Cook Islands: Offshore Legal and Tax Regimes
Cook Island trusts are known locally as International Trusts and are governed by the provisions of the International Trusts Act 1984 (as amended). All International Trusts must have non resident beneficiaries and a resident licensed trustee (unless they come within the custodian trustee exception cited below). In order to meet the requirement of having a resident licensed trustee the International Trust would be required to use one of the 5 registered trust companies which operate out of the Islands. To obtain the protection of the Islands' laws the trust must be registered by the registered trustee company within 45 days of its creation who at registration must certify that the trust is an International Trust under the International Trust Act 1984.
See Offshore Business Sectors for details of the confidentiality rules applied to licensed trust managers.
A Cook Islands International Trust has a number of distinct advantageous features:
- The International Trusts Act 1984 (as amended) abolished the perpetuity period rule in the Cook Islands and so enabled the "dynasty" trust to be established and administered in perpetuity;
- The details of the beneficiaries and settlor of the trust are not registered; the only information that must be filed with the Registrar of International Trusts is the name of the International Trust, the names of the trustees and the date of the trust deed. Offshore public registries in the Cook Islands are not open to the general public and may be searched only by persons showing to the Registrar a good and cogent reason for doing so. Fraud constitutes one such reason;
- The legislation specifically excludes the applicability of foreign inheritance laws. Thus if a foreign party from a civil law jurisdiction raised a legal challenge in the Islands courts against a disposition made by a settlor and cited foreign inheritance laws as the basis of a claim alleging that the disposition was invalid as it offended against the forced heirship rules that applied in his country, the action would fail since the Cook Island courts do not recognize foreign inheritance laws;
- Only the judgments of New Zealand courts can be enforced in the Cook Islands. Thus a foreign creditor wishing to set aside a disposition would have to commence an action in the courts of the Cook Islands and so put himself within the ambit of laws and procedures which are generally favourable to the settlors, trustees and beneficiaries of an International Trust. The foreign judgment could only be used in the Cook Islands courts as evidence (if any) of the strength of the litigants claim. Furthermore exemplary and punitive damages are rarely if ever available in the Cook Islands with the consequence that such categories of damages would be denied to a litigant who successfully obtained judgment in the local courts and would be excluded from any judgment obtained in the courts of New Zealand.
- The rule against accumulations has been abolished in the Cook Islands. In the Cook Islands the trustee of an International Trust can accumulate the income indefinitely.
- The common law rule against purpose trusts has been abolished in the Cook Islands which has provided a mechanism under which a purpose trust can be enforced by the court.
- The definition of what does and what does not constitute a charitable trust has been extended in the Cook Islands.
- Under Cook Islands law a disposition can only be set aside if: a)The disposition occurred within 2 years of the date of the act or omission which gave rise to the creditors cause of action and the creditor can prove fraud on the part of the settlor; or b) if the action to set aside the disposition is commenced within 3 years of the date of the act or omission which gave rise to the creditors cause of action . If an action has already commenced in a foreign court the time limit is frozen pending its conclusion.
- Under the International Trusts Act 1984 the rule requiring unanimity among trustees now only applies to an International Trust if the trust deed does not specify otherwise .The trust deed can now set out procedures for making of majority decisions by the trustees.Some doubt whether this is permitted under the rules of equity and it remains to be seen whether such changes bring any advantage to the jurisdiction given that these rules essentially exist for the protection of the beneficiaries.
- In the Cook Islands so long as the trust deed so provides a trustee can delegate all powers except dispositive powers. Dispositive powers are powers enabling the trustees to dispose of assets whether by way of sale or by way of distribution of income or capital in favour of the beneficiaries. Thus a Cook Islands trustee could now place all trust fund investment decisions in the hands of an investment company.
- A trust deed may now impose a different standard of care on a trustee making investments and can provide that he is to have the same powers of investment as a natural person.This might prove useful where the trustee is expected to manage a family business. Unless the trust deed otherwise specifies the standard of care expected of a trustee is that stated in the common law namely that which a prudent person would exercise in managing the affairs of another. Moreover under the common law if the trustee is a professional the standard of care expected is even higher.
- The law allows for trusts created in the Islands before these amendments came into being to have their trust deeds re-drafted so that they can take advantage of the new legal provisions. Thus a trust which under the previous law had to prescribe a perpetuity period of no longer than 100 years can now have its trust deed redrafted so as to take advantage of the abolition of the perpetuities rule.
- So long as the settlor appoints a licensed and resident Cook Islands trustee as a custodian trustee he is free to appoint managing trustees within his own jurisdiction. (This is the only exception to the rule that requires the trustees of a Cook Islands trust to be licensed and resident there).
- A new mechanism and procedure has been created whereby the trust deed can appoint a "nominated person" who has the power to obtain the consent of and represent all the beneficiaries including non sui juris and future beneficiaries, beneficiaries who cannot be found and beneficiaries who have yet to be ascertained.
- There are provisions allowing trusts to be redomiciled in and out of the Cook Islands. It was felt that the legislative changes (e.g. the abolition of the rule against perpetuitites) will make the Islands a particularly attractive jurisdiction in which to locate a trust and that accordingly there will be considerable interest in re-domiciliation. A trust re-domiciled in the Cook Islands is by the Islands' law deemed to be an International Trust formed under the International Trusts Act 1984 from the date of its inception and not just from the date of its re-domiciliation.
- Under Cook Islands law the trust deed can deem that different aspects of the trust can be governed by the laws of different jurisdictions. Furthermore the trust deed will also be able to provide for a change in the governing law on the happening of a specified event (otherwise known as a "flee clause").
The full text of the International Trusts Act (as amended) can be found here.