Strong, long-lasting asset protection is oftentimes a matter of where exactly your trust instrument is located.
For many high-net-worth individuals, such as entrepreneurs, investors, doctors, actors, and more, a Cook Islands trust is the perfect solution when it comes to protecting real estate, finances, property, and other assets that might be seized by creditors and aggressive litigators.
However, knowing how a Cook Islands trust works is just as important as setting up a new trust in this jurisdiction. Let’s take a closer look.
Why Are the Cook Islands Known for Trusts and Asset Protection?
For several decades, the Cook Islands have been practically synonymous with offshore trusts and financial protection. Sometimes, that association has even taken on a quasi-criminal element.
Rest assured, setting up a Cook Islands trust is not illegal. An offshore trust is just a trust set up in a jurisdiction other than your own; if you’re a US citizen who sets up a German trust, for instance, that’s also an offshore trust instrument.
The Cook Islands themselves are so well known for asset protection because this small island nation developed a statutory framework specifically designed to protect investments and trust assets from creditors. This approach initially began in 1984, and in the years after, other jurisdictions like the Bahamas, Belize, and Nevis followed suit.
Since its inception, the Cook Islands trust has been successful for many high-net-worth individuals. This fact has also reinforced the trust's protectiveness, establishing decades of precedent that modern litigators and courts must wade through in order to attack properly protected assets stored in his jurisdiction.
In addition, a huge percentage of the Cook Islands' economy is based on legal services like providing asset protection and trust formation. The Cook Islands government has a huge incentive to ensure that the statutory framework remains in place and guarantees that legal services providers succeed as often as possible.
This itself is an inherent benefit, as it means the Cook Islands government-connected financial infrastructure is more “durable” than the infrastructure of other governments to some extent. Bottom line: the Cook Islands have been known for trusts and asset protection for several years, and that reputation is well-earned.
How Does a Cook Islands Trust Work?
A Cook Islands trust works the same way that any other trust instrument works:
- The person setting up the trust, known as the grantor or settlor, establishes a trustee to oversee the trust. The trustee is a person or corporation who is located in the Cook Islands. The trustee’s responsibility is to hold and manage trust assets according to the terms of the trust as drawn up in the initial deed
- The trustee has a legal obligation to act in the best interests of named beneficiaries
- The beneficiaries are those who benefit from the trust, and these are determined by the grantor. In many cases for a Cook Islands trust, the settler is the only or primary beneficiary, although this is not always the case, and you can set up more beneficiaries like your children or grandchildren.
Once the trust is properly set up, the assets within are legally no longer controlled by the original trust grantor. Therefore, if a creditor, court, or other legal attacker comes after the assets within the trust, the grantor can legally say, “I can’t access those assets, so I can’t give them to you.”
Thus, if you are ordered to use your assets to pay down the debt, bill, lawsuit payment, or something else, you don’t have to use the assets in the asset protection trust.
Trust Taxation in the Cook Islands
Trust taxation is a major part of asset protection planning, and it’s one of the things we specialize in at Dominion. Because the Cook Islands are so focused on legal services like asset protection, trust taxation in the Cook Islands is a little different and unique.
For example, the Cook Islands don't impose taxes on offshore trusts. So long as neither the settlor nor the beneficiaries are residents of the Cook Islands, offshore trusts are also exempt from certain taxes, including:
- Income tax
- Capital gains tax
- Estate duty tax
This doesn’t mean offshore trusts in the Cook Islands don’t have any tax obligations whatsoever, of course. Because of this, any tax obligations that arise in your jurisdiction or the jurisdiction of your beneficiaries can impact whether a Cook Islands trust is right for your asset protection plan.
For example, many grantors in different jurisdictions are subject to taxes on trust income regardless of whether or not they control the assets in the APT. This is most common with trust grantors who live in countries that have a worldwide tax system, like the US. As a US resident, you are taxed on your global income, including any income that's generated by offshore trusts.
Beneficiaries can also be taxed on distributions they receive from a Cook Islands trust. In the worst-case scenarios, this may lead to double taxation if the grantor has already been taxed on trust income.
All that said, the tax benefits that are possible with a Cook Islands trust can also make them excellent choices for your asset protection plan. Developing a plan and managing it with the assistance of experts at Dominion is a wise idea, as you’ll be able to both determine whether the Cook Islands are right for you and, if so, set up the right trust instrument for your needs.
Advantages of Cook Islands Trusts
The Cook Islands are popular places to set up offshore asset protection trusts for a variety of reasons. Let’s break down some of those reasons one by one.
Firstly, any monetary or asset transfers into a Cook Islands trust that are made more than two years after a creditor’s cause of action (i.e., the reason a creditor comes after your assets, like you not making a debt payment or defaulting on a loan) are totally protected by the trust.
Put in simpler terms, if you make an asset transfer into your Cook Islands trust even two years after the original cause of a creditor coming after your money, those assets will be defended. You can continually put assets into your asset protection trust in the Cook Islands during legal proceedings, which offers invaluable flexibility in many circumstances.
One-Year Statute of Limitations
Furthermore, there's a one-year statute of limitations for all creditor lawsuits. A creditor has to file a lawsuit within one year from the original cause of their action if they want to go after assets that are transferred into the trust within two years of the date of the original cause of their action.
Again, put more simply, if you transfer assets into your Cook Islands trust within two years of a creditor’s cause of action, the creditor has one year to file a lawsuit against you. That severely limits the ability of creditors to go after the assets you protect in the Cook Islands, even if they wish to do so, given the legal precedent the Islands are known for.
No Fraudulent Transfer Claims Into the US
Fraudulent transfers, also called fraudulent conveyance, are any monetary transfers that are made with the intent to defraud a creditor, lender, or lawsuit plaintiff.
For example, if a creditor comes after you for a loan payment, and you give $10,000 to your brother the day before you get your bill, the creditor can accuse you of a fraudulent transfer. It won’t be very difficult to prove that you made the monetary transfer just to avoid having to pay the bill.
With a Cook Islands trust, however, fraudulent transfer claims can’t be brought in the US. Instead, the creditor has to bring the fraudulent transfer action into the Cook Islands legal system. Compared to the US legal system, this is very expensive, time-consuming, and overall burdensome for a US creditor.
Again, this just adds another barrier to legal claims against your person or company. It's a phenomenally effective deterrent, especially if you follow Dominion's strategy of saving money and assets well ahead of time (so you can't reasonably be accused of a fraudulent transfer in the first place).
High Burden of Proof for Fraudulent Transfers
Even if a creditor does bring a fraudulent transfer claim against you, they have a very high burden of proof if they want to see a successful resolution. In the Cook Islands, the creditor has to prove that the transfer was made with the explicit intent to defraud them and that the transfer left the debtor (you, in this hypothetical) insolvent well beyond a reasonable doubt.
Proving one of those is difficult enough. Proving both is often possible, particularly with the right asset protection strategy.
Insurance and Bonds
The companies that provide trustee services and asset protection trust setup are heavily insured and bonded. Because of this, even if the company overseeing your asset protection trust goes bankrupt or suffers some other financial problem, there's a good likelihood your assets will be protected due to insurance policies.
Naturally, when you work with experts like Dominion, we will do our due diligence and make sure the trustee for your APT is set to stay solvent and protective for as long as possible. You shouldn’t need to worry about this, but every little bit of extra protection is another point in the Cook Islands’ favor.
Lots of Case Precedent
Lastly, and as we broke down earlier, there are several decades of Case precedent regarding asset protection trusts, asset claims, etc. If you set up an asset protection trust in the Cook Islands, any creditors or courts that come after you will have to cut through all that case precedent and prove that they have a legal right to your money.
That’s very difficult to do, and we can make it even harder for them with the right plan, knowledge, and setup.
Disadvantages of Cook Islands Trusts
While Cook Islands trusts do have serious advantages and benefits, they also have some potential disadvantages to keep in mind.
First and foremost, when you establish and maintain a trust in the Cook Islands, keep in mind that it's oftentimes much more costly compared to trusts set up in other jurisdictions. Of course, this depends on how your trust is set up and the actual nature of your trustee and their management fees, but offshore trusts in general are heavily regulated and managed in the Cook Islands.
Highly skilled individuals are always necessary to navigate this legal and financial infrastructure. This results in generally higher costs for things like administration, legal advice, trustee services, etc.
Furthermore, with a Cook Islands trust structure, you may have significant difficulty managing and accessing your trust assets. This is intentional to some extent, as you don't want a court to believe it can use you to get to your assets. But the Cook Islands legal framework can still complicate matters when it comes to beneficiaries and long-term asset management.
Lastly, the global financial industry has seen an evolving push for more financial regulation and greater transparency. Depending on how things shake out in the next decade, the overall asset protection available via Cook Islands trusts may not be as durable or resilient.
This is true with every offshore jurisdiction, of course, but it’s especially important to consider here, as the Cook Islands are one of the default or “go-to” options for offshore asset protection, and the courts know it.
Setting Up Your Cook Islands Trust Property is Vital
Like with any offshore jurisdiction, how your trust is set up is just as, if not more, important as where your trust is set up.
If you don’t set up your asset protection trust properly, all of the protections inherent in the Cook Islands jurisdiction won’t matter at all. A judge will look at your paperwork, demand you turn over your assets, and get to your money no matter what you do.
Indeed, just following the letter of the Cook Islands law doesn’t mean you are adhering to the complex trust precedent that has been established both in the Cook Islands and in your home jurisdiction.
Your Home Jurisdiction’s Trust Precedent Matters, Too
How does your home jurisdiction’s trust precedent matter? It determines how parties or attackers, like courts or creditors, can get access to your offshore trust assets. If there’s precedent for a court in the US, for example, to access an offshore trust of your type and in the Cook Islands, don’t expect the Cook Islands to magically keep your assets safe.
This is just one example of how you can’t simply open up a trust in the Cook Islands and call it a day. You need to work with knowledgeable legal experts and trust advisors who can help you set up a truly bulletproof, Dominion-style trust that can’t be broken under any circumstances.
How to Set up a Cook Islands Trust
Setting up a trust in the Cook Islands isn’t drastically different from the process of setting up a trust elsewhere. Without getting into too much detail, you’ll need to:
- Choose the right trustee company, which is the third party that will manage your assets. The trustee company has to be licensed to work in the Cook Islands, of course
- Complete a background check, which your attorney will assist with
- Prepare the trust agreement and documentation, also with the help of your attorney. You’ll also name any beneficiaries, including potentially yourself
- Decide on the trust management strategy
- Transfer the assets to your Cook Island trust. Securities, business interests, cash, and more are just a few of the things you can store in a Cook Islands trust
You’ll also likely set up an offshore bank account, either in the Cook Islands or elsewhere. Just like with setting up a trust, where you set up your offshore bank account can heavily impact its overall defensive capabilities and legal resilience.
Don’t assume that this will take only a few weeks, either. Setting up a Cook Islands trust can take several months if it’s done properly, especially if you want to make sure that there aren’t any loopholes litigators and courts can exploit. Given this fact, let us once more reiterate the importance of getting started quickly.
You do not want to try to scramble to set up a Cook Islands trust if you are already facing legal difficulties or challenges. You should have a Cook Islands trust ready to go to protect your assets before someone comes after them.
Get in Touch with Dominion Today
Overall, a Cook Islands trust could be an effective vehicle for you to store cash, property, real estate, and any other assets you want to protect, especially for decades to come. But you’ll only know whether setting up a Cook Islands trust is a wise idea if you get in touch with Dominion ASAP.
Our trust setup infrastructure is the best in the business, and we are well-equipped and ready to help you determine what exactly you need for your asset protection strategy. Contact us today and we'll get started.