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Fraudulent Transfer

Fraudulent Transfer (aka Fraudulent Conveyance) is a typically a civil issue not a criminal one. It particularly arises when a debtor is insolvent. That is, the debtor does not have enough assets to cover his/her debts. Creditors or bankruptcy trustees are the ones who generally file these actions against debtors.

Making oneself insolvent typically involves a debtor who donates his assets. They usually transfer them to an “insider,” such as a family member. This leaves him/herself with nothing to pay debts. In a successful suit,  the courts entitle the plaintiff to recover the property that the debtor transferred. Alternatively, they may simply receive its value from the person who has received a gift of the debtor’s assets.

Furthermore, this often involves a lawsuit against the recipient of the transfer. So, legal advisers strongly discourage  transferring assets to family members for asset protection. Simply put, it doesn’t work. Plus it will likely get the family member entangled in your legal battle.

Cook Islands Statute of Limitations

In the Cook Islands there is a one-year statute of limitations on fraudulent transfer (or two years from the cause of action – the reason why the lawsuit was filed).

This is what that means:

  1. The assets in the Cook Islands trust are protected immediately the creditor can file a fraudulent conveyance action. The creditor is highly unlikely to win.
  2. If a creditor wants to file a fraudulent conveyance lawsuit, they need to file it within one two to years.
  3. Once the statute of limitations runs out, the Cook Islands courts will dismiss any lawsuits claiming fraudulent transfer of assets.
  4. That is, once a lawsuit runs its course in the defendant’s home jurisdiction, the statute of limitations clock will likely have run out. This will will bar the suit in the Cook Islands.
  5. It gets even better. Suppose (highly unlikely) the lawsuit is filed in the Cook Islands before the statute of limitations. The plaintiff (the one suing) would have to prove the following:
    a. That the reason the trust was established was to fraudulently transfer assets away from that particular creditor. That is,  they transferred assets not just away from  any creditor, but the creditor filing the lawsuit.
    b. Most notably, the plaintiff will need to prove his case beyond the shadow of a reasonable doubt. The burden of proof in most civil lawsuits is by a preponderance of the evidence (51% to 49%). However, in this instance it requires a 95-97% proof of the facts. This is nearly impossible to do in actual practice with respect to asset protection trusts. This is because the defendant can simply let the other side know that the trust was established to diversify investments. Alternatively they can say it was to place funds in a safer jurisdiction. Another reason is that they set it up to hold assets for future distribution to children. There are a plethora of other reasons one can offer.
  6. Moreover, if one has an existing living trust that holds assets, that trust may generally be amended and turned into a Cook Islands trust. It will be the same trust with different wording. Thus, the assets that were held therein for the previous one to two years will have already passed the statute of limitations test. Thus the amended trust instantly protects assets from a fraudulent transfer challenge in Cook Islands courts.

Cook Islands Fraudulent Dispositions

Prior to the fraudulent disposition revision for trusts, the Cook Islands and most other British colonized financial centers fell under the Statute of Elizabeth which did not offer strong protection against creditor claims. The new law greatly increased asset protection by requiring it to be proven that the trust was created solely with the intent to defraud that creditor. Without proving intent to escape a debt from the creditor, the trust is not subject to the creditor’s claim.

What this means is that a Cook Islands Trust settled would not be subject to future creditor’s claims.