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COOK ISLANDS
A NEW TWIST ON PRIVATE TRUSTEE COMPANIES
A private trustee company can provide savings, control, and privacy for clients who prefer not to place their assets with a trustee company owned by a financial institution. There is a high degree of flexibility in structuring control over the international While the client is in control of the offshore company, he must be careful to maintain its separate identity as a trustee to avoid any accusation that the structure is a sham Most offshore jurisdictions require a grantor. To appoint a licensed trustee company to act as trustee of an offshore trust if the trust is to be domiciled in that jurisdiction. In some jurisdictions, however a client may form a separate offshore company (a private trustee company) for the special purpose of acting as trustee of his The Cook Islands has special provisions ensuring that private trustee companies are easy to establish and operate, as well as being effective. Most importantly, in the Cook Islands there is no need to form a separate purpose trust to hold the shares of a private trustee company, as the different forms REASONS FOR FORMING A PRIVATE TRUSTEE COMPANY Some trustee companies require complete control of the trust’s investment activity without client participation. Furthermore, it is common for licensed trustee companies owned by financial institutions to require the investment of client trust funds in financial products of entities related to that financial institution, whereas clients normally want to have the right to choose the funds and products the trust will invest in, as well as the fund manager. Often the only licensed trustee companies giving the client the security of being owned by a financial institution are exposed in jurisdictions such as the United States because of their worldwide links. The alternative of placing assets under control of an individually owned trustee company may not be comfortable for the client or his advisers, nor can this risk Finally, where a trust or a group of trusts has a substantial amount of activity, or where the trust assets themselves are substantial, a client can achieve savings by carrying out his own administration rather than have these activities carried PROBLEMS WITH A PRIVATE TRUSTEE COMPANY In an asset protection environment, ideally the client should not have personal ownership or personal control of the private trustee company. In the event of a threat to the trust, the client must not be subject to court orders exposing the trust assets. Different tests must be met if there are tax or reporting issues. To deal with these problems, a number of jurisdictions have developed special laws permitting non charitable purpose trusts. A purpose trust (i.e. a trust that is created for a stated purpose rather than for stated beneficiaries) is permitted to be established with objects limited to holding the shares in the private trustee company. The client is thereby able to control the activity of the purpose trust and, indirectly, the private trustee company. This “solution” does have some problems however. Purpose trusts are a creature of statute, and there is still some discussion about their effectiveness, particularly in dealing with the issue of ultimate beneficial ownership. Further, there are the extra costs involved in maintaining an extra entity.
PRIVATE TRUSTEE COMPANIES IN THE COOK ISLANDS ESTABLISHING NEXUS Before registering as a Cook Islands international trust, a trust must establish a nexus with the Cook Islands jurisdiction. Section 2 of the International Trusts Act 1984 (ITA) requires a trust to appoint either a licensed trustee company, or a Cook Islands international company, as its trustee. The international company is permitted to act as trustee for no more than three trusts, but otherwise must not carry on business as a trustee company. When forming a trust, therefore, the client can first incorporate his own specially structured international company. That international company is eligible for appointment as trustee of the client’s trust, making the trust eligible for registration as a Cook Islands international trust. STRUCTURE OF THE PRIVATE TRUSTEE COMPANY SHARE OWNERSHIP 1. The international company can issue bearer shares to the client or his nominee. 2. The international company can issue “default shares” to the client or a nominated party. 3. The international company can be formed as what we call a purpose company, with no shares. 4. The shares of the international company can be held by a licensed trustee company which exercises shareholders voting rights as nominee for the client. DEFAULT SHARES PURPOSE COMPANIES After incorporation, the shares of the international company are forfeited by the company under a statutory process. The promoter of the company or his nominee is then issued with a perpetual bearer debenture the powers of which enable the bearer to effect appointment and removal of directors. CONTROL OF MANAGEMENT BY DIRECTORS The client may want himself or his personal advisors to be appointed as directors, or may request a licensed trustee company to provide the directors. The client may then want to have the directors approve his own appointment to manage the business of the international company, or may want to contract a licensed trustee company to carry out part of these functions. MANAGEMENTS OF PRIVATE TRUSTEE COMPANY BY LICENSED TRUSTEE COMPANY NUMBER OF TRUSTS EXIT STRATEGY FOR ASSET PROTECTION TRUSTS In the case of the default shares, the shares can be issued subject to terms that vest the shares of the private trustee company in a licensed trustee company in the event of any threat against the client. In a similar situation with a purpose company, a cautious client can transfer the bearer debenture by simple delivery. If a change of jurisdiction is called for, then as an alternative to re-domiciling the trust by a change of trustee, the private ESTABLISHMENT The international company can then be appointed as the trustee of the client’s trust. The trust is then registered, with the licensed trustee company also being TAXATION CONSEQUENCES COMPARISON WITH OTHER JURISDICTIONS First, no Purpose Trust Required. In other jurisdictions the shares of a private trustee company must be held by a purpose trust to separate legal ownership by the client of the private trustee company. Although a purpose trust may be established in the Cook Islands, it is not necessary given the company structures available. ANOTHER ADVANTAGE IS THAT NO LOCAL APPOINTMENTS ARE REQUIRED These appointments add cost and give opportunity for disclosure. No such appointments are required in the Cook Islands. FINALLY NO AUDIT IS REQUIRED IN THE COOK ISLANDS
In other jurisdictions the accounts of the private trustee company must be audited annually. In the Cook Islands the need for an audit can be dispensed with by a shareholders’ special resolution. EXAMPLE John has spoken to several offshore trust companies. Because of their potential exposure for calls as well as the risk of action by beneficiaries in the event of loss of capital, they are unwilling to act as trustee if John expects the trust to invest in high risk investments. Even if John changes to more conservative funds, they are not comfortable with him in effect being the manager. They offer to manage the funds for John on a percentage of funds under management basis (one percent), but he is not comfortable with giving control to a company John’s attorney, Louis, recommends that John form his own private trustee company. Louis gives instructions to the trust company to form an offshore company with no shares. A bearer debenture is issued to Louis as the promoter of the offshore company, and she uses her powers under the debenture to appoint John as a director. The directors of the offshore company then pass resolutions authorizing the opening of trading accounts in the name of the offshore company as trustee, and approving the appointment of the offshore company as trustee of a trust to be settled by John. Louis then prepares an asset protection trust in the form of trust he is accustomed to using. The licensed trust company will not impose any requirements as it is not acting as trustee, although the instrument will have special asset protection provisions dealing with items such as duress, change of trustee, and appointing a standby trustee. The offshore company signs the trust as trustee, and the trust is sent to the licensed trustee company to register. While John is in control of the offshore company, he must be careful to maintain its separate identity as a trustee to avoid any accusation that the structure is a sham. This requires John to maintain a certain level of administration, and he may wish to bring in another person in whom he has confidence to act as a director of the offshore company to promote this independent stance. The offshore company must keep separate minutes as trustee and must ensure that it enters into contracts in this capacity only. It will need to prepare its own accounts as well as separate accounts for the trust, and should prepare a formal report to the beneficiaries annually. Louis reviews these records with John annually. In the event that John does come under threat of litigation at a later date, he can resign (or be removed by the debenture holder) as a director, and the bearer debenture can be delivered Under Cook Islands law, the trust would have survived through the limitation of actions period and would then be protected from litigation. CONCLUSION The structure is familiar to clients, easy to explain and understand, and has adequate safeguards in the event of a challenge to the trust assets.
OFFSHORE INCORPORATION SERVICES FREE CONSULTANCY |
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