Cook Islands TRusts
The Cook Islands is a sovereign state located approximately 1800 miles northeast of New Zealand. In 1965 the country became self-governing in free association with New Zealand, with New Zealand retaining responsibility for external affairs and defense. In practice, however, the Cook Islands conducts its own external affairs, its foreign policy different from that of New Zealand in ways which reflect the particular needs and location of the country. The Cook Islands are free to establish complete independence at any time without the consent of New Zealand. The Cook Islands government has complete legislative and executive competence over all the nation’s affairs, including the exclusive power to amend the country’s constitution.
The Cook Islands is a common-law jurisdiction. Section 615 of the Cook Islands Act 1915 provides (inter alia) that the law of England as existing on 14 January 1840 shall be in force in the Cook Islands and on this basis the High Court of the Cook Islands – which is a Court with full legal and equitable jurisdiction – views English and Commonwealth case law as persuasive precedent. The Cook Islands thus recognizes the equitable concept of a trust, and the large body of applicable English and Commonwealth case law. That case law has been modified by the Trustee Act 1956 (which is loosely modeled on the United Kingdom Trustee Act 1925) and, in the case of asset protection trusts, by the Cook Act.
The Cook Act provides extensive creditor protection and transfer provisions; these are considered in detail below. Furthermore, an international trust established under the Cook Act is wholly exempt from all forms of Cook Islands taxation.
The Cook Act contains a number of provisions that substantially modify the pre-existing law which is of interest to estate planners but have nothing to do with asset protection. The relevant provisions are section 6 (establishment of a specific and liberal perpetuity period), section 7 (adoption of the wait and see doctrine), section 8 (abolition of the rule against double possibilities), section 9 (application of the rule against accumulations) and section 10 application of the rule in Saunders v. Vautier).
The Cook Act also contains a number of provisions that are relevant to this jurisdiction’s desirability as the situs for a trust specifically designed for enhanced asset protection. These are as follows:
- Anti Statute of Elizabeth provision: The Statute of Elizabeth made it possible to set aside a transfer that was intended to defeat future – but currently unknown – creditors. It is the precursor to all fraudulent conveyance acts. The Cook Act specifically overrides this by providing that the trust “shall not be fraudulent as against a creditor of a settlor if the settlement…took place before that creditor’s cause of action…had arisen.” Just to make sure, section 6 of the International Trust Amendment Act of 1991 provides: “Repeals – The enactment titled, 13 Elizabeth I Ch 5 (1571) shall have no application to any settlement upon or disposition to an international trust.”
- Cook fraudulent settlement law: If the establishment of an “international trust” is done with the “principal intent to defraud” a particular creditor and this renders the settlor insolvent, then that specific creditor by bringing suit on the Cook Islands can be recompensed out of the trust (provided there still is a trust and the assets have not been transferred out of the Cook Islands). Neither the transfer to the trust nor the trust itself is invalidated by the Cook Act. As a result, each creditor must bring his or her own action. The standard of proof which the aggrieved creditor must meet is “beyond a reasonable doubt.” There have been “several”…” a very small number” of actions brought under this portion of the Cook Act and no case has ever got to the merits, is settled or disposed of under the procedural grounds discussed herein. Section 13B(5) of the Cook Act provides a large number of traditional “badges of fraud” of the settlor which “solely by reason of which” “shall not” permit an inference of fraud. Such actions include settlement of the trust, naming the settlor as a beneficiary, retaining a power to amend or to revoke or to remove a trustee or to direct a trustee.
- Statute of limitations: Both the “international trust” and the actual transfer to the trust shall conclusively be presumed to not be fraudulent if (1) two years have passed since the creditor’s cause of action accrued (i.e. as that phrase is defined in section 13B(8) of the Cook Act) or (2) in the event that the “international trust” was established prior to the expiration of the 2-year statute of limitations mentioned in (1) above, then the creditor’s action was commenced in the Cook Islands more than one year after of the establishment of the trust or the transfer to the trust. This has the effect of imposing a one-year statute of limitations if a transfer is made to an “international trust.” The Cook Act is very specific as to the date on which the statute of limitations begins to run. In all cases, the statute of limitations begins to run on the date of the first act or omission that generated the claim. This is particularly harsh in the case of an action upon a judgment, as most actions from the United States would be. In that case, the statute begins running on “the date that the omission shall have first occurred, as the case may be, which gave rise to the judgment itself.” In almost every case, by the time the judge has obtained the statute of limitations in the Cook Islands will have run.
- Bankruptcy: The Cook Act provides that an “international trust,” even if “voluntary and without valuable consideration” or made “for the benefit of the settlor” shall be deemed “valid” and shall not be void or voidable by the settlor’s bankruptcy or insolvency. The Cook Islands does not have any laws relating to bankruptcy and bankruptcy will not invalidate a trust settled in the Cook Islands. In particular, the Cook Act provides “In determining the existence and validity of a trust registered under this Act the Court shall apply: (a) the provisions of this Act; and (b) any other law of the Cook Islands; and (c) and other law, which would be applied; if to do so, would validate the trust.”
Two sections of the Cook Act take this even further by specifically providing that Cook Island law shall govern matters relating to the validity of the trust and specifically excluding the application of foreign law if such law could somehow negatively impact either the existence of a Cook Island trust or its ability to hold property or otherwise transact business.
- Flight provisions: The Cook Act specifically contemplates a change of governing law and hence trust situs. The Cook Act validates a change if, “in the case of a change to the law of the Cook Islands, such change is recognized by the law of the trust previously in effect; [and] in the case of a change from the law of the Cook Islands, the new governing law would recognize the validity of the trust and the respective interests of the beneficiaries.”
- Enforcement of foreign judgments: “Notwithstanding…the provision of any…treaty…statute…[or a]ny rule of law, or equity…no proceeding for or in relation to the enforcement…of a judgment obtained in a jurisdiction other than the Cook Islands against …[a] trust, settlor…[or] trustee…shall be entertained…in the Cook Islands if…[t]hat judgment relates to a matter…that is governed by the law of the Cook Islands.” As a result, all foreign judgments must be relitigated de novo in the Cook Islands.
- Secrecy: All judicial proceedings relating to a Cook Islands trust are to be in camera and no details may be published without an order from a Cook Islands court. Although not specifically stated in the Cook Act, no details of the trust need be filed with or disclosed to any public agency. Any violation of this provision, as well as all other provisions of the Cook Act, is a criminal matter calling for a fine of up to US$10,000 as well as up to one year in jail.
- Registration: The Cook Act provides for the registration of international trusts. An international trust is simply a trust or disposition which is registered as such under the Cook Act. In order to qualify for registration, an international trust must have at least one trustee (or in the case of a disposition, one of the donors or holders of the power of appointment, maintenance or advancement) which is registered in the Cook Islands as a foreign company or an international company (i.e., companies registered or incorporated in the Cook Islands which are typically controlled by or on behalf of the settlor) or a trusted company. In practice, the trust companies established in the Cook Islands will provide such a trustee on request subject to indemnity requirements.
Registration of an international trust is a straightforward process that entails retaining the services of a trusted company in the Cook Islands. There are currently five trustee companies on the Cook Islands and fees do vary widely (from about $1,350 to about $5,000) for registration and the first year’s administration. The fee routinely includes the registration charge of the Government (currently $100.00 per annum) but does not include special charges (typically $80.00 to $200.00 per hour) if substantial or specialized administrative work is required (e.g., when a duress provision is triggered).
The trustee company will require the provision of information to satisfy itself that the international trust is not being registered for criminal or fraudulent purposes. A certificate or affidavit of solvency will be required and a deed of indemnity from the client will be sought routinely. The trustee company will provide the registered office in the Cook Islands for the international trust and will attend to annual re-registration, accept service of process and generally provide the Cook Islands locus for the international trust.