WEALTH PROTECTION LAW
When discussing the services that Eurofinanzza provides we often get non-lawyers asking about the legitimacy of using trusts to protect wealth. Many people also ask whether Cook Islands laws are overly aggressive in protecting trust funds. In reality however trusts have been used for hundreds of years for the same purposes- protecting personal and family wealth so that it can be used in times of need, and by future generations.
Cook Islands law is based on the old English law principles, and the International Trusts Act, while certainly modifying those principles and bringing the balance more in favour of the trust, responds to what we perceive as excessive extensions of personal liability in some jurisdictions, including the United States.
In this section we present a current status of Cook Islands wealth protection law.
COOK ISLANDS WEALTH PROTECTION LAW
The legal history behind the implementation of the International Trusts Act, some of the modern mischief's that such legislation is designed to address, and some of the factors in selecting an offshore jurisdiction.
This should provide some more insight for those who question the use of trusts as an asset protection planning tool.
Recent changes to the International Companies Act. While these are relatively minor, they should be the first of a raft of improvements and updates to the Cook Islands offshore legislation over the coming years. As an example we expect to see new LLC legislation and insurance legislation early in 2007, both of which should help to expand the services that can be provided from the Cook Islands, and give an excellent alternative to the established LLC and insurance jurisdictions.
HISTORY, EVOLUTION AND CURRENT STATUS OF
COOK ISLANDS WEALTH PROTECTION LAW
What tools were traditionally available to protect a family's wealth from financial misadventure?
Although trust law developed initially around family and land tenure, by the 16th century there was already use of family trusts for wealth protection. However there was always some balance in the use of trusts for wealth protection because of the threat of debtors' prison. This meant there was always a strong interest in funds being available for payment to creditors, whether the wealth was held in trusts or otherwise. At a very early stage the timing of the funding of trusts also become important due to the development of fraudulent transfer law based on tort of deceit and criminal fraud. Both required proof of intent to defraud beyond reasonable doubt.
In 1541, the Statute of Elizabeth redefined the common law elements of fraud introducing a new remedy for fraudulent transfer. The consequence of fraud and fraudulent transfer was to avoid the transfer, making the assets available to creditors. Parts of the Statute of Elizabeth still survive in one form or another in the legislation in many jurisdictions, including most states of the United States. The limitation of fraudulent transfer actions is therefore a key consideration in the choice of a trust jurisdiction.
Limited Liability Companies were created by statute in the 1800s. The company structure limited the liability of the investor to the share capital subscribed for. it effectively quarantined personal wealth from commercial investments. Also in the late 1800s, the first bankruptcy law enacted with three key aspects:
a) A bankrupt person essentially received a "get out of jail free" card. Wealth could now be held in a trust without fear of debtor’s prison;
b) Certain assets were exempt from bankruptcy; and
c) Claw back powers were introduced for prior transactions, now the remedy of avoidance for fraudulent transfer and fraud was available for all transfers taking place within a time period without having to prove intent to defraud or satisfy criminal burdens of proof.
The first limitation statutes were introduced in the late 19th century. The issue here was how long should a person's errors continue to haunt him? The common law doctrine of 'laches' gave some protection by requiring a plaintiff to act on his rights within a reasonable time or lose these rights.
The limitation statutes set arbitrary but finite time limits within which a plaintiff could bring an action, thus bringing some degree of certainly in this area.
Dealing with the Mischief in the 20th century
The 20th century brought a number of new problems. Most significant in the United States was the increased exposure of wealth due to an explosion of doctrines of personal liability as well as significantly increased damages awards.
The phenomena of the trial lawyer and the practice of contingency fees were important contributors to this. The United States is probably the most litigious country in the world with the most extreme personal liability exposure of any country.
Although corporations and limited liability companies still provide shareholders with an effective quarantine of their personal wealth form the failure of the business, the directors of such companies are increasingly exposed personally. Directors liabilities are both civil and criminal, and prison terms post Enron remind us of the debtor’s prisons of the 1800s.
In the United States new bankruptcy legislation has extended claw back periods, as well as restricting some of the exemptions, some of which were viewed as generous. In a similar approach, Australia has recently enacted a 10 year claw back rule.
The protection offered by limitation statutes has in practice become circumscribed due to courts consistently requiring knowledge of a right of action before time begins to run.
Courts have continued to explore new methods of setting aside trusts and transfers to trusts. There has been development of badges of fraud where fraud is presumed and the burden passes to the defendant. There are concepts of future fraud dealing with transfers to trusts before any cause of caution existed. Doctrines of incomplete transfer have also developed to account for the situation where control or benefit is retained by the Settlor. In the United States the courts further developed the self settled trust doctrine. This doctrine is unique to US, law clients turning to a foreign jurisdiction to establish a family trust.
Simply Establish an Offshore Trust
A Watertight Solution?
Historically, offshore wealth protection meant hiding your assets offshore. It didn't really matter what the laws of the offshore jurisdiction said about foreign judgments, as long as they provided for confidentiality. If the existence of a trust was discovered, in theory the trust could be moved immediately to another offshore jurisdiction, the creditor being left to trace it and issue proceedings in the new jurisdiction. While there was and still is a place for confidentiality, this response is now very definitely out of date. A trustee participating in such an exercise nowadays is likely to find itself being cited as a party to a conspiracy to defraud. Further-more, recent anti money laundering legislation makes planning based on hiding assets even more precarious.
Ordinary principles of international law recognized by English law jurisdictions make it a relatively simple process in many jurisdictions to enforce a foreign judgement dealing with a sum of money.
The same objective may be accomplished under a wide range of constitutional legislation, and there are several treaties, both multilateral and bi-lateral, simplifying recognition and enforcement of foreign judgements. Simply put if a U.S. court finds that a transfer to a foreign trust is a fraudulent transfer and therefore void, it will issue an order to the foreign trustee to transfer the assets back to the transferor, or his creditors. In many offshore jurisdictions touting themselves as suitable for asset protection, such a decision is going to be recognized and given effect by the foreign court against the foreign trustee.
As mentioned above, the Statue of Elizabeth, or derivations of it, still applies in many countries and provides a mechanism to unwind transfers to a trust made with the intent to hinder, delay or defraud creditors. If the chosen jurisdiction does not provide sensible limits to the ability of a creditor to establish a fraudulent transfer then little practical protection is obtained.
As can be seen it is not sufficient for a U.S. person to take advantage of foreign law simply by establishing a trust in a foreign jurisdiction. It is important to identify a jurisdiction which will not give ready recognition or effect to a U.S. decision contrary to local law and which limits the ability of a creditor to challenge transfers to a trust established in such a jurisdiction. It was against this background that the Cook Islands entered the wealth protection arena in 1988.
Cook Islands legal system and the special features of the Cook Islands International Trusts Act 1984.
RECENT AMENDMENTS TO
THE INTERNATIONAL COMPANIES ACT
Two recent amendments to the legislation have enhanced the suitability and competitiveness of using a Cook Islands International Company as a holding or investment entity. The removal of the requirement to issue share certificates and the de-regulation of fee levels have been welcomed by both trust companies and their clients.
The International Companies Act 1981-82 allows companies to be formed and operated with both flexibility and administrative ease making them an ideal asset holding entity or a commercial trading vehicle. Some of the advantages include: tax exempt in the Cook Islands, strict confidentiality provisions, no public record of shareholders or directors, accounts are not required to be filed, shares can take advantage of specific asset protection provisions, and a company can act as a trustee of a Cook Islands International Trust.
Confidentiality and flexibility have now been further enhanced by the removal of the requirement to issue share certificates. Previously share certificates were necessary to cat as evidence of legal title to issued shares. Pursuant to the International Companies Amendment Act 2006 legal title of shares is now evidenced by the Members Register which is kept at the registered office of the company in the Cook Islands. Instead of issuing share certificates, the name and details of each shareholder is recorded by the company on the Members Register. Access to the register is at the discretion of the directors of the company.
As a result of the aforementioned amendment we will no longer issue share certificates unless specifically requested to do so. If existing shareholders wish to relinquish their physical share certificates and simply have their details recorded in the register of members then they are welcome to do so. As well as increased privacy, the removal of share certificates eases the administrative procedures for registering and transferring share ownership.
If evidence of ownership is needed for practical purposes such as opening bank accounts then the company secretary can provide the shareholder with a certified copy of the Members Register.
In May 2006 the Cook Islands government agreed with industry proposals to reduce government registration fees for International Companies. This is partly as a result of the increasing number of international shipping companies being registered and is also due to the Cook Islands desire to continue to compete strongly in the ever growing offshore corporate services market. As a result the incorporation and renewal fee charged by the Registrar has been slightly lowered. Furthermore the previous minimum level of fees to be charged by trustee companies has been removed.
These changes should result in greater competition within other the Cook Islands, but more importantly with other offshore jurisdictions.
For clients it means that the Cook Islands remain a viable and appropriate alternative to the traditional offshore corporate providers.
OFFSHORE INCORPORATION SERVICES
COMPANY FORMATION & MANAGEMENT SERVICES
TAX PLANNING AND ASSET PROTECTION SOLUTIONS
INTERNATIONAL BUSINESS COMPANIES
PRIVATE LIMITED COMPANIES
LIMITED LIABILITY COMPANIES
LIMITED LIABILITY PARTNERSHIPS
PRIVATE & FAMILY FOUNDATIONS
PANAMANIAN LICENSED FINANCIAL CORPORATIONS
NEW ZEALAND OFFSHORE FINANCIAL INSTITUTIONS
SECURE & CONFIDENTIAL NOMINEE STRUCTURES
INCORPORATION IN EUROPE AND
MAJOR INTERNATIONAL OFFSHORE CENTRES
WORLDWIDE FULL SERVICED VIRTUAL OFFICES