How Private Trust Companies in the Cook Islands Can Help Safeguard Your Wealth: A Comprehensive Guide
Private trust companies (“PTCs”) are established with the sole purpose of acting as a corporate trustee to one or more family, or otherwise related, trusts and are becoming increasingly popular with settlors when deciding who to appoint as trustee of their trusts. This is inevitably due to a settlor’s understandable reluctance to hand over ownership and control of his/her assets to people he/she doesn’t know and who might be based in a country he/she has never visited.
The Cook Islands has seen a growing number of Cook Islands International Companies (“ICs”) being registered for the purpose of acting as a PTC, as ICs provide a convenient, flexible and easy to administer PTC option.
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- Peace of mind: the settlor may find greater comfort having the trust assets owned and administered by a PTC that he/she has created;
- Control: a PTC allows the settlor, or those he/she nominates, to retain a high degree of control over the administration of trust assets, including investment and distribution decisions. This can be achieved by the settlor and his/her family members and advisors becoming directors of the PTC;
- Confidentiality: a PTC enables better control over information confidential to the settlor and his/her family;
- Diversification: a PTC will provide the settlor greater opportunity to invest in and hold assets of his/her choice. A trustee has a duty to preserve and diversify trust assets in the best interests of all beneficiaries. A professional corporate trustee may therefore be averse to holding high risk assets or a high percentage of the same assets to avoid breaching its duty;
- Expense: a PTC allows the settlor to avoid trustee fees, and other professional costs, which for larger trust funds are often charged on an ad valorem basis.
Important Questions when establishing a PTC
When establishing a PTC to act as trustee of his/her trust, there are a number of important questions that need addressing by the settlor and his/her advisors, including:
In which jurisdiction will the PTC be incorporated?
- Does that jurisdiction have competent and trustworthy service providers?
- How is the PTC established?
- Who will be appointed to the board of directors?
- What will be the ownership structure of the PTC?
This is how the Cook Islands answers those questions, proving it offers a PTC solution to meet the needs of every settlor.
Jurisdiction of Choice
Ideally, the jurisdiction of choice for the PTC should be one that is reputable, politically stable and compliant with international best practice. Service providers must be regulated with a level of experience, expertise and integrity that provides comfort to clients and their advisors. They must be accessible and responsive. The laws must be robust, tested and designed to meet the needs of today’s society.
Over the past 40 years the Cook Islands has become a world leader in the preservation and protection of wealth by developing a legal framework focused on protecting wealth and the rights of its owners.
The Cook Islands is a sovereign nation and can therefore make its own laws.
It has a Westminster styled parliamentary democracy and a strong history of respect for the rule of law and has always been politically stable with no threat of military or social unrest. Over the past 40 years the Cook Islands has become a world leader in the preservation and protection of wealth by developing a legal framework focused on protecting wealth and the rights of its owners.
The Cook Islands trust, foundation and company laws each contain provisions providing certainty to settlors, founders and beneficial owners, as well as third parties, as to the rights of those who might claim against assets by reference to specific dates and events.
The Cook Islands is located north east of New Zealand and south west of Hawaii in the middle of the South Pacific providing a time zone convenient for doing same day business with Asia and the USA.
The Cook Islands is meeting international standards on exchange of financial information, harmful tax practices and combatting financial crime. It is not on any of the blacklists published by international organisations, such as the OECD, FATF and EU, proving itself to be a good international citizen.
Local Service Providers
The Cook Islands has been providing wealth management and administration services internationally for over 40 years. It has a number of licensed trustee companies (“LTCs”) that have existed for nearly if not as long as the industry itself. That being the case, the LTCs contain a vast wealth of experience and expertise in structuring, managing and administering all types of wealth management plans and structures including trusts and PTCs. The Cook Islands LTC will assist the PTC in meeting its statutory and regulatory obligations, as well as other trust activity as the PTC board directs.
Cook Islands LTCs are licensed and supervised in the Cook Islands by the Cook Islands Financial Supervisory Commission.
How is the PTC established?
Cook Islands law allows an IC to act as trustee (i.e., a PTC) of no more than three Cook Islands International Trusts (“IT”) without the IC being licensed to carry on trustee company business. The use of an IC as trustee of an IT meets the Cook Islands legal requirement that one of the IT’s trustees be a LTC, a registered foreign company or an IC.
ICs must be incorporated through a Cook Islands LTC with the LTC providing a registered office and company secretary as required by law. The directors of the IC do not need to be resident in the Cook Islands therefore allowing the settlor to determine the composition of the PTC board. Cook Islands LTCs will incorporate and register the IC to act as a PTC, with the Registrar of ICs in the Cook Islands. Details of the settlor(s) and beneficiaries of the IT do not need to be disclosed to the Registrar.
The Board of Directors
The ownership and management of the PTC are vital to its effectiveness and the efficient operation of the overall structure. The settlor’s circumstances and what is best for him/her and his/her family will ultimately determine ownership and management decisions.
In determining the composition of the PTC board, the settlor must understand that he/she having total control over trust assets may compromise the validity of the structure as well as its tax effectiveness.
In addition, it must be remembered that the PTC is a trustee and owes legal duties to the trust’s beneficiaries. The settlor and family members will not (as a professional corporate trustee would) be familiar with the role of the trustee or what is required to discharge those duties. Failure to discharge those duties may lead to personal liability for the directors.
...it is advisable that directors of a PTC be a combination of family members and professional advisors, including a professional corporate trustee
Where the settlor retains too much control over trust assets through the use of the PTC, the structure runs the risk of being considered a sham. Similarly, it may lose tax effectiveness if all substantial decisions are seen to be made in the settlor’s home jurisdiction.
To avoid such scenarios, it is advisable that directors of a PTC be a combination of family members and professional advisors, including a professional corporate trustee.
It is most unlikely the settlor and his/her family members would have experience in administering a trust and its assets. It is therefore advisable that the PTC board engages a professional corporate trustee to provide administration services to the PTC to ensure it meets statutory, regulatory and compliance obligations, and properly documents trust activity such as investments, distributions, financial transactions and asset transfers.
A Cook Islands LTC can provide a corporate director and administration services to the PTC to enable it to maintain its objectivity, meet statutory obligations and ensure trust activity is properly carried out and recorded.
There are a number of options a settlor might consider when deciding on the ownership of the PTC. The most favourable is for the PTC to be ownerless as this will distance the settlor from ownership reducing the potential for (i) the structure to be compromised through the settlor not having divested ownership of trust assets sufficiently, and (ii) the trust being taxable in the hands of the settlor.
Two vehicles commonly used to create an ownerless PTC are a purpose trust and a foundation. A purpose trust is a trust established for a particular purpose, as opposed to being for the benefit of named beneficiaries. In the PTC scenario the trust’s sole purpose would be to hold shares in the PTC.
A foundation is created by a founder and managed by a foundation council, similar to a board of directors. Although it is an incorporated entity, the foundation has no shareholders or beneficiaries with proprietary interests. A foundation is established to carry out certain activities or achieve certain objectives. In the PTC scenario that objective would be to hold shares in the PTC.
Cook Islands law provides for non-charitable purpose trusts where the specified purpose will be to hold the shares of the PTC.
Should the settlor wish to hold shares in the PTC directly, he/she should be mindful that in addition to this potentially compromising the overall structure and its tax effectiveness as previously mentioned, in the event of the settlor’s death the PTC shares will form part of his/her estate and may result in the ownership and control of the PTC, and the succession of the trust assets, being different to what he/she had intended.
When structuring the ownership of the PTC, the Cook Islands LTC can provide an ownerless vehicle to hold the shares of the PTC through either a purpose trust or a foundation. Cook Islands law provides for non-charitable purpose trusts where the specified purpose will be to hold the shares of the PTC. Similarly, a foundation could be established pursuant to the Foundations Act 2012 for the purpose of holding the shares. The LTC will be able to provide a trustee to the purpose trust and a member to the foundation’s council and administration services to both.
In the event the settlor wishes to hold the PTC shares directly, despite the potential pitfalls mentioned above, the Cook Islands can provide a solution to assist the settlor’s succession planning and avoid the PTC shares falling into his/her estate upon death. Section 228B of the Cook Islands International Companies Act 1981-82 allows the settlor to specify in the PTC’s articles of association, a person or persons to whom he/she wishes the shares to be automatically transferred to upon his/her death and therefore avoiding the probate process.
Given its compliance with international standards, its legal framework focusing on protecting and preserving wealth and the experience and expertise gained from providing trustee, management and administration services to a global client base for over 40 years, the Cook Islands is perfectly placed to work with settlors and their advisors to achieve all of their wealth planning needs.
In particular, through a carefully structured and professionally administered Cook Islands PTC, a settlor and his/her family are able to actively participate in decisions concerning their trust and its assets. The integrity of the structure can be retained, the settlor’s succession and tax planning objectives achieved and legal duties to beneficiaries discharged.
For more information on establishing a Cook Islands Trust contact one of our experienced, local trust companies here or download our Cook Islands trust information factsheet.