1. What is a Cook Islands Trust ?
The Cook Islands was one of the first common law offshore jurisdictions to provide asset protection provisions to trusts established in the jurisdiction. Cook Islands trust laws were drafted with the expressed intent of helping Canadians to protect their assets from vexatious and predatory lawsuits. A Toronto-based lawyer was one of three co-authors of the 1989 amendments to the Cook Islands International Trust Act. The Cook Islands International Trust Act became a model for off shore asset protection trust law. Cook Islands became the world’s leader in protection trusts’ assets. As the result, the Cook Islands trusts are favored by Toronto, Calgary, Vancouver high-net-worth individuals seeking to protect their assets against potential vexatious and predatory lawsuits. According to the Cook Islands Financial Supervisory Commission, as of April 2022 there are 2,141 trusts registered in the Cook Islands. After the Cook Islands developed an extensive legal framework protecting trust assets from foreign plaintiffs, other off shore jurisdictions, namely Nevis, Belize, Bermuda, BWI, Cayman Islands and the Bahamas also developed similar statutes.
2. What Benefits Can Canadians Gain from a Cook Islands Trust ?
The Cook Islands trust is the world’s strongest off shore asset protection legal mechanism available today. The benefits of Cook Islands trust are outlined below:
Assets Protection from Canadian Court Judgments
The Cook Islands courts will not recognize and will not enforce judgments made by Canadian courts. Generally, only Cook Islands courts and their judgements have jurisdiction over trusts established in the Cook Islands. Additionally, Canadian plaintiffs who wish to litigate claims against assets held in the Cook Islands trusts are required by law to make those claims by commencing legal proceedings in the Cook Islands courts. To do so, Canadian plaintiffs must travel to the Cook Islands and must commence legal proceedings in the Cook Islands courts within a strict limitation period.
Strict and Short Limitation Periods
A legal proceeding against Cook Islands trusts has to be commenced withing the world’s strictest and shortest limitation period for claims of fraudulent transfer. There is a twelve months limitation period to commence a legal proceeding in the Cook Islands for claims arising from allegations of fraudulent transfer starting on the date the original legal proceeding with claims of fraudulent transfer has been commenced in Canada. There is a twenty-four months limitations period from commencement of a legal proceeding in Canada to bringing a corresponding legal proceeding in the Cook Islands. Once the twenty-four months limitation period has ended, the Cook Islands courts will dismiss any legal proceeding commenced in the Cook Islands courts with allegations of fraudulent transfer. Even if a lawsuit is brought by a Canadian plaintiff within the twenty-four months limitation period, the Canadian plaintiff will face significant difficulties in obtaining a favourable judgment in the Cook Islands courts. The Canadian plaintiff must prove that the only reason that the defendant’s assets were transferred into Cook Islands trust was the defendant’s desire to defraud that particular Canadian plaintiff. Not any plaintiff, but the particular Canadian plaintiff that commenced the legal proceeding in the Cook Islands courts. Furthermore, burden of proof for the Canadian plaintiff is the burden of proof “beyond a reasonable doubt”, a very high legal threshold applicable only to criminal law cases. The burden of proof beyond reasonable doubt places certainty of defendant’s guilt is in the range of 99 percentile. Most civil cases are decided by applying standard of “balance of probabilities”, where a plaintiff has to show that certainty of allegations is in the range of 51 percentile.
Information Protection from Canadian Authorities
Cook Islands trust records are not open to the general public. The information about the beneficiaries and settlors of a Cook Islands trust is not open for public review. Only the name of the trust, the names of the trustees, and the date on which the trust agreement has been signed have to be publicly registered with the Cook Islands Financial Supervisory Commission. A Canadian plaintiff who desires to review the records of a Cook Islands trust must commence litigation in the Cook Islands courts with allegations of criminal fraud in order to review the Cook Islands trust records.
Local Tax Exemption
Trusts established by Canadians residents in the Cook Islands are exempt from tax in the Cook Islands.
Purpose Trusts are Legal
Canadian laws against purpose trusts and judgements made by the Canadian courts agaist such trusts are not enforceable in the Cook Islands. This means that a beneficiary of a Cook Islands trust could be a “purpose to establish the trust” rather than a human beneficiary.
Canadian Settlors Control Cook Islands Trusts
The Cook Islands trust law allows the settlor of the trust to control the trust. In order to do so, the settlor must establish a Limited Liability Company (the “LLC”) 100 percent shares of which the Cook Islands trust will control. The settlor is named as the director and officer of the LLC. The settlor has the authority to control the LLC’s bank accounts and sign cheques and other financial documents. The bank account accumulating the settlor’s assets is held in the name of the LLC. Assets held in the name of the LLC do not need to physically reside in the Cook Islands. The assets may reside in any financial institution in Canada or in any other country. The settlor retains the power of revocation of the trust, power of disposition of the trust property, power to amend the trust agreement, and power to relinquish or transfer legal interest in the trust property.
Protection Against Litigation
Once a litigation against the settlor
is commenced either in Canada or in another jurisdiction, the settlor
has the option under the Cook Islands trust law to transfer control of
the trust over to a trustee. A properly drafted trust agreement of a
Cook Islands trust should contain provisions that do not allow the Cook
Islands trust to be managed by the settlor while the settlor is a
defendant in a litigation. The terms of the trust agreement could state
that control of the trust will only pass to the trustee when the settlor
is named a defendant in a Canadian lawsuit or a lawsuit brought in
another jurisdiction. The settlor can then genuinely adopt legal defence
that it is impossible for him or her to relinquish the assets over which
the trustee has complete legal control. Beneficial for Canadian
Intergenerational Succession Planning There is no rule against
perpetuities in the Cook Islands. Unlike in Canada where a trust has to
be wound down not later than 21 years after it was established, the Cook
Islands trusts may exist for an indefinite period of time. Also, there
is no rule against trust accumulations in the Cook Islands and local
trusts are allowed to continue to accumulate income indefinitely.
Consequently, the Cook Islands trusts are perfect legal mechanisms for
Canadian intergenerational wealth transfers and estate planning.
Moreover, the Cook Islands courts do not recognize Canadian and other
foreign inheritance laws. Positive International Reputation The Cook
Islands have escaped some of the scrutiny and pressure applied on the
most of the offshore jurisdictions. One reason for this is because it
does not appear that they have been widely used by multinational
corporations to evade taxes. Additionally, they have not been linked to
being used for funding terrorist activities or money laundering. A
statement made by Heather Lowe, the director of Government Affairs at
the advocacy group Global Financial Integrity, in the New York Times,
suggest the Cooks are under less scrutiny than other jurisdictions. The
Times reported Lowe as stating “There has been a lot of pressure on the
Caymans and other places to clean up. There are many areas where
pressure is not exerted, and the Cooks is one of them".