Cook Islands international trusts: how they work and what payment providers need

The Cook Islands as a trust jurisdiction

The Cook Islands is a self-governing country in the South Pacific in free association with New Zealand. Its legal system is based on English common law, with New Zealand influence. In the early 1980s it set out to build an international financial services sector, and the International Trusts Act 1984 became the centrepiece of that effort.

The Act has been amended many times since. Over the years it has developed a reputation as a statute designed with asset protection in mind, and the Cook Islands trust is often named alongside Nevis as a leading asset protection jurisdiction. That reputation brings both interest and scrutiny. Families who use these trusts for sound reasons should expect counterparties to ask careful questions.

The Financial Supervisory Commission regulates the financial sector in the Cook Islands, including the trustee companies that administer international trusts. Trustee companies are licensed and must meet anti money laundering and record keeping standards.

What an international trust is

A trust is an arrangement under which a person, the settlor, transfers assets to another person, the trustee, to hold for the benefit of others, the beneficiaries. The trustee becomes the legal owner of the assets but must deal with them for the beneficiaries and according to the trust deed. A trust is not a company. It has no separate legal personality, so the trustee contracts and holds assets in its own name as trustee.

An international trust under the Cook Islands Act is a trust that meets the Act's conditions, which include having a qualifying trustee in the Cook Islands and being registered. The details of qualification are technical, but the practical effect is that one of the trustees is a licensed Cook Islands trustee company and the trust is registered with the authorities in the Cook Islands.

The trust deed sets out the terms. It names the settlor, the trustee and usually a protector. It describes the beneficiaries, either by name or by class, such as the settlor's children and remoter issue. It sets out the trustee's powers and any limits on them, such as decisions that need the protector's consent. It also chooses the governing law, which for an international trust is the law of the Cook Islands.

Main features in general terms

Without going into the detail of particular sections, the features usually associated with Cook Islands international trusts include:

• Recognition of the trust under local law despite foreign claims. The Act sets out rules about when a foreign judgment can be enforced against trust assets, and these are generally more restrictive than in many onshore countries.
• Specific rules on fraudulent transfer claims. The Act sets standards of proof and limitation periods that a creditor must meet to challenge a transfer into the trust.
• Flexible trust terms. Discretionary trusts, trusts with protectors and trusts where the settlor is also a beneficiary are all possible.
• Duress provisions. Deeds often include clauses directing the trustee to ignore instructions given under compulsion, for example by a foreign court order.
• Confidentiality. Information held about the trust is protected, subject to the trustee's regulatory obligations and international information sharing.

Two cautions apply. First, these features protect assets that were placed in trust properly and in good time. They are not a tool to defeat existing creditors, and people who have tried to use them that way have faced serious consequences in their home courts. Second, the effect of the trust in other countries depends on those countries' laws, and on where the settlor and the assets are. This is an area for specialist legal advice.

The licensed trustee company

Every Cook Islands international trust has at least one trustee that is a trustee company licensed in the Cook Islands. This company is the legal owner of the trust's assets, or of the shares in the companies that hold them, and is responsible for administering the trust.

The trustee company's responsibilities include:

• Carrying out due diligence on the settlor and the source of the assets before accepting the trust.
• Registering the trust and keeping the registration current.
• Holding the trust deed, letters of wishes, minutes and accounts.
• Making decisions on distributions and investments within the terms of the deed, often after consulting the protector.
• Meeting its own reporting obligations, including under international tax information exchange standards.

Many trusts do not hold investments directly in the name of the trustee. Instead, the trustee owns an underlying company or LLC, often in Nevis, the BVI or another jurisdiction, and that entity holds the bank and brokerage accounts. The trustee then controls the underlying company through its board or as its member. This arrangement gives the trustee control while keeping day to day administration practical.

For a payments provider, the trustee company is the key relationship. It signs the account application, provides the trust documents and is answerable for the payments. A responsive, well organised trustee makes everything else easier.

Why families and business owners use them

People come to Cook Islands trusts for a range of reasons, most of them ordinary.

• Long term family wealth planning. Holding assets for several generations under a single set of rules, with a professional trustee providing continuity.
• Protection against future risk. Professionals in fields with a high risk of litigation sometimes put part of their savings into trust while they are solvent and have no claims pending.
• Succession. A trust can reduce the friction of passing assets on death, particularly where assets are in several countries.
• Business continuity. Owners may place shares in a family company in trust so that control passes in an orderly way.
• Diversification of legal risk. Some families like to hold part of their wealth under a different legal system from their home country.

A payments provider will ask why the trust was set up. A short honest answer, consistent with the timing of the transfers into the trust, is far better than marketing language. If the trust was established ten years ago when the settlor was building a medical practice, say so.

What payment providers need from the trust

Payments providers regulated under anti money laundering laws have to identify everyone with a role in a trust. The exact list depends on the law that applies to the provider, but you should expect to supply the following.

Where beneficiaries are a class, providers usually identify individual beneficiaries when a distribution is about to be made to them. Expect a request for identification before the first distribution to any new person.

Source of wealth for the settlor is the area that takes longest. A provider wants to understand how the settlor built the wealth that went into the trust: a business sale, years of professional income, an inheritance. Supporting evidence such as sale agreements, tax returns or probate documents is often requested. The trustee company should already have this from its own due diligence, and can usually provide a summary with key documents.

Typical payment patterns

Trust accounts tend to have a modest number of larger payments. Common flows include:

• Initial funding from the settlor or from the sale of an asset.
• Investment income, such as dividends, interest or rent, from underlying companies.
• Payments to investment managers, lawyers, accountants and the trustee itself.
• Distributions to beneficiaries for education, housing, medical costs or general support.
• Loans to beneficiaries or to family companies, documented by loan agreements.

Each distribution should be backed by a trustee resolution. Providers will often ask for it, along with confirmation of who the recipient is and how they relate to the trust. Payments to a beneficiary's business, or to third parties on a beneficiary's behalf, need clear documentation, because they look less like distributions and more like ordinary commercial payments.

Currency is a frequent practical issue. A trust may hold assets in US dollars while a beneficiary lives in Europe or Asia. Converting at spot when a distribution is made, and paying in the beneficiary's local currency, avoids leaving the beneficiary to handle conversion through a retail bank.

Common problems and how to avoid them

• Outdated deed. Trustees change, protectors resign and beneficiaries are added. Make sure every change is recorded in a deed or resolution, and send the full chain.
• Settlor acting as if the assets were still personal. If the settlor gives instructions directly to the provider, bypassing the trustee, the account will be reviewed. Instructions should come from the trustee or from the underlying company's properly appointed officers.
• Gaps in source of wealth. A trust funded years ago may have thin records. Reconstruct what you can before applying.
• Undocumented distributions. Distributions without trustee resolutions are hard to explain later.
• Mismatched names. The trust name on the deed, on the registration and on the account application should be identical.

General information only

This article provides general information about Cook Islands international trusts and payments. It is not legal or tax advice, and anyone considering or operating such a trust should take advice in the Cook Islands and in their home country. CCYFX does not act as trustee or give advice on trusts. Trustees and underlying companies that need FX or international payments can read how CCYFX works with them on our Cook Islands page.