Offshore Trusts – The Low Down
In 2009, California woman Nadya Suleman gave birth to octuplets – the second set to be born within the United States and the first of whom all eight survived for more than a week after their birth.
While Suleman quickly became known as “Octomom,” the doctor who had implanted the embryos in her, Michael Kamrava, faced a different outcome: he lost his medical license later that year, after the Medical Board of California found his judgment in implanting so many embryos to have been unsound.
If Suleman or the Medical Board had come for Dr. Kamrava’s assets, however, they would have found them difficult to recover – because he had placed them in a Cook Islands trust.
In 2013, the New York attorney general reached a multimillion-dollar settlement with Northern Leasing Systems, Inc., a Manhattan company accused of massive credit card skimming.
However, two of the principals of Northern Leasing Systems avoided personal liability – because they had placed their assets in a Cook Islands trust.
In 2007 and 2008, Fannie Mae obtained judgments against investor Andrew Grossman. While the judgments against Grossman were in excess of $10 million, the federal government was only able to collect a tiny fraction of that money – because he had placed his assets in a Cook Islands trust.
These stories documented by the New York Times are just a few of the stories of the various figures who have used Cook Islands trusts to their advantage.
However, while the media may portray such trusts in a sinister light (that certainly makes for the most sensational story!), the fact is that these trusts, like any financial planning tool, are a value-neutral institution whose effects can cut both ways and which may be used for virtuous purposes as easily as vicious ones.
When it comes to protecting your assets, offshoring is the way to go. And there is no better jurisdiction for doing that than the Cook Islands.
What Are the Cook Islands?
You probably haven’t heard of the Cook Islands before, and if you have, it was probably in the context of tourism. They’re a tiny archipelago nation in the South Pacific, with a population of fewer than twenty thousand.
But the Cook Islands are world famous for one thing: asset protection. Their laws are designed to welcome foreign investors looking to protect their estates, and under the right circumstances, offshoring your assets into a Cook Island trust may save your millions of dollars.
How can this be done? Through a simple and perfectly legal strategy.
Asset Protection Trusts
Trusts are legal arrangements by which a settlor transfers assets to a trustee, who then holds those assets in trust for a beneficiary.
Most people think of trusts in the context of estate planning, as an alternative to a will. However, not many people are aware that trusts can also be structured for the purpose of asset protection. Such a trust is known, perhaps unsurprisingly, as an asset protection trust.
An asset protection trust is self-settled, which means that you are both the settlor and the beneficiary. This is different from a trust intended for estate planning, in which you are the settlor but your heirs are the beneficiaries.
Once you have placed assets in the trust, then these assets are under the control of the trustee, and the law no longer considers them to be your property. This means that, if somebody sues you, they will not be able to collect the assets that are being held within the trust.
Domestic versus Offshore
Asset protection trusts are typically established in a jurisdiction where the law is friendly to their establishment, often one other than your home jurisdiction. As a result. there are two types of asset protection trust: domestic and offshore.
As the name suggests, domestic asset protection trusts are created in the United States, in one of a set of states which are known for fostering such trusts. The primary states which allow domestic asset protection trusts are Nevada, Alaska, and Delaware, although there are a few others.
Offshore asset protection trusts are created in a foreign country. Foreign trusts are even more secure against judgments issued in American courts, as the case law concerning offshore trusts is actually much more well-established than the case law concerning domestic trusts.
That is why we recommend that clients opt for an offshore asset protection trust if they have significant assets and are worried about protecting them.
As with domestic asset protection trusts, there are a few countries which have made themselves havens for offshore asset protection trusts, including Switzerland, Belize, and the Cayman Islands.
However, in our professional opinion, the country which offers the absolute best protections for your assets will be the Cook Islands.
Benefits of a Cook Islands Trust: What Makes the Cook Islands So Great?
1. Strong Institutions
The first point in favor of the Cook Islands is the nation’s strong social and legal institutions. These islands are no banana republic. On the contrary, they’re a peaceful, stable modern democracy with well-developed infrastructure and the highest GDP of any small island nation in the South Pacific. Most islanders are well-educated and speak English, and there are no foreign exchange controls, making international business easy.
The legal system of the islands is also very well-developed: if you find yourself involved in any sort of legal case in the islands, you will be dealing with highly respected New Zealand judges, and a constitutional legal system which incorporates English common law and the statutory laws of Britain and New Zealand.
But those aren’t the only benefits the Cook Islands have to offer.
2. Unenforceability of Foreign Judgments
As we mentioned above, the laws of the Cook Islands are, hands-down, the friendliest in the world to asset protection. They were designed to be this way! The islands’ International Trust Act of 1984 was passed with the help of American legal experts and with the express intention of making the Cook Islands an asset protection sanctuary. The Act did this by modifying a number of common law principles which run contrary to the aims of asset protection.
The central provision of Cook Islands trust law that makes it hospitable to asset protection is that the Cook Islands do not recognize foreign judgments. Even if a creditor has obtained a judgment against you in the United States, this will afford them no power to force Cook Islands courts to comply. If they want to collect, they will have to file a complaint directly in the islands.
It doesn’t stop there: once the creditor has filed suit in the Cook Islands, the only grounds they will have to challenge the trust will be fraudulent transfer – i.e. they will have to show that you transferred the money into the trust with the express intent of making yourself insolvent and unable to pay a creditor. This must be proven beyond a reasonable doubt (the highest standard of proof imaginable in law, usually reserved for criminal cases), and the creditor must also prove intent, although this requirement may be waived if intent would almost certainly have been found under American laws.
To top it off, creditors have an extremely narrow window of time to bring an action on the basis of fraudulent transfer. There is a very short statute of limitations in the Cook Islands: the lawsuit must be brought within two years of the cause of action arising, and within one year of the allegedly fraudulent transfer. So if they don’t pursue action against you almost immediately, they will have lost their opportunity.
3. Other Benefits
Although the unenforceability of foreign judgments is the central benefit of a Cook Islands trust, there are several other major benefits offered by the islands’ laws, and many of these benefits are just as important in their own right:
- Taxation. Although moving your trust to the Cook Islands does not absolve you of your obligation to pay all relevant United States taxes, there is no tax in the Cook Islands on either the assets or the income of offshore vehicles.
- Anonymity. The Cook Islands will ensure that all of your information is protected. Nobody outside the country is entitled to know whether or not you own a Cook Islands trust, or how much that trust is worth.
- Bankruptcy. Even in the event of your bankruptcy, a trust made in the Cook Islands will not be void or voidable. This extends not just to you, but to your beneficiaries as well: if they are declared bankrupt, then the courts will not be able to take assets from the trust (i.e. a spendthrift provision.)
How Secure Are the Cook Islands?
Although other jurisdictions have copied the legislation passed by the Cook Islands in 1984, the islands are and remain the most secure jurisdiction in the world for storing your assets. If you want to protect against the avarice of creditors, it really doesn’t get any better than this.
The benefits of a Cook Islands trust are not paper guarantees, either. These trusts have been tested in court, time and again, and proven to be secure against creditors, even in cases where defendants have been liable for large amounts of money.
Furthermore, simply by existing, a Cook Islands trust is doing you a service: it is acting as a powerful dissuasion against any and all potential creditors. Some attorneys will file lawsuits with the intention to bully you into settling for a large sum. An offshore trust sends a message that your assets will be a lot harder to get, and this makes people less likely to file against you (and, if they do file, to settle for less than they would).
Basically, the trust has the same dissuasive power for creditors that a burglar alarm sticker on your door does for burglars. It gives a signal that you aren’t easy prey.
As we alluded to above, offshoring your money in the Cook Islands does not absolve you of your responsibility to pay taxes.
Many people, when they think about offshoring money, have an image of billionaires and big corporations hiding their money in foreign accounts to avoid paying their fair share in taxes. However, tax evasion (which is illegal) must not be confused with asset protection (which is legal and a smart strategy besides).
So long as you fulfill all of your necessary tax obligations to the federal government and the government of your state, it is perfectly legal for you to have an offshore trust for the purpose of asset protection.
Why You May Need to Offshore
After reading the examples of Cook Islands trusts at the beginning of this article, you might not believe that an offshore trust is necessary for you. After all, nothing to fear, nothing to hide, right?
In fact, it’s not so simple. The United States is the most litigious society in the world. We spend hundreds of billions of dollars a year on lawsuits, a higher rate per capita than any other country, and we also have the most lawyers per capita in the world. All sorts of trivial matters can explode into lawsuits, a fact which often surprises visitors and observers from Europe and other parts of the world, which tend to have more of a culture of informal dispute resolution.
The role of victim can also be a coveted role in our society, even in cases where the victimhood is not legitimate (as we’ve seen in the news all too recently). This culturally entrenched bias in favor of victims seeps upward into our court system, and affects the attitudes (and eventual verdicts) of judges and juries.
While we as attorneys would never deny that many people have very sound reason to file lawsuits, if you get slapped with a frivolous lawsuit, then you also have every right (and, for your loved ones who will be your heirs once you die, every obligation) to fight to protect your own assets.
That is why, if you are in a position where your assets may face a high risk of being lost in a lawsuit, you should do all you can to protect yourself. And there is no better way to do this than with a Cook Islands trust.