An Introduction To Cook Islands Trusts
The Cook Islands comprises a group of 15 islands located between Tahiti in the east and Samoa and Tonga in the west. Named after captain James Cook, the English explorer, the country consists of 15 islands spread over 1 million square miles of ocean. The main island of Rarotonga is 3,000 kilometers north-east of Auckland, New Zealand, and the township of Avarua on that island is the administrative and commercial centre of the Cook Islands.
Originally a colony of Britain, then New Zealand, the Cook Islands achieved limited self-government in 1957, and became “self-governing in free association” with New Zealand in 1965.
The Cook Islands is an English Common Law jurisdiction. It is well regulated and has a reputed and effective court system.
Cook Islands International Trusts
The Cook Islands is now a world leader in the creation of trust legislation specifically designed to afford robust protection from creditor claims. Some important features of international trust law in the Cook Islands are:
- A trust, which is registered under the Cook Islands International Trusts Act 1984 (as amended) is entitled to the benefits and protection provided by that Act.
- The Act provides a registration system whereby a registered trust is sheltered from both the general common law and Cook Islands statue law insofar as those laws are inconsistent with the Act.
- Application for registration is made by a licensed Trustee Company. The application must certify that no resident of the Cook Islands is a beneficiary, advise the date of the trust deed, the name of the trustee and the name of the trust. There is no requirement to file the trust deed with the Registrar.
- Any information pertaining to an international trust, including the deed of trust and the identity of parties connected with the trust is confidential and subject to the secrecy provisions of the Act.
- The Act creates a flexible tax neutral environment in which the familiar English trust concept can be used for both tax planning and asset protection purposes.
- The trustee(s), beneficiaries and settlors of an international trust are exempt from any form of taxation and duty in the Cook Islands.
- The legislation resolves some of the difficult aspects of the common law relating to trusts. The modern rule against perpetuities has been abolished although if desired a specific perpetuity period can still be selected by the settlor at the time the trust is established. Other common law rules such as the rule against accumulations and double possibilities do not apply.
- The Act, as a consequence of amendments in 1989 and 1991, contains innovative statutory provisions for the protection of assets held under international trusts.
- The legislation overcomes specific common law problems to provide protection for settlors and beneficiaries from unwarranted claims against trust assets.
- More recent amendments in 1996 and 1999 have expanded the definition and role of the protector, expanded the scope of the Purpose Trust and adopted with slight modification Section 50 of the New Zealand Trustee Act 1956 in respect of Custodian Trustees.
Some important asset protection features of the International Trusts Act are:
- An international trust will not be void or voidable as a consequence of the settlor’s bankruptcy, notwithstanding any law to the contrary in the settlor’s domestic jurisdiction.
- If a creditor establishes that an international trust was settled with the principal intent of defrauding a creditor and such settlement rendered the settlor insolvent or without property by which the creditor’s claim could be satisfied, the settlement shall not be void or voidable but the trust shall be liable to satisfy that creditor’s claim from trust property which was the subject of such settlement.
- Foreign judgments cannot be enforced against an international trust in the Cook Islands.
- A transfer of property to an international trust is deemed not be a fraudulent transfer if:
- The transfer of property takes place more than two years after the date upon which the creditor’s cause of action arose; or
- Where the transfer does takes place within two years from the date of the cause of action accruing to that creditor, the creditor fails to bring that action against the settlor of the trust within one year from the date of such transfer.
- The settlor may retain certain powers and benefits without invalidating the trust. The interest of a “spendthrift” beneficiary in an international trust may not be alienated by a creditor.*
- The avoidance of forced heirship rights does not render an international trust void or voidable.*
- A trustee may delegate its functions, discretions and powers (other than dispositive powers) beyond the general common law rule on delegation.*
- Co-trustees may make valid decisions as a majority rather than unanimously. Title to trust property may be held by a single co-trustee.*
- The settlor, beneficiaries and the international trust are not subject to any form of taxation in the Cook Islands.*
(* It is important to note that whilst the legislation allows such flexibility, these provisions do not apply unless specifically adopted in the trust document.)
It is apparent that the Cook Islands constitutes an ideal legal environment for asset protection trusts whilst preserving commercial responsibilities to the creditors.
In summary, there are four main features of Cook Islands law that provide effective barriers to creditors attacking an International Trust:
- Practical Barriers – including instructing local counsel and appearing in local Courts;
- No Enforcement of Foreign Judgments – Cook Islands courts will not recognise or give effect to judgments of foreign courts in relation to International Trusts;
- Barriers to claims for fraudulent transfer – including strict time limits on bringing an action; no action can be brought for ‘future fraud’ i.e.: if the transfer of assets to the trust occurs before a creditor’s cause of action arises; requirement of proof of fraud beyond a reasonable doubt (criminal standard).
- Procedural law – prevents ‘fishing expeditions’ by creditors, puts onus of proof on the creditor, and requires that all facts and circumstances be established at the outset of the case.
In addition to the protective aspects, there are numerous provisions that enable a Cook Islands trust to be administered without requiring the settlor to give up all control over the trust assets. Other areas that might benefit a client include repeal of perpetuities law (allowing dynasty trusts) and the negation of the principle in Saunders v Vautier.
(Note: The common law rule in Saunders v Vautier is that where all beneficiaries under a trust are of full age and capacity, then notwithstanding the trust providing for the assets to be retained in trust, or that income is to be accumulated, the beneficiaries can apply to a court to terminate the trust and require the distribution of the trust income and assets to them. In special circumstances this may also apply to the objects of a discretionary trust. Section 10 of the Cook Islands International Trusts Act 1984 (ITA) negates this rule where the trust contains an express provision to accumulate income, or to refrain from making any distribution of capital or income until a specified date or event. If the grantor does want to restrict payment of income or capital to final beneficiaries beyond their common age of majority, the trust must contain an express provision to this effect in the trust instrument.
In conclusion …..
The Cook Islands International Trust is a robust structure for clients seeking an international investment vehicle offering a substantial level of wealth preservation.
(This article is compiled by Mr. Chaitanya G. Kirtikar, Manager, Offshore and Free Zone Services)