Cook Islands offshore trusts provide one of the strongest levels of asset protection in the world. Many wealthy individuals choose the Cook Islands due to its favorable laws during legal proceedings. But what happens if the lawsuit has already begun before you set up the trust? Experienced asset protection attorneys from Blake Harris Law discuss what you need to know about setting up a Cook Islands Trust while in a lawsuit.
Legal and Regulatory Considerations
The primary issues at hand when shielding assets with a Cook Islands Trust in a lawsuit are legal concerns. You don’t want to create more problems for yourself when you’re already dealing with a lawsuit. The purpose of offshore trusts is to protect your assets, but if you do not have proper guidance, you could be looking at much more concerning issues.
Let’s look at the legal and regulatory considerations of creating a trust in the Cook Islands during litigation so you know what to prepare for.
Fraudulent Conveyance
Fraudulent conveyance is the term for fraudulently transferring assets to intentionally hinder, delay, or avoid active or anticipated creditor claims. Many often confuse fraudulent conveyance with fraud, but these are two different actions.
Fraud is a criminal penalty that requires a hearing in front of a criminal court. On the other hand, fraudulent conveyance is a civil matter that is brought in front of a civil court. Because of this, anyone accused and found guilty of fraudulent conveyance will face civil charges and penalties rather than criminal ones.
Fraudulent conveyance also has more favorable timelines and statutes of limitation than fraud because of its non-criminal status. Essentially, if you want to create a Cook Islands Trust during legal proceedings, you may face a fraudulent conveyance accusation, but you likely will not face a fraud charge. The highest penalties you’re at risk of are generally civil charges not criminal if you are found to have made an improper transfer.
Cook Islands Trusts are generally extremely safe. The Cook Islands offers favorable policies to trust makers accused of fraudulent conveyance. Unlike many jurisdictions, the Cook Islands has a tight statute of limitations, difficult court processes, and high requirements for the burden of proof that make it challenging for the plaintiff to win fraudulent conveyance cases. If you are found guilty, the assets are reversed from their trust transfer.
Timing and Intent
Setting up an offshore trust immediately after having a lawsuit filed against you may look like suspicious timing, but suspicion isn’t always enough in the Cook Islands. The Cook Islands require a very high burden of proof to win a fraudulent conveyance case.
Even if a creditor comes after your wealth and you immediately set up a trust, that doesn’t mean the creditor can tie the two events together. For example, you could claim that you were diversifying your investments by moving assets to your trust. The plaintiff must prove beyond a reasonable doubt your intent to defraud them by establishing assets in the offshore trust, which often proves to be difficult.
Disclosure Requirements
Trust establishment during litigation in the Cook Islands does not provide full opacity. To create a legal trust, you still must meet disclosure requirements with the IRS to keep your assets somewhat transparent. As a U.S. owner of a foreign trust, you must file IRS Form 3520-A each year as well as other reporting requirements to the IRS and FinCEN, and you will need to adhere to U.S. income tax laws.
Failure to meet disclosure requirements can quickly lead to consequences, so you must follow all steps carefully. Working with an experienced offshore trust attorney can help you avoid these legal concerns.
Standard of Proof for Fraudulent Conveyance Claims
One of the benefits of setting up a Cook Islands Trust while in a lawsuit is the high standard of proof for fraudulent conveyance claims, which makes Cook Islands trusts relatively safe from U.S. courts. The creditor must meet numerous legal hurdles, defined in S13B of the International Trusts Act of 1984, to prove beyond a reasonable doubt your intent to defraud them and your insolvency.
Under Cook Islands law, you do not need to prove your reasoning for setting up your trust, as the creditor will need to do all the work proving the following:
Proof of Intent To Defraud
The creditor must prove beyond a reasonable doubt your intent to defraud them by creating or establishing assets in a trust. Beyond a reasonable doubt means the burden of proof must be more than 99% in their favor.
The creditor needs to provide evidence showing that you established the trust with explicit intent to defraud them in particular, ultimately leading to the lawsuit. In general, such claims do not hold up in Cook Islands courts.
The creditor must also prove that your sole reason for establishing the trust was to defraud them. If you had any other minor reason for setting up your trust, that could debunk their claim. For example, if you wanted to avoid bankruptcy, protect your wealth for your loved ones, or diversify your investments, you would have other motives.
Solvency
Beyond proving your proof of intent to defraud, the creditor must also prove that the asset transfer into the trust made you (the settlor) insolvent. Again, the creditor must prove this beyond a reasonable doubt (99%). Even if the court confirms that you created the trust with the sole purpose of defrauding this specific creditor, you may still be found not guilty if the creditor fails to confirm your financial status.
The creditor must go through exhaustive work to prove you are insolvent. First, they need to provide extensive financial records showing your current position and inability to pay back your debts.
Along with this, the Cook Islands has no bankruptcy law, so it cannot use the normal tests U.S. courts use to determine bankruptcy. In other countries, the creditor could rely on these tests to show you are bankrupt and therefore insolvent. In the Cook Islands, though, they must jump through seemingly endless hoops to attempt to prove their financial status.
Between proving both the intent to defraud and solvency beyond a reasonable doubt, being found guilty of a fraudulent conveyance claim is rarely heard of in Cook Islands cases. What makes cases even more challenging for the creditor is the statute of limitations, though, adding another advantage to setting up a Cook Islands Trust while in a lawsuit.
Understanding The Cook Islands Statute of Limitations
When you choose the Cook Islands, creditors do not have much time to file fraudulent conveyance claims against your offshore trust strategy in legal cases. The statute of limitations on fraudulent conveyance cases in the Cook Islands is one or two years:
- One year on fraudulent conveyance claims, or
- Two years from the cause of action relating to when the initial lawsuit was filed
During this one-to-two-year period, your assets will remain protected within the trust you create in the Cook Islands.
If the creditor does not bring the case to a Cook Islands court within the required time frame, the Cook Islands will dismiss any future cases regarding the matter. If the creditor manages to gather all the necessary materials, finances, and legal support to file a case in the required time frame, they will need to hire a Cook Islands lawyer to see the case in court.
Cook Islands law prohibits contingency cases, meaning the creditor will need to pay fees upfront despite the slim likelihood of winning the case. If the creditor can file a case within the statute of limitations, find an attorney, and pay the fees, they will still need to provide the high burden of proof as discussed above.
How long does it take to set up a Cook Islands Trust?
Establishing a Cook Islands Trust can take anywhere from a few weeks to a few months, depending on the trustee you select. You will need to file an official application with your offshore trust company or trustee, complete a background check, fulfill all the required legal documents, and then transfer your assets into the trust. When dealing with asset protection in lawsuits with a Cook Islands Trust, working with an offshore trust asset protection attorney can help you expedite the process.
We recommend carefully selecting your trustee and legal team, given the potential of a fraudulent conveyance claim. By selecting an experienced asset protection lawyer to help establish your trust, you can enjoy an efficient setup process and guidance moving forward.
The Importance of Experienced Legal Guidance
If you’re considering setting up a Cook Islands Trust while in a lawsuit, you must take careful steps to safeguard your wealth and avoid additional scrutiny. By selecting an experienced and knowledgeable asset protection attorney, you can not only establish your trust in an ironclad way, but you can also protect yourself from potential fraudulent conveyance claims.
At Blake Harris Law, we have ample experience in Cook Islands trust and extensive knowledge of the jurisdiction’s local regulations. Contact Blake Harris Law today to consult our asset protection attorneys about setting up your offshore trust.
