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Trust Law/Level VI · Protection/6.2 Offshore/Lesson 2

Cook Islands, Nevis and the offshore model

What the Cook Islands International Trusts Act 1984 and the Nevis International Exempt Trust Ordinance say about creditor claims, and where their protection stops.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Exhaust domestic options first, such as exemptions, insurance, third-party trusts or a DAPT, before paying offshore trustees and advisers in two countries. Catch: a US court can still order a settlor within its reach to repatriate assets and hold them in contempt.
  2. Cook Islands law treats a transfer made over 2 years after the creditor’s cause of action arose as not fraudulent; otherwise suit must begin within 1 year, with proof beyond reasonable doubt (s.13B). Catch: these limits bind only Cook Islands courts.
  3. Nevis requires a creditor to post a bond, reported at EC$270,000 (about US$100,000) since 2015, before suing trust property. Catch: settle only while solvent and claim-free, since US voidable-transfer law and §548(e) still apply at home.
  4. Reporting never goes away: a US settlor files Form 3520, ensures Form 3520-A, and files FBAR above $10,000 and Form 8938 above its thresholds. Catch: an unreported transfer to a foreign trust costs the greater of $10,000 or 35% (IRC §6677).

MaterialsA plain-language summary of the Cook Islands International Trusts Act 1984 from a source you trust, for your own referenceLesson 6.1.3, on domestic asset protection trusts, for comparison with US state lawLesson 6.3.1, on fraudulent and voidable transfers, and lesson 6.3.4, on bankruptcyLesson 6.2.4, on the US reporting duties that apply to foreign trusts

Wonder

  1. What happens when a creditor with a US judgment tries to collect from a Cook Islands trust?
  2. Why would a statute set the criminal standard of proof for a civil claim?
  3. If assets sit offshore, why can a US court still act against the person who set up the trust?

Explore

  1. The Cook Islands International Trusts Act 1984 is the statute most often linked with the offshore asset protection model. It applies to ‘international trusts’, generally those with a licensed Cook Islands trustee whose settlor and beneficiaries live outside the Cook Islands. Its creditor provisions were added by later amendments. This lesson describes what the law says and how it has fared in practice; it explains the law and does not suggest using such a trust. US persons who are connected to a foreign trust have reporting duties (lesson 6.2.4).
  2. Section 13D of the Act bars Cook Islands courts from recognising or enforcing a foreign judgment that applies law inconsistent with the Act or that concerns a matter governed by Cook Islands law. A US fraudulent transfer judgment is a common example. A creditor who wants to reach the trust’s assets generally has to start a new case in the High Court of the Cook Islands, under Cook Islands law, rather than simply registering a judgment won at home.
  3. Under section 13B, a creditor claiming that a transfer to the trust was fraudulent must prove beyond reasonable doubt that the settlor intended to defraud that creditor and that the transfer left the settlor unable to pay the claim. In most US civil cases the standard is lower, usually a preponderance of the evidence or clear and convincing evidence. Solvency is generally measured at the date of the transfer, not the date of the lawsuit.
  4. Section 13B also sets short time limits, as practitioner summaries describe them. A transfer made 2 years or more after the creditor’s cause of action arose is treated as not fraudulent against that creditor. For a transfer made within that window, the creditor generally must begin proceedings in the Cook Islands within 1 year of the transfer. Some summaries state these periods differently, so the current text of the Act is the authority. A creditor whose claim arose after the transfer faces further limits.
  5. Nevis, in the Federation of Saint Kitts and Nevis, adopted the Nevis International Exempt Trust Ordinance in 1994, modelled on an earlier version of the Cook Islands law. It also uses a beyond-reasonable-doubt standard and short time limits, though not the same ones as the Cook Islands. Before suing over trust property, a creditor must lodge a bond with the Nevis Ministry of Finance to cover costs if the claim fails. Practitioner sources report that amendments in 2015 raised the bond to EC$270,000 (Eastern Caribbean dollars, about US$100,000); older sources give a lower figure.
  6. These rules bind courts in the Cook Islands and Nevis, not courts in the settlor’s home country. A US court cannot order a foreign trustee abroad to act, but it can order the settlor, who is within its reach, to bring assets back, and can hold a settlor who keeps control of the trust in contempt (lesson 6.2.3). US bankruptcy law can reach some transfers to self-settled trusts (lesson 6.3.4), and fraudulent transfer law applies at home (lesson 6.3.1). Costs vary widely by place and adviser. Offshore trusts do not reduce US tax for US settlors, and the reporting duties are strict.

Key facts

  • The Cook Islands International Trusts Act 1984 is the model statute for offshore asset protection trusts; its creditor provisions came by later amendment.
  • Section 13D bars Cook Islands courts from enforcing foreign judgments that apply law inconsistent with the Act, so creditors generally must sue again locally.
  • Under section 13B, a creditor must prove the settlor’s intent to defraud beyond reasonable doubt.
  • A transfer made 2 or more years after the creditor’s cause of action arose is treated as not fraudulent; otherwise proceedings generally must begin within 1 year of the transfer.
  • Nevis adopted its International Exempt Trust Ordinance in 1994, and creditors must post a bond (EC$270,000 since 2015, per practitioner sources) before suing.
  • Offshore rules bind local courts only; a US court can still order a settlor within its reach to repatriate assets.

Exercise nine, six, three, one

9CollectList up to 9 features of the Cook Islands or Nevis rules described in this lesson or a reliable source you are reading (some lists are shorter), such as the standard of proof, time limits, the bond and the treatment of foreign judgments.
6ClusterSort them into 6 categories: foreign judgments, standard of proof, time limits, costs of suing, limits from home-country courts, and facts you are unsure about.
3DistillReduce the 6 categories to 3 groups: rules that apply in the offshore court, rules that apply in the home-country court, and questions you would ask a lawyer about.
1CrystallizeWrite 1 sentence explaining, in your own words, why an offshore statute can make collecting from a trust harder but cannot stop a home-country court from acting against the settlor.

Fact check

Dates, figures and claims checked against the published sources listed below.

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