection provided by the trust structure and not knowing how to find a reputable trustee. There are trustee companies which provide insurance cover to their clients in the case of negligence or loss arising due to their trustee services. Furthermore, a trustee is legally not able to benefit from the trust. They can only step in and act in the best interest of the trust if the assets are under threat due to a court case for example. They must behave in accordance with Cook Islands trust laws and your instructions as the grantor, and so can never run off with the assets in the trust.
- Failure to properly report assets to the IRS and complete federal disclosures: The US has stringent reporting and disclosure requirements that it applies to its taxpayers, which includes all US citizens and residents worldwide. If the grantor and/or beneficiary of a Cook Island’s trust is a US citizen or resident, they must report all assets held by the trust to the IRS for tax purposes. Failure to do so could result in federal tax compliance issues where there could be penalties or even criminal charges. Not even the highly protective Cook Islands trust is completely out of reach of the IRS, so do not make the mistake of thinking your assets held abroad are exempt from these compliance requirements.
Why Do People Have Them?
The primary reason for forming a Cook Islands trust is to protect your assets from lawsuits and other dangers. We already discussed the powerful protective mechanisms offered by Cook Islands trusts, which makes them highly suitable as asset protection vehicles.
In addition, there are other benefits and uses of Cook Islands trust, such as to optimise estate planning, legally reduce taxes, open new investment opportunities, and maintain financial privacy.
To summarise, some of the most popular uses of a Cook Islands trust include:
- Protecting assets from a divorce,
- General asset and investment protection (inc. bank accounts, equities, bonds, etc.),
- Protecting real estate and other tangible assets,
- As a way to protect assets after a lawsuit,
- Protecting assets before marriage (this is more effective than protecting assets after a divorce, as assets placed in the trust before marriage are extremely difficult for the spouse to claim),
- Estate planning,
- Protection of business sale proceeds,
- Tax optimisation,
- Access to new investment opportunities through the trust.
How does it work in a Divorce situation
A Cook Islands asset protection trust is one of the most powerful vehicles available to protect assets. As much as we like to believe otherwise, the harsh reality is that divorces are very common, and oftentimes end in bitterness. If you are a high-net-worth individual, such a situation places your assets directly at risk to claims made by a disgruntled spouse.
Cook Islands trusts place the assets far out of reach of local matrimonial court rulings, and make them extremely difficult for your ex-spouse to lay their hands on. In order to avoid a case of fraudulent conveyance, it is important to transfer the assets into the trust early in the marriage, long before there is any cause for divorce.
In addition, the Cook Islands has unique legislation regarding the treatment of assets held in a joint trust during divorce. This falls under the International Relationship Property Trust Act.
Under this act, married couples who have formed a Cook Islands trust together for the sake of their heirs or other beneficiaries, cannot simply liquidate these assets upon divorce and share the proceeds, as they would do in the US.
The act protects the assets in the trust and allows it to remain intact for its intended purpose. This has the following benefits:
- Reduces litigation pertaining to assets during the divorce process,
- Restricts the power of the court to divide and distribute trust assets during a divorce,
- Protects the interests of beneficiaries and future generations,
- Prevents reckless liquidation of assets which would erode their value and lead to a loss of capital,
- Provides special protection for assets of a family business.
So, whether you want to protect your personal assets from a greedy and bitter ex-spouse, or you want to put assets away together with your partner for future generations, you can rest assure that the assets will be protected for their intended purpose with a Cook Islands trust.
Read more: about the most effective use of a Nevis LLC + Cook Islands Trust
Do You Need a good Attorney?
It is essential to find a good asset protection attorney who is familiar with the structure of an offshore trust in the Cook Islands to help you set up the trust in the most effective way possible.
Trust law is complex, and there is a great deal of paperwork required and a subtle understanding of the law to ensure that everything is set up properly and your assets are adequately protected.
A Cook Islands Trust attorney can provide you with the necessary expertise to guide you through this process. There are reputable companies offering such services in the Cook Islands and abroad, but they do come at a hefty fee.
Do You Need a local Trustee?
One of the requirements of establishing a Cook Islands trust is to designate a trustee who is based in the Cook Islands. The best way to do this is to use the trustee services offered by a well-known Cook Islands Trust Company (see below). This will include full insurance against any losses to your assets caused by the negligence of the trustee.
The trustee will act for the sole benefit of the trust and its beneficiaries, and follow your instructions unless they need to step and protect the assets in the trust due to a court ruling against you as the settlor to hand over its assets.
This is the only time in which they can go against your instructions and refuse to hand over the assets held by the trust to the courts.
What is Cook Islands Trust Company?
A trust company is an entity that is able to serve as a trustee or agent of a trust as opposed to nominating an individual trustee.
Trust companies offer many additional benefits compared to an ordinary trustee, as their services extend well beyond just operating as the trustee. In addition, they can:
- Handle estate settlements and oversee the process of distributing the trust’s assets to beneficiaries,
- Perform orthodox financial wealth management services,
- Handle equity transfers and beneficial ownership registration,
- Perform other financial services offered by commercial banks and other financial service providers.
Case studies and personal experiences and reviews of Cook Islands trusts show that they have historically been highly successful at protecting people’s assets from lawsuits and other dangers.
There is a wealth of resources available online which speak of the high efficacy of Cook Islands trusts for asset protection purposes. The Cook Islands trust was the first real offshore asset protection vehicle available and is still widely considered the very best.
A Cook Islands Trust has never been broken into by the US government. Although trusts held in the US have been broken into by US courts. Federal Courts have so far not been able to litigate against a trust as it would have to do so in a Cook Islands court room.
The Cook Islands generally are not the location people search out for when tried to evade taxes.
Is a Trust For You?
Find out by getting a free consultation from a qualified consultant.