The Cook Islands: Expert provider of international trust solutions – a guide to new divorce and separation laws, international trust law and private trust companies
The Cook Islands is a recognised jurisdiction for the establishment of international trusts. The emphasis in the past has been on protecting trust assets from frivolous and sometimes vexatious claims by third parties against settlors. Cook Islands international trusts and private trust companies are also used for intergenerational wealth management. The Cook Islands International Relationship Property Trust (the IRPT) is the most recent innovation in international trust law – it is designed to provide couples with greater certainty as to the treatment of their common assets in the event that they separate or divorce. The IRPT is intended to protect relationship property from the consequences of separation by requiring that specified property be held for the benefit of a couple and their issue in accordance with the couple’s agreement as set out in the trust instrument.
1. The International Relationship Property Trust
The purpose of The International Relationship Property Act 2021 (the IRPT Act) is stated as enabling persons to settle an irrevocable trust through which they can choose the financial terms of the relationship and the separation, and in the event of their separation, preserve and retain intact, property that might otherwise be dissipated by judicial direction.
It is not uncommon that when a couple separates there is a division of their matrimonial property, if they are married, or their relationship property if they are in a civil union or de facto relationship. This can be, and often is, to the detriment of one spouse but more significantly to children of the relationship. Succession plans are ignored, long term investments are liquidated at reduced prices and assets originally intended for the future benefit of the couple’s children are divided and transferred to new relationships and other children. Even where a couple has settled matrimonial property on trust for their benefit and that of their children, the courts have not been precluded from altering such settlements, ranging from wholly excluding a beneficiary from a settlement to transferring some trust or other asset to a non-beneficiary free from all trusts. This is something that the IRPT Act is designed to address.
The IRPT Act deals only with assets which the parties have agreed are matrimonial property. It provides a statutory regime under which parties may:
- Settle property on a trust for the benefit of themselves and their issue
- Agree upon their respective shares in that property
The IRPT Act also provides that the trust instrument must contain a relationship agreement entered into by the couple which affirms, modifies or waives rights or obligations they have in regards to the relationship property settled whilst they are in the relationship and upon their separation. The couple must have independent legal representation and provide full disclosure of off assets and income before entering into a relationship agreement.
An IRPT is tax neutral in that it is not subject to any form of Cook Islands taxation. The settlors and beneficiaries, being non-resident in the Cook Islands for tax purposes, will however be subject to the tax laws in their home jurisdictions in so far as they apply to foreign trusts and assets transferred to and distributions made from such trusts.
An IRPT must be registered and remain registered in accordance with the IRPT Act. An application for registration of an IRPT must be made by a Cook Islands licensed trustee company in the prescribed form within four and half days of that trustee becoming trustee of the IRPT. The IRPT must comply with the requirements of the IRPT Act. Registration insulates the IRPT from the general common law and Cook Islands statute law in so far as those laws are inconsistent with the IRPT Act.
2. The Cook Islands International Trust
Cook Islands trust law is derived from the common law which has been enhanced by the International Trusts Act 1984 (the ITA). The ITA allows trustees to better carry out their duty to preserve and protect trust assets and overcomes a number of features of trust law that have existed for centuries but are no longer relevant to today’s society. The ITA contains many technical and practical features that can be obtained through the use of a Cook Islands International Trust.
Perpetuity Period: the ITA abolishes the Common Law rule against perpetuities. A Cook Islands International Trust can exist indefinitely or terminate upon the happening of a specified event or date.
Fraudulent Conveyance: the Act has repealed the Statute of Elizabeth 1571, the English statute which provides that any transfer made with the intention to defraud creditors will be deemed fraudulent. In its place the Act provides rules that give certainty to the rights of those who might claim against trust assets by reference to specific dates and events. A Cook Islands International Trust, or any settlement thereon, shall not be fraudulent against a creditor of the Settlor if the settlement occurs either prior to the creditor’s cause of action arising, or more than two years after it arose. If, however, the cause of action arises within two years of the settlement taking place, the creditor must bring an action in a court of competent jurisdiction within one year of the settlement.
Burden of Proof: a creditor of the Settlor shall only have access to the assets of the particular settlement in question, and not the entire trust fund, where he/she can bring an action within the time limits prescribed, and prove beyond reasonable doubt that the particular settlement was made with the intention to defraud that creditor and once made rendered the Settlor insolvent.
Foreign Judgments: a Cook Islands court will not recognise any judgment that is based upon any law inconsistent with the Act or relates to a matter governed by the law of the Cook Islands. Any claim against assets in a Cook Islands International Trust must therefore be commenced de novo in a Cook Islands court.
Forced Heirship: no Cook Islands International Trust or any settlement on it, shall be void or voidable, and nor shall the capacity of a Settlor be questioned, in the event such trust or settlement may defeat the heirship rights of any person related to the Settlor.
Bankruptcy: no Cook Islands International Trust or any settlement on it, shall be void or voidable in the event of the Settlor’s bankruptcy in his/her home jurisdiction.
Spendthrift Beneficiaries: any interest in trust assets given to a beneficiary during his/her lifetime shall not be alienated or pass by bankruptcy, insolvency or liquidation or be seized or taken in execution by process of law.
Common Law Rules: the Act specifically abolishes the rules against accumulations and double possibilities and gives the Trustee the discretion to avoid the rule in Saunders v Vautier.
3. Private Trust Companies
When establishing a trust for wealth planning, succession, philanthropic or any of the many other reasons trusts are established, choosing a trustee is the first and most important decision a settlor will need to make. As creating a trust requires legal ownership of the settlor’s assets to be transferred to the trustee, the settlor will need to have the utmost confidence in the trustee’s experience, substance, integrity and professionalism.
There are a number of options available to a settlor when choosing a trustee. Professional corporate trustees in foreign jurisdictions are commonly used, where that trustee is licensed and either institutional or independent. However, due to the settlor’s understandable reluctance in handing over ownership and control of his/her assets to people he/she doesn’t know and who are based in a country he/she has never visited, another trustee option is becoming increasingly popular.
Private trust companies (PTCs) are established with the sole purpose of acting as a corporate trustee to one or more family, or otherwise related, trusts. Using a PTC can provide a settlor with numerous benefits and advantages, including:
Peace of mind: the settlor may find greater comfort having the trust assets owned and administered by a PTC that he/she has created.
Control: a PTC allows the settlor, or those he/she nominates, to retain a high degree of control over the administration of trust assets, including investment and distribution decisions. This can be achieved by the settlor and his/her family members and advisors becoming directors of the PTC.
Confidentiality: a PTC enables better control over information confidential to the settlor and his/her family.
Diversification: a PTC will provide the settlor greater opportunity to invest in and hold assets of his/her choice.
Expense: a PTC allows the settlor to avoid trustee fees, and other professional costs, which for larger trust funds are often charged on an ad valorem basis.
The ownership and management of the PTC are vital to its effectiveness and the efficient operation of the overall structure. The settlor’s circumstances and what is best for him/her and his/her family will ultimately determine ownership and management decisions.
Through a carefully structured and professionally administered PTC, a settlor and his/her family are able to actively participate in decisions concerning the trust and its assets. The integrity of the structure can be retained, the settlor’s succession and tax planning objectives achieved and legal duties to beneficiaries discharged. The Cook Islands PTC solution currently involves the use of an international company as a PTC, a licensed trustee company to provide administration services to the PTC, and an ownership structure.
Written by Marie Francis, CEO of Cook Islands Finance