Cook Islands Trusts: Prudent Planning or Tool for Scoundrels?

The Cook Islands is a popular offshore haven, offering unique asset protection and privacy benefits for wealthy individuals throughout the world. Those with high liability risks, such as physicians, real estate developers and business owners often put assets into Cook Islands Trusts to shield their wealth from potential lawsuits and claims.

However, complaints are growing that these trusts are a favorite of corrupt politicians and other lawbreakers, taking advantage of these laws to hide and protect illegal funds. Are Cook Islands Trusts a legitimate planning technique or an international haven for criminals stashing their gains?

The world’s strongest asset protection laws

So why are Cook Islands Trusts such a good place to shield wealth? First, a little background.

In 1989 the Cook Islands, a former Protectorate of New Zealand in the South Pacific, began an effort to diversify its tourist economy and attract a robust financial services industry. New laws were enacted focusing heavily in the area of asset protection. These laws created a single, clear and detailed legislative scheme that permitted the establishment of trusts intended to shield and protect assets from lawsuits and claims.

Through these initial efforts and various modifications and court challenges over the years, it is generally acknowledged that the Cook Islands has the strongest asset protection laws in the world. Assets in the trusts are not disclosed to Cook Islands authorities and the law makes it a crime to identify who owns the trusts or to provide any information about them.

Judgments from foreign countries are not enforced in the Cook Islands against the trusts established there, assets of the trusts cannot be seized by a creditor, and the trustees are required to maintain strict secrecy regarding the owners and beneficiaries of the trusts. The Government of the Cook Islands has no treaties or mutual assistance agreements (as the Swiss do) that would permit disclosure or cooperation with a foreign creditor or even a government agency in a collection action.

Who uses Cook trusts?

According to a recent article in The New York Times, the Cook Islands as an asset protection haven, has perhaps worked out too well, opening the door to a variety of illegal and questionable activities. The point of the story is that because these trusts have been difficult or impossible to pierce, they have been a magnet for fraud artists and crooks.

Convicted Ponzi-schemer R. Allen Stanford and various corrupt government officials from around the world have used Cook Islands Trusts to protect the proceeds of their activities from defrauded victims and government pursuit. Efforts to recover funds from the Cook Trusts have been largely unsuccessful.

Although clearly subject to potential abuse, my own experience in establishing and monitoring hundreds of Cook Trusts over the years, is that generally these trusts are set-up to accomplish legal and prudent asset protection goals.

Liability risks from operating a business or a professional practice are well known and understood at this point and many individuals sensibly wish to protect accumulated assets from the particular risks of their business. This can be accomplished in a variety of ways through the use of well-known business entities and strategies such as corporations, LLCs, family limited partnerships, retirement plans and domestic and foreign-based trusts. Cook Trusts sometimes play a role as a component of these asset protection and estate plans.

No tax evasion opportunities

One of the reasons that the Cook Islands has not drawn much international attention or attack (as Switzerland has recently) is that the Cook Islands has only a minimal banking presence and cannot function as a tax haven or a center for money laundering or dubious financial transactions.

Unlike the well known and powerful offshore banking centers in Hong Kong, Switzerland, Singapore and the Cayman Islands, Cook Trusts are unlikely to be used by U.S residents for financial crimes, tax evasion or for purposes other than legal asset protection. The trust companies in the Cook Islands are audited and regulated by the government and impose strict due diligence requirements concerning a prospective client’s business and financial background before agreeing to act as trustee.

Individuals establishing Cook Trusts must comply with US tax reporting and filing requirements and under the provisions of FATCA trustees are subject to similar compliance rules.

States adopt Cook trust laws

Because the opportunities for financial crimes and tax evasion are so greatly limited (as opposed to the tax-haven countries), the US government and other nations have not demonstrated an interest in persuading or coercing the Cook Islands to change or modify its strict asset protection laws.

In fact, rather than attacking these laws, many US states have adopted similar asset protection rules for their own residents. Noting the popularity, the need and the effectiveness of these laws (and the income potential for financial services), an increasing number of states in the US have enacted their own versions of the Cook Islands trust laws. Fifteen states, including Ohio, Virginia, Delaware and Nevada, permit residents to establish trusts that are intended to shield assets from liability and claims.

Laws that permit some measure of financial privacy and substantial asset protection will always be subject to abuse by individuals’ intent on corrupt or illegal activities. Government limitations on secret business transactions are justified in the fight against terrorism and corruption to the extent that they are narrowly and accurately targeted.

However, given the reality of frivolous litigation, the targeting of “Deep Pocket” defendants and the normal liability risks of most business and professional activities, financial privacy and asset protection with Cook Islands Trusts is often a strategic component of sound business planning.

Robert J. Mintz, JD LLM, is an attorney and the author of the book Asset Protection for Physicians and High-Risk Business Owners. To receive a complimentary copy of the book visit www.rjmintz.com.