What You Need to Know About Offshore Asset Protection With Matthew Smith

In this podcast, Blake interviews Matt Smith from Southpac, a trust company based in the Cook Islands. They discuss the benefits of the Cook Islands Trust for asset protection, the specific asset protection provisions enacted by the Cook Islands, and the advantages it offers compared to other jurisdictions.

Blake Harris:
On today’s show, we have a very special guest. We have Matt Smith from Southpac. Southpac is a trust company based in the Cook Island. They’re one of the oldest and most reputable trust companies in the Cook Islands. Matt and I have been working together for a number of years. I’m excited to have you on the show. Thanks for being with us today, Matt.

Matt Smith:
No worries Blake. Thanks very much for having me.

Blake Harris:
Before I get into my string of questions, is there anything you want to add about yourself or Southpac, in terms of an introduction?

Matt Smith:
Yeah, sure. Just to give you the spiel on Southpac, Southpac’s been operating for 40 years now we’re celebrated our 40th anniversary this year, started off in the Cook Islands in 1982, opened an office in Nevis, in 2000, and we’ve had a presence in New Zealand since 2014. So, we’ve got we’ve got about 25 staff across those three locations, working primarily with the with the high net worth individual market in the US. And yeah, we’ve been providing premium trustee services for all that time. I’m Southpac’s General Counsel, I’ve been with Southpac for coming up to six years now. And work closely with a lot of our attorneys in the US and a lot of the clients there. And yeah, really pleased to be on your show today, Blake.

Blake Harris:
So, can you just start off by telling us a little bit about how Cook Islands Trust works?

Matt Smith:
Yeah, so I mean, a Cook Islands trust is, in a sense, it’s a trust like any other like, like we’ve had trusts in the common law for hundreds of years now. But the Cook Islands has enacted specific asset protection provisions, which came online during the late 1980s. And so that gives the Cook Islands the edge over a lot of jurisdictions in terms of asset protection, because you have provisions in the law there that state that any assets that are placed into a trust into a Cook Islands international trust, before there’s any creditor cause of action accrued against the settler or against those assets, they’re going to be completely protected from any future settler claim. So, it makes the Cook Islands an excellent jurisdiction. For anyone who’s looking to guard against any potential unknown creditor claim, you get this day one protection there. Even if there is something on the horizon, there is still a two year statute of limitations that applies. So, anyone placing assets into a trust, if two years passes from that point, and no action has been bought, then those assets become protected. And creditors have to work very quickly if assets are placed into a trust, and they have to, for example, bring a case in in a court of competent jurisdiction. So that would probably be the US court within one year, and then in the Cook Islands within two years. So, there’s tight time limits that apply to very protective jurisdiction.

Blake Harris:
And to add to that, the Cook Islands has an ability, or they prohibit amending claims. So, if somebody starts a lawsuit in the Cook Islands, and they realize they’re coming after you for the wrong reasons, they can’t amend a claim like they can do United States, they have to restart their case entirely. And in doing so, there’s a good chance the statute of limitations may have run during that time period.

Matt Smith:
Yes, that’s absolutely correct. Like, you’ve got to get it right from the start if you’re bringing a claim there. So, you’ve got to have all your ducks lined up in a row as a creditor. And you’ve got to be ready to prove your case, when you go to the Cook Islands, you can’t sort of lay it lay a protective claim there, for example, just to just to get your foot in the door, and then gather the evidence as you go on later.

Blake Harris:
And which we in America do allow what we refer to as fishing expeditions, you start the process, you dig in a little bit, you see what it is you want to sue someone for, and then you and then you rearrange where that’s not allowed in the Cook Islands. There’s also a much higher standard of proof and proving and winning your case and proving a case in the Cook Islands, it’s a standard of beyond a reasonable doubt in order to win your case in the Cook Islands as compared to America, where it merely requires a preponderance of the evidence. Do you have any comments on that?

Matt Smith:
Yeah, correct. That’s so, in in certain areas, the trust legislation requires the court to be satisfied to that criminal standard of proof to beyond a reasonable doubt that certain things have happened in order for a creditor to prove their case. So, a creditor has to prove beyond reasonable doubt that a transaction was fraudulent to a Cook Islands trust. So that means they have to prove beyond reasonable doubt that the primary intent of that transaction was to defraud them, that particular creditor. It’s not enough for them to prove that it was it was with the intention of taking assets out of the hands of multiple potential future creditors has to be specific to that creditor, they have to show beyond reasonable doubt that the disposition to the trust did in fact render the settler insolvent and unable to pay again that creditor so that there’s a couple of very high hurdles that have to be cleared. And yeah, it’s a, it’s a stringent test that creditors have to have to pass.

Blake Harris:
And right. And to emphasize your point, there’s certainly no rule against creating a choice for the purpose of protecting your assets that came into being in 1982, with the Cook Islands, passing their legislation. And the same principle is true in the United States since 1998, when Alaska passed their domestic asset protection trust law, you have every right to unless you’re under court order preventing you from it. But aside from that situation, you have every right to rearrange your financial affairs to minimize your taxes and to protect yourself from lawsuits. The domestic Trust has grown in some popularity in the United States, I tend to steer my clients more towards the offshore trusts. And I do this for two reasons. One reason is it gives my clients better asset protection. If a plaintiff is coming up against a creditor, I’m sorry, if a plaintiff is coming up against a client whose assets are secure in a offshore trust, it’s going to be much harder for that plaintiff for that attorney to get my client assets, then if the client’s assets are using a domestic trust, and plaintiff attorneys know this, and they’re going to be much more aggressive about coming after domestic trust, and they’re going to be much more willing to take a settlement offer with an with an offshore trust. So that’s part one, it gives me putting my clients in a better position. But the other reason that I like the offshore trust better is because it helps me to sleep better at night, it’s a little selfish of me as well. But no, it’s simply aligning my interests with the with the interests of my clients. So, when setting up a Cook Islands trust, it’s important not only to registered in the Cook Islands, but we also want to properly involve the trustee in the process. And I’ve never had a client lose any money with the Cook Islands trust. And I think that is true for the vast majority of trusts. Now, there are some rare and unusual cases where perhaps the settler retains too much power over the trust. And that could put the settler in a position where assets might be compromised. Do you want to talk a little bit about how to properly design and setup a Cook Islands trust?

Matt Smith:
Yeah, there are a lot of ways to set up a trust and that there’s a lot of different structures we see where through a variety of different means the settlor retains a certain amount of control. So sometimes, you know, at one end, you’ve got the settlor placing assets into the trust. And then it’s a sole trustee. There’s a trust protector, that isn’t the settlor, there’s maybe an independent company, and the settlor has really, really no control over those assets, then you may be moved to a situation where the trust owns a company and the settlor manages the company and has day to day management of those assets, then maybe we come to the other end of the scale, and you have a situation where the settlor may even be a co-trustee and may have you know may be able to exercise all the powers of a trustee. Now, in and of themselves, none of these elements of settlor control make a Cook Islands trust invalid there, there’s reserved powers legislation, it’s called in the Cook Islands, which means that a settlor can be a protector, a beneficiary or CO trustee in the same way that domestic asset protection, trust legislation in the US allow these self-settled trusts. What’s important is the way the trust is operated after that. So, if the settlor does really want to retain some control, they need to do that in conjunction with the trustee they need to work with the trustee. If a settlor just cuts the trustee out of the loop, your managers the LLC themselves makes distributions to themselves out of the LLC retains this total control over the trust over the trust assets without having any regard to the trustee’s role in that there’s a real and I think increasing risk that those trusts could be found invalid. There has been a body of case law over the last sort of five, six years in particular, which has shown that where a settlor is, you know, overly involved in the management of a trust has too much decision making power in the assets and exercises that power. Those trusts have been struck down. They’ve been declared invalid by the court. And there’s been there was a big case involving a Russian bank, and settlor from 2017 has Mezhprom and Pugachev. And more recently, we’ve had a case involving it was a Cook Islands trust that will be at a domestic one. The case is called Web versus Web. And that was another case in which the settlor was held have too much power, that, and the trust. The court basically said, you made this look like a trust but it isn’t a trust because you’ve retained total control over it. And so, it’s just a bit of a cautionary tale for trust settlors, you know, don’t go to the trouble in the expense of paying your attorney to set up this wonderful asset protection trust in the Cook Islands. If you then manage it in such a way that it’s going to get invalidated, you’ve kind of wasted your time and your money and it’s not going to get you the protection you need.

Blake Harris:
Yes, and I certainly agree, agree with all of that. I mean, an aspect of creating a trust is having some element of trust in your, in your trustee of anyone I’ve ever sent to Southpac, or anyone I’ve ever sent to any of our offshore providers I work with whether to trust company in Southpac, or banker a in Switzerland, I’ve only received positive feedback. And the question that I get very often is, how do I know that my assets are safe, and I say, well, that way you work with a licensed attorney. That’s why you work with most reputable offshore providers. I will say that I spoke with years ago, Barry Engel, the attorney who wrote the Cook Islands trust law. And he said that in his career, one time he ever came across a trustee that actually mismanaged and stole some money. And this trustee, it was not a client, it is not a client of his, was out of Chicago. So, it was not even an issue with an offshore provider. So, thank you, thank you for all that. So, let’s talk a little bit about the asset side. So, in terms of asset protection, there’s two parts to it. One is getting control outside of the United States. And that’s why we utilize the Cook Islands. But then there’s also the aspect of removing the asset from physically being reachable by a US by a US court. If clients have real estate we’ll pretty much always unless two primary homes suggest they put that real estate into an LLC, and then put that into a trust, that real estate in a moment of a threat may need to be sold. Or you may need to strip the equity out of that. Real Estate, not necessarily the easiest asset to protect. What I tend to use Cook Island trust for is to protect liquid assets. So, with that there’s stocks, bonds, cash. And if you could talk a little bit about your relationships with the banks that you work with, in terms of how they play into the Cook Island trust structure. And if you could comment a little bit on any opportunities for clients with cryptocurrency and what they can do to put themselves in a better position to weather a lawsuit.

Matt Smith:
Yeah, sure, Blake, I mean, you’re quite right. An offshore trust is better at protecting liquid assets than it is real property you’ve got, you’ve got that. So, you know, you can’t pick up a house and move it to move it to Switzerland. But you can put cash and securities there. So, most of the banks and the custodians and investment managers that Southpac works with are based in Switzerland, although we do work closely with a bank in the Cook Islands, called Capital Security Bank. And so, they’re kind of tied up to it to work with a couple of the investment managers that we work with. And because if you’re if you’re a US person and you’re looking to manage assets in offshore in a Swiss bank account, you need an SEC registered investment manager. And so, there’s a number of those that we work with that we can introduce our clients to. And yeah, in terms of the banking options so that there’s a number in Switzerland for cryptocurrency there is a bank called there is a bank called CBRE in Switzerland that offers a cryptocurrency account. There is also Bank Frick in Liechtenstein that that we have connections with so there are there are options coming online more and more now for your regular accounts, if you like that have a cryptocurrency dimension to them. And that’s been of interest to a lot of clients. Although obviously been a bit of a volatile time for cryptocurrency these last few months.

Blake Harris:
Yes, 2021, I would say maybe 90% of my clients were rushing in with big amounts of crypto that they just fell into. Now I still have probably 50% of my clients come in with some with some crypto holding it’s not as big of a demand for crypto asset protection as there was last year. But that’s just kind of the nature of the crypto market is continually crashing up and crashing down. But clients have crypto that they want to protect from lawsuits and there’s some misconception that you can just lose your crypto on a boating accident. But doing so may require you to perjure yourself. We would never advise a client to take that course of action. What they can do is legally protect their crypto by working with professionals such as the two of us. Well Matt, this has been a lot of fun. Last question I have for you today is if somebody wants to get in touch with you or the team at Southpac, what’s your contact information?

Matt Smith:
Yeah, so if anyone goes to southpacgroup.com That will bring up the website for our New Zealand office you can see our profiles on there, see we’re all real people. And we do our separate websites for the for the Cook Islands and Nevis offices as well. But generally, the way we’re contacting our clients is through the New Zealand office. We’ve got the bulk of our staff here. We’ve got a team of attorneys here who work on client inquiries and help with the onboarding process. So yeah, look us up there. Give us a call. We’re, you know, we tend to be up pretty early so that we can be dealing with the US clients, it says ten to six here now in the morning coming up, and yeah, this is around the time. We’re all starting to get going.

Blake Harris:
Well, Matt, thanks for giving me your freshest moment of the day. And thanks for being on the show. And I’m sure I’ll be talking to you again very soon.

Matt Smith:
I’m sure. Thanks very much for having me been a pleasure as ever.