January 24, 2022 Matthew Smith

INNOVATIVE NEW TRUST PRODUCT LAUNCHES IN THE COOK ISLANDS – THE INTERNATIONAL RELATIONSHIP PROPERTY TRUST

BY MATTHEW SMITH – GENERAL COUNSEL

On 4 December 2021, an exciting piece of new trust legislation was enacted in the Cook Islands: the International Relationship Property Trusts Act 2021 (the ‘Act’).

Purpose of the Act

In a nutshell, the Act allows specified trust assets in an International Relationship Property Trust (an ‘IRPT’), which has been settled by two persons in a relationship, to be ring-fenced and retained intact for administration by the trustee in the event of the settlors’ separation, rather than being divided between them.

Whereas a primary objective for practitioners establishing Cook Islands international trusts before now has been to protect their clients from future creditors, the objective behind an IRPT is to save clients from themselves by removing or limiting the possibility of trustees dividing and distributing relationship property held in trust in the event of the settlors’ separation.

The Act was developed by practitioners in the Cook Islands who wanted to address problems arising from court-directed splits of trust assets upon divorce of the parties who had settled those assets. While those parties had originally intended to hold family assets in trust for the benefit of future generations, their separation had resulted in those assets being liquidated and divided, with catastrophic results for long-term holdings and interests in family businesses, which would frequently be wound up and sold at a discount rather than being retained for the benefit of children and descendants.

An IRPT can exist as a standalone trust at Cook Islands law (and must be registered under the Act to do so), or can also be registered as an international trust and enjoy the protections afforded by the Cook Islands International Trusts Act 1984 (the ‘ITA’).

Legislative Summary

A summary of the key provisions and requirements of the Act is set out below:

• Section 4 contains definitions, and provides in particular that a relationship is a partnership of two persons who are married, in a civil union, or in a de facto relationship; that relationship property is property owned by either or both persons in a relationship; and that separation means the termination, dissolution or annulment of a relationship, including a decision not to cohabit which has the effect of ending the relationship. Same-sex relationships are covered by the Act.

• Section 6 codifies the purpose of IRPTs, being to maintain and administer relationship property during a relationship, preserve and retain the value and benefit of relationship property after a relationship ends, and to ensure that relationship property can continue to provide support for trust settlors and beneficiaries after a relationship ends.

• Sections 8–10 set out the conditions that must be satisfied for a trust to be an IRPT, including that: the IRPT has settlors who are in a relationship with each other when the IRPT is settled and who settle relationship property into the IRPT; that each settlor receives separate and independent legal advice before setting up the IRPT which is evidenced by a certificate in a prescribed form; that the IRPT is registered as such in the Cook Islands; that the settlors ratify the trust instrument between 14 and 45 days after executing it (in order to allow for a ‘cooling off’ period); and that the trust instrument makes specific provision for the administration and management of relationship property before and after separation and restricts the division and distribution of relationship property to beneficiaries.

• Section 16 requires relationship property to be held intact and not to be divided among IRPT beneficiaries in the event of the settlors’ separation.

• Section 18 allows IRPTs to be registered in the Cook Islands provided the trust instrument complies with the Act, the settlors and beneficiaries are not resident in the Cook Islands, and at least one trustee is a Cook Islands trustee company, international company, LLC or foundation.

• Section 27 allows Cook Islands international trusts registered under the ITA to also be registered as IRPTs provided the terms of any such trust are modified to ensure compliance with the Act. In the event of a discrepancy between the terms of the Act and the terms of the ITA, the terms of the Act prevail.

• Sections 30–32 prohibit the amendment of a trust instrument of an IRPT that is inconsistent with the terms of the Act or which permits the sale of relationship property contrary to the terms of the original trust instrument, and provides that after the settlors have separated the trust instrument may only be amended by the Cook Islands High Court.

• Sections 33–35 define ‘family business’ and enable IRPTs to provide that interests in a family business must be retained by trustees and cannot be divided or distributed to the beneficiaries.

• Section 75 limits the grounds on which a settlor of an IRPT can challenge its terms or any settlement to it.

• Section 82 provides that a foreign judgment affecting an IRPT is unenforceable in the Cook Islands if it is inconsistent with the purpose of the Act or has the effect of ordering the sale or division and distribution of relationship property contrary to the terms of the trust instrument.

• Section 86 enables a trustee of an IRPT to participate in certain ways in foreign proceedings involving an IRPT but provides that such participation does not amount to an acceptance of the jurisdiction of the foreign court.

• Section 91 disapplies the rule in Saunders v Vautier to an IRPT and removes the rights of beneficiaries of an IRPT to unanimously require the trustee to distribute the trust fund to them.

The Act also contains a number of provisions which are equivalent to those set out in the ITA, and which relate in particular to custodian trustees, trust advisers, protectors, record-keeping, perpetual trusts, retention of settlor powers, avoidance of forced heirship, spendthrift beneficiary provisions, governing law, non-disclosure of trust information and private court proceedings.

A copy of the Act is available on the Cook Islands Financial Supervisory Commission’s website.

Crossover with ITA and Key Differences

While the Act has many provisions which replicate those set out in the ITA, including a number of protective provisions, it does not replicate the fraudulent transfer provisions in section 13B of the ITA, or the 2-year statute of limitations contained in section 13K. Clients seeking creditor protection in addition to certainty as to how relationship property is managed will need to rely on the dual registration provisions set out in the Act, which allow IRPTs also to be registered as international trusts and vice versa.

If the settlors of an existing international trust also wish that trust to be registered as an IRPT, this will inevitably involve amendments to the terms of the trust instrument to ensure it complies with the Act and can enable the trust’s registration as an IRPT. Additionally, if the settlors are looking to define any property already held in trust as relationship property, they will need to obtain the legal certificates prescribed in the Act. This will also need to be done every time additional relationship property is added to the IRPT.

If you would like to discuss converting an existing international trust into a dual-registered IRPT, or if you are interested in establishing a new IRPT (either on a standalone basis or for registration under the ITA as well as the Act), please reach out to your regular point of contact at Southpac.

Matthew Smith

Matthew joined Southpac in March 2017 and was appointed as General Counsel in July 2020 before assuming the role of Group General Manager in January 2023. Matthew originally graduated with a BA Hons in French and Linguistics from the University of Durham, UK, before obtaining Graduate Diplomas in Law and Legal Practice from the University of Law in London. He is a dual-qualified lawyer/attorney, having been admitted as a Solicitor of the Senior Courts of England and Wales in 2008 and as a Barrister and Solicitor of the High Court of New Zealand in 2017. Matthew obtained a Trust and Estate Practitioner designation from STEP, the Society of Trust and Estate Practitioners, in 2021 after passing the STEP Diploma in International Trust Management with distinction. He received three STEP Excellence Awards for achieving the highest worldwide total STEP Diploma score via distance learning, and the highest score in two individual Diploma papers. Matthew has worked closely with many of Southpac’s clients and referrers during his time with the company. He is passionate about ensuring Southpac provides world-class fiduciary services to its clients to help them safeguard their assets and protect their legacies.
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