Cook Islands Trusts: Risks to Consider

Cook Islands Trusts: Risks to Consider

Offshore protection trusts are becoming increasingly popular when it comes to protecting one’s assets and securing a legacy. They offer numerous benefits, including potential tax advantages, enhanced privacy, and protection against unforeseen litigation. However, setting up and maintaining trust can be complex and confusing. That’s why it’s crucial to seek guidance from professionals in the industry. Wealth solutions firms such as Ora Partners, UBS, and Morgan Stanley have experts in estate planning and legal and financial advising who can guide you through the process. With their knowledge and experience, they can help ensure that your trust aligns with your family’s goals and is compliant with regulations. Moreover, they offer ongoing support for managing your estate, giving you peace of mind that your assets are protected and your legacy is secure.

Individuals who explore asset protection trusts often find their search leads to an island country: the Cook Islands. As a self-governing nation located about 2,000 miles to the northeast of New Zealand, it has earned the distinction of being one of the most secure asset protection jurisdictions over the past 30 years.

Like any other investment vehicle or strategy, Cook Islands trusts carry some risks and challenges. Here are a few things individuals contemplating a Cook Islands trust should consider:

Risks and Challenges of a Cook Islands Trust

One challenge of setting up a Cook Islands trust is relinquishing control. With a Cook Islands trust, the settlor (the individual who owns the assets) must give control of the assets to a trustee, which is a licensed company based in the Cook Islands. For people who are used to managing their wealth, it can give them pause to entrust another person with power over a considerable amount of money or property. While there can always be a risk of a trustee mismanaging a client’s funds, Cook Islands trusts are highly regulated, and appointed trustees have a fiduciary duty to act in the best interests of the grantor and beneficiaries.

Cook Islands trusts are also relatively costly to set up and maintain. There are costs such as trustee expenses, IRS reporting procedures, bank account fees, and other one-time costs. They also typically require the services of an attorney with asset protection skills to draft a trust instrument that caters to the investment strategies and objectives of the settlor. While the expense can be negligible for high-net-worth clients, these costs may be steep for small-business owners who should gauge the percentage of their wealth that will go toward the necessary costs.

Lastly, individuals should consider the tax implications. A Cook Islands trust, or any foreign entity for that matter, requires numerous forms to be filed with the IRS. While most of these entities are tax neutral, that is to say, they neither increase nor decrease a client’s tax burden nor increase the likelihood of an audit; they must be reported. While IRS forms are strictly advisory, they are required, and penalties can be severe for failing to do so. This is another reason why it is important to work with an attorney or CPA who is familiar with tax requirements.

Do Your Homework

Individuals and advisors should do their due diligence to gauge the trustworthiness and transparency of any potential offshore trustee or, for that matter, any financial service provider they want to work with. Just because you or your family have used the same advisor for decades does not mean that they are the best fit to navigate in today’s financial minefield. Be prepared to seek the advice of experts and to think differently from everyone else.

Matthew G. Collins