May 30, 2018 Vibha Vallabh



Trusts 101 will teach you that in order to have a trust, three elements must exist at the time of establishment: the settlor must have the intention to establish a trust; the trust must have an asset; and it must have beneficiaries or an identifiable class of beneficiaries.
Popular destinations for trusts outside of a person’s home country tend to be Bermuda, Belize, Bahamas, British Virgin Islands, Cayman Islands, Cook Islands, Guernsey, Hong Kong, Isle of Man, Jersey, New Zealand, Nevis, Singapore and Samoa.  Forum shopping for a trust  is highly competitive amongst jurisdictions and sometimes occurs on the basis of the familiarity of the jurisdiction to the client’s advisor located in their home country, costs, rule of law, synergy between home and trust jurisdiction, ease with which business can be conducted and registration requirements. These are what could be classified as external packaging, but what is can be found within the package is just as important as not all jurisdictions are the same beyond the basic elements.  You will find that there are subtle differences between them which is just as important. A Cook Islands trust has a number of bells and whistles comparable to the other jurisdictions making it an attractive choice when it comes to choosing your destination.

The first basic element of having a trust is that a person must have the intention to establish a trust. Which means that the Settlor must relinquish all control over the assets that are placed into the trust and have a genuine intention to do so.  To do otherwise, could see a court rule in favour of a creditor or litigant declaring that the trust is either illusionary or a sham whereby the assets remained the personal property  of the settlor leaving  the doors wide open to that creditor or litigant claim.  The recent widely publicised case of Mezprom Bank v Pugachev [2015] EW HC 2426 Ch is a timely reminder of why a trustee should not let their client have their cake and eat it too.

An unusual creature of the Cook Islands International Trust Act 1984, is that it allows the settlor to have extensive powers and if adopted, will not render the trust invalid or any disposition made to it void.  Under the Act the settlor has the power to: revoke the trust instrument; amend the trust deed; appoint and remove the trustee and protector; direct a trustee or protector on any matter; and retain, possess or acquire a power of disposition over the trust property. The settlor can be a beneficiary, trustee or protector of the trust either solely or with others and may have beneficial interest or property from the trust. Ordinarily in any other jurisdiction, case law would indicate that if the settlor had all these powers, the trust would be illusory or a sham.  But if you have a client who insists on having some element of control then a Cook Islands trust would be the choice. Even so, be wary of including them in the trust deed if a client resides in a litigious country or at risk of being litigated against.  It would be more prudent to exclude them altogether otherwise the client’s home country court may compel them to use these personal powers and refusal to do so may see them being held in contempt of court.

There are other unique features that you may not find in another trust jurisdiction. The recent amendment to the Act now allows a Cook Islands trust to have a charitable purpose instead of beneficiaries or identifiable class of beneficiaries. Furthermore, the Act will not recognise forced heirship. There is no rule against perpetuity so the trust can exist indefinitely, whereas most jurisdictions impose a finite period in order to discourage dynastic type trusts that could potentially alienate trust property from family ever receiving it.  Most jurisdictions recognise the rule of Saunders v Vautier.  If the beneficiaries are adult, of full capacity, and between them entitled to the whole beneficial interest and agree unanimously, that they may request the trustee to terminate the trust. Under the Act the trustee has the discretion to not comply with such a request which is useful if a court from a foreign jurisdiction has ordered the beneficiaries to terminate the trust.

Many jurisdictions do not allow the accumulation of income in any 12 month period so the income from the trust would either need to be converted into capital or be distributed to the beneficiaries of the trust. A Cook Islands trust does away with the rule against accumulations.
Finally and the most attractive feature of a Cook Islands trust is of course the legislative provisions that collectively provide that protective shroud over it’s trust (which is an entire topic on its  own). There are strict privacy and confidentiality laws that must be followed. The Act will not recognise or enforce foreign judgments where the law of the foreign jurisdiction is inconsistent with the Act or the Trustee Companies Act 2014 or relates to a matter already governed by the law of the Cook Islands.  Further in order for any litigant to bring a claim within the Cook Islands, they must overcome a number of hurdles and all within a limited statute of limitation period of two years. But this shroud only works if the client plays their part and does not transfer their assets into the trust when there is a current cause of action and such transfer would render then insolvent that they cannot pay the creditor/litigant.

When looked at closely, the contents of this package is quiet impressive and worth considering if your client is thinking of establishing a trust.

Vibha Vallabh

Vibha Vallabh is the General Counsel for Southpac Group and is responsible for the oversight of the legal teams.
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