In the Cook Islands there is a one to two-year statute of limitations on fraudulent transfer. That is, one year from the time the settlor registers and funds the trust or two years from the cause of action (the reason the plaintiff filed the lawsuit) Cook Islands court will refuse to hear the case.
To be clear, it does NOT mean the assets are unprotected for one to two years. The Cook Islands trust protects assets immediately. It simply means the courts won’t hear the case challenging the transfer of assets into the trust after that time.
Let’s back up a bit so we’re all talking about the same thing. Fraudulent Transfer (aka Fraudulent Conveyance) is 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 entangle the family member in your legal battle.
Cook Islands Trust Fraudulent Conveyance Statutes
So, what do the statutes say? Bear with me because, naturally, the laws are written in legalese. So we’ll first wildly entertain you with the statutes. Then we’ll interpret them in to plain English. Specifically, the Cook Islands INTERNATIONAL TRUSTS ACT 1984 (As Amended) says the following:
(3) An international trust settled or established and a disposition to such trust shall for all purposes be deemed not to have been so settled or established, or the property disposed of with intent to defraud a creditor
(a) if settled, established or the disposition takes place after the expiration of 2 years from the date that creditor’s cause of action accrued; or
(b) where settled, established or the disposition takes place before the expiration of 2 years from the date that the creditor’s cause of action accrued, that creditor fails to commence in a court of competent jurisdiction proceedings in respect of that creditor’s cause of action before the expiration of 1 year from the date such settlement, establishment or disposition took place
What the Heck Does That Mean?
Let’s talk about what 13B of the International Trusts Act means. We will explain it in the context of the remainder of the statutes.
- It does NOT mean the assets are unprotected for one to two years. As we said, the Cook Islands trust protects assets immediately.
- It means that inside this timeframe, the creditor can file a fraudulent conveyance action in the Cook Islands. (However, the creditor is highly unlikely to win.)
- So, it means that if a creditor wants to file a fraudulent conveyance lawsuit, according to other parts of the Act, they need to file it in the Cook Islands within one to two years,.
- That is, once the statute of limitations runs out, the Cook Islands courts will dismiss any lawsuits claiming fraudulent transfer of assets.
- Thus, once a lawsuit runs its course in the defendant’s home jurisdiction, the statute of limitations clock will likely have run out. Therefore, it will will bar the suit in the Cook Islands.
- It gets even better. Suppose (highly unlikely) your opponent files the lawsuit in the Cook Islands before the statute of limitations. The plaintiff (the one suing) would have to prove the following:
a. That the reason you established the trust 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 or her 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 they established the trust for some other reason, which we discuss below.
- Moreover, the Cook Islands recognizes immigrant trusts. For example, let’s say a person has an existing revocable living trust that holds assets, We can amend that trust and turn it into a Cook Islands trust. Therefore, it will be the same trust with different wording. Thus, the assets the trust 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.
Warning: Never Say This
Since you want to avoid the appearance of fraudulent conveyance, especially before the requisite time as elapsed, here is what to never say. “I set up this trust to protect my assets from you, Mr. Judgment Creditor.” Don’t say that. It is in your best interest that such a statement, or one similar to it, never show up in a deposition or court transcript. If it does, and your opponent hurries up and files suit in the Cook Islands before the deadline, it could come back to haunt you.
There are many other reasons for setting up Cook Islands trust that may appear more “acceptable” in the eyes of the court. Here are reasons other than asset protection for setting one up.
Reasons for Setting Up a Cook Islands Trust
Here are some reasons for setting up a Cook Islands trust other then asset protection.
- Diversify: The trust was established to diversify investments internationally.
- Legacy: To create a legacy for many generations. That is, you can honestly say you established the trust to place funds in a jurisdiction that allows trust to last indefinitely. Many jurisdictions force trust dissolution, for example, twenty-one years after the death of the last-named beneficiary who was alive at the time the trust was created.
- Trustworthiness: Transparency International has listed New Zealand as the most trusted jurisdiction in the world for many years. Cook Islands is a part of, or associated with New Zealand.
- History: Cook Islands trusts have a long and trusted track record. The International Trust Act was enacted in 1984.
- Bankruptcy Protection: The trust remains valid when the settlor or beneficiaries have filed for bankruptcy.
There are a plethora of other reasons one can offer for setting up your Cook Islands trust other than asset protection.
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. It did so by requiring the creditor to prove that the trust was created solely with the intent to defraud that specific creditor. When the creditor does not prove intent to escape a debt from the creditor, the trust assets are not subject to the creditor’s claim.