The South Pacific Bridge to Financial Security

Written by Tamatoa Jonassen. Posted in Finance

 

Known for its innovative international trusts, the Cook Islands is ideal for wealth and succession planning for sophisticated high net-worth individuals seeking financial security.

When experienced offshore wealth planners look for a jurisdiction to establish wealth planning structures that will secure their client’s assets, they look at the Cook Islands. Given its location, background, and legislation, it is not surprising that the Cook Islands is on the list of top recommended jurisdictions for effective wealth planning.

Although by some standards the Cook Islands is considered remote, located 2,854 miles South of Hawaii and 3,232 miles to the north-east of New Zealand, being physically remote but digitally accessible is an advantage in wealth protection regimes. Approximately halfway between Hong Kong and New York, but on the opposite side of the globe from London, the Cook Islands offers an attractive time zone to bridge Asia and the Americas.


"The Cook Islands also anticipates its next evaluation being conducted by the Asia Pacific Group in 2017 to also be very positive."


Residing in the heart of the South Pacific, the Cook Islands is made of fifteen distinct islands with a combined Exclusive Economic Zone (EEZ) of 690,000 miles2 of ocean, or an area the size of two and a half times the state of Texas. The beautiful natural resources naturally make it a tourist destination and sustains fishing and black pearl industries. The Cook Islands also has a significant but untapped supply of sea bed minerals, of which holds an estimated 25% of the world’s supply of cobalt.

In 1965 the Cook Islands opted for self-governance in “free association” with New Zealand. As an independent country, the Cook Islands manages its own foreign affairs and makes its own laws through a democratically elected parliament modelled on the Westminster system. The relationship with New Zealand seeks to strengthen the Cook Islands, which allows Cook Islanders the opportunity of New Zealand citizenship, brings in highly qualified judges from New Zealand to sit in Cook Islands’ courts (which also helps to insulate the judiciary from possible local political interference), and pegs the value of Cook Islands currency to the New Zealand dollar.

The Cook Islands’ unique background gave birth to an international financial services industry with innovative legislation and a supportive environment that has embraced the increasing culture of compliance still prevailing globally. In 2009 the Cook Islands received a positive evaluation by the Asia Pacific Group on Money Laundering (a FATF-style regional body) resulting in the Cook Islands being in the top 20 percent of the 165 nations assessed for implementing international regulatory standards. The Cook Islands further received positive evaluations in both Phase One and Phase Two Peer Reviews of the Global Forum on Transparency & Exchange of Information for Tax Purposes, the most recent of which was conducted in 2015. The Cook Islands is tax neutral, meaning that using a Cook Islands offshore entity neither increases nor decreases one’s tax liability. The Cook Islands also anticipates its next evaluation being conducted by the Asia Pacific Group in 2017 to also be very positive.

In 2015 the Cook Islands announced its commitment to the Automatic Exchange of Information for Tax Purposes and implementing the international Common Reporting Standard (CRS) by 2018. CRS legislation was enacted in 2016 with emphatic support from the financial services industry. With the Cook Islands set to automatically exchange tax information in 2018, it is no stranger to international cooperation on tax matters. The Cook Islands has already signed over 20 TIEAs, 11 of which are with countries who are members of the European Union; in fact, the Cook Islands is in the top 15% of countries with the most TIEAs signed with EU member countries.

The Cook Islands was the first country to create legislation in the 1980s allowing for modern asset protection trusts. Since the Cook Islands pioneered the security afforded under its trust legislation in the 1980s, many other jurisdictions have copied the Cook Islands, including the United States. There are now sixteen states in the US that allow asset protection beginning with Alaska in 1997 and with West Virginia more recently in 2016. Although the continuing US trend speaks of the importance of asset protection, many have pointed out patent defects in using a US domestic trust (DAPT) over a foreign trust. Such defects include:

(a) US state court judges are generally reluctant to apply the laws of another state, especially when it involves residents or property in that judge’s jurisdiction.

(b) Matters before the US federal court are generally not bound by state law due to the Supremacy Clause of the US Constitution and so asset protection laws enacted by a state might be ignored.

(c) US trustees, unlike Cook Islands trustees, are bound by US court decisions and are vulnerable to civil lawsuits, US law enforcement actions, and potential jail for contempt of court should a US court seek to compel the US trustee. Not only does this make US trustees reluctant to stand up for clients involved in lawsuits, but it may compromise the very protection being sought by establishing a DAPT.

(d) Perhaps the most concerning for effective protection is the “Full Faith and Credit” clause of the US Constitution; under this clause a court judgement from any state can be taken to any other state and registered and such state is required to recognise the judgment. Practically speaking, a high net-worth individual (HNWI) with a DAPT could potentially be liable on a court judgement from a state in which the HNWI does not reside or has never visited. The Cook Islands does not recognise US court judgements and so any litigation would need to be held physically in the Cook Islands (which in itself can be viewed as a deterrent) and must be commenced within short time limitations (e.g. 2 years).


The international trust legislation enacted by the Cook Islands was so innovative that many jurisdictions have sought to capture a degree of protection afforded under Cook Islands law. Another aspect of Cook Islands law understood the need for succession planning with the increasing number of HNWIs from Asia. Cook Islands legislation includes provisions that avoid “forced heirship” and allows HNWIs flexibility and adaptability in succession planning and wealth structuring.

With a Cook Islands trust in one’s wealth planning structure, the Cook Islands is well placed to bridge jurisdictions and generations for greater wealth protection.

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